SEC Proposes Amendments to Investment Advisers Act Regarding Small Business Investment Companies

The Securities and Exchange Commission (“SEC”) recently announced a proposal to amend Rules 203(l)-1 and 203(m)-1 of the Investment Advisers Act of 1940 (“Advisers Act”). The purpose of these proposed amendments is to “reflect changes made by… the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”).” The FAST Act amended sections 203(l) and 203(m) of the Advisers Act to provide advisers to small business investment companies (“SBICs”), venture capital funds, and certain private funds with additional avenues to registration exemption.

SBICs are commonly defined as privately-owned investment companies that are licensed and regulated by the Small Business Administration (“SBA”). They typically provide a vehicle for funding small businesses through both equity and debt. Section 203(b)(7) of the Advisers Act provides that investment advisers who only advise SBICs are exempt from registration. Moreover, investment advisers who use the SBIC exemption are not obligated to comply with the Advisers Act’s reporting and recordkeeping provisions, and they are not subject to SEC examination.

The FAST Act amended Advisers Act Section 203(l), which provides a registration exemption for investment advisers to venture capital funds, to include SBICs in the definition of “Venture Capital Funds” for purposes of the exemption. The FAST Act also amended Section 203(m), which provides a registration exemption for investment advisers to private funds with less than $150 million in assets under management. The FAST Act’s amendments provide that the assets of SBICs should be excluded for purposes of determining the amount of assets that a private fund manages.

As a result, the SEC is proposing amendments to Rules 203(l)-1 and 203(m)-1, which cover the registration exemptions for advisers to venture capital funds and advisers to certain private funds. The SEC is proposing to amend the definition of “Venture Capital Funds” in Rule 203(l)-1 to cover SBICs. It is also proposing amending the definition of “Assets Under Management” in Rule 203(m)-1(d)(1) to “exclude an adviser’s regulatory assets under management attributable to SBICs… for purposes of the private fund advisers exemption.”

If these amendments are adopted, investment advisers to SBICs will be able to rely on either the SBIC exemption, the venture capital funds adviser exemption, or the private fund adviser exemption. If they rely on the SBIC exemption, they will only be able to advise SBICs. If they rely on the venture capital funds exemption, they will be able to advise both SBICs and venture capital funds. If they rely on the private fund adviser exemption, they will be able to advise both SBICs and non-SBIC private funds, if the non-SBIC private funds have fewer than $150 million in assets under management. However, if investment advisers to SBICs choose to rely on the venture capital funds or private fund exemption, they will be considered “exempt reporting advisers.” Exempt reporting advisers are required to keep certain records and submit certain reports to the SEC. They are also obligated to file certain information on Form ADV with the SEC.

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