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Colorado Division of Securities Adopts New Exemption from Investment Adviser Licensing Requirements

July 18, 2017

The Colorado Division of Securities has adopted new rules applicable to investment advisers effective as of July 15, 2017.[1] The adopted rules include an exemption from state licensing requirements for certain investment advisers. Specifically, the new Rule 51-4.11(IA) (the “New Rule”) under the Colorado Securities Act (the “Act”) exempts certain “private fund advisers” from the Act’s licensing requirements.[2] The effect of the New Rule is that certain investment advisers who are subject to the Act and who fall below the dollar amount of assets under management for registration with the SEC,[3] now may also be exempt from registration with the state of Colorado, subject to the terms of the New Rule.

Eligibility and Requirements for the Licensing Exemption

Under the New Rule, a private fund adviser, which is an “investment adviser” under the Act who provides investment advice solely to one or more “qualifying private funds,” is exempt from the licensing requirements of Section 11-51-401(1.5) of the Act, subject to certain additional requirements under the New Rule. A “qualifying private fund” means a private fund that meets the definition of a “qualifying private fund” in Rule 203(m)-1 under the federal Investment Advisers Act of 1940 (the “Advisers Act”), which is generally 3(c)(1) and 3(c)(7) funds.[4]

To qualify for the exemption under the New Rule, an investment adviser must satisfy each of the following conditions:

  1. The investment adviser must provide investment advice only to “qualifying private funds”;
  2. Neither the investment adviser nor any of its advisory affiliates may be subject to a bad actor disqualification in Rule 506(d)(1) under the federal Securities Act of 1933 (the “Securities Act”);
  3. The investment adviser must file as an “exempt reporting adviser” on Form ADV with the state of Colorado, generally through the Investment Advisory Registration Depository (“IARD”); and
  4. The investment adviser must pay the fees prescribed by the Colorado securities commissioner.

In addition to the above requirements, if the investment adviser provides investment advice to at least one qualifying private fund that is a 3(c)(1) fund (and that is not a “venture capital fund”[5]), then the following additional requirements apply for such investment adviser to qualify for the licensing exemption:

  1. Any such 3(c)(1) fund that is not a venture capital fund must be beneficially owned exclusively by persons who meet the definition of a “qualified client” under Advisers Act Rule 205-3[6] at the time of investment in the fund;
  2. The investment adviser to such 3(c)(1) fund that is not a venture capital fund must make certain disclosures to all investors including the disclosure of (i) all services, if any to be provided to investors, (ii) all duties, if any, the investment adviser owes to investors, and (iii) any other material information affecting the rights and responsibilities of the investors; and
  3. The investment adviser must obtain, on an annual basis, audited financial statements of each such 3(c)(1) fund that is not a venture capital fund, and deliver a copy of such audited financial statements to each beneficial owner of the fund.

Considerations for Using the New Exemption

Investment advisers with a place of business in Colorado or who are otherwise subject to the Act should consider the following in determining whether to take advantage of the licensing exemption under the New Rule:

  1. The SEC rules for investment adviser registration still apply. If an investment adviser is required to register under the SEC rules and regulations, this exemption does not apply.
  2. An investment adviser that provides investment advice to qualifying private funds that are 3(c)(1) funds and are not venture capital funds should carefully review the status of each of the fund’s investors, especially if the fund has accepted friends and family investors who might not satisfy the “qualified client” standard. However, the exemption does allow investment advisers with current non-qualified clients in 3(c)(1) funds that are not venture capital funds to be grandfathered under the exemption so long as: (i) the subject fund existed prior to July 15, 2017 (the “Effective Date”), (ii) as of the Effective Date, the subject fund ceases to accept investors who are not “qualified clients,” and (iii) the investment adviser provides all fund investors with the information required to be provided to 3(c)(1) fund investors under the New Rule, including annual audited financial statements.
  3. Investment advisers relying on this licensing exemption will still be required to file an abbreviated version of Form ADV – also known as an “exempt reporting adviser report” – which will continue to be publicly visible and which will contain certain information regarding the investment adviser’s business operations and ownership structure.
  4. The licensing exemption only applies to investment advisers who exclusively advise 3(c)(1) and 3(c)(7) funds. Investment advisers who advise funds that are not relying on one or both exclusions under the 1940 Act[7] will not qualify for this exemption.
  5. Per the instructions to Form ADV, all assets under management in a 3(c)(1) or 3(c)(7) fund will count towards the $100 million in assets under management threshold for eligibility to register as an investment adviser with the SEC. Additionally, if the assets under management in such a fund or funds meet or exceed $150 million, an investment adviser may be required to register with the SEC under the federal rules and regulations.

Although the Colorado Division of Securities did not issue any formal written guidance with respect to the New Rule prior to the effective date, additional guidance may be forthcoming. Such guidance is likely to include, for example, instructions on whether investment advisers who are already licensed in Colorado or registered with the SEC will need to first file on Form ADV-W withdrawing their registrations before submitting an exempt reporting adviser report in reliance on the New Rule.


[1] New rules with respect to cyber security, business continuity planning, and other matters are also among the rules that went effective on July 15, 2017. See https://www.colorado.gov/pacific/dora/securities-law-rules for more details.

[2] Under the previous rules, those private fund investment advisers with a place of business in Colorado or who were otherwise subject to the Act and who did not meet the eligibility requirements to register with the Securities and Exchange Commission (the “SEC”) were generally required to be licensed with the Colorado Division of Securities.

[3] Generally speaking, in accordance with the Advisers Act and the instructions to Form ADV, advisers exclusively to private funds are required to register with the SEC when they have reached $150 million in assets under management and are eligible to register with the SEC when they have reached $100 million in assets under management.

[4] A 3(c)(1) fund is a privately offered fund that has no more than 100 beneficial owners. Subject to certain exceptions, a 3(c)(7) fund is a privately offered fund whose beneficial owners all qualify as “qualified purchasers” under Section 2(a)(51) under the federal Investment Company Act of 1940 (the “1940 Act”).

[5] A private fund that meets the definition of a “venture capital fund” under the federal Advisers Act Rule 203(I)-1.

[6] Note that while all investors in a 3(c)(1) fund may be “accredited investors” as such term is defined under the Securities Act, not all accredited investors qualify as “qualified clients” under Rule 205-3 of the Advisers Act.

[7] Such non-qualifying funds include private funds that are excluded from the definition of “investment company” under Section 3(c)(5) or Section 3(c)(9) of the 1940 Act. However, a fund that qualifies for one of these exclusions but also meets the requirements for Section 3(c)(1) or Section 3(c)(7) could be included in the definition of “qualifying private fund.”

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