Arkansas

Historically, Arkansas has not been a particularly popular state for emerging managers, no doubt in part because until 2022, Arkansas did not provide for an exemption framework.  As such, private fund advisers based in Arkansas had to become registered investment advisers in order to operate.  However, Arkansas has adopted the North American Seucrities Administrators Association (“NASAA”) model rule exemption framework⁽¹⁾ as of August 1, 2022.  This is the most common exemption framework utilized by states.

With this framework, and with respect to hedge funds (VC funds have certain exceptions) the primary restrictions are:

• Investors must be “qualified clients” ($2.2m net worth).  Investors that are accredited but not also qualified clients cannot invest.
• Each fund must undergo an annual audit, the results of which must be furnished to investors.

There are a variety of other restrictions that are uncommon to pose issues, such as (without being a complete list) not being subject to certain disqualifying events, providing descriptions of services and duties to be provided to underlying investors (this is handled by way of standard offering docs), and notice filing by way of Form ADV.

Additionally, prospective fund managers should take note that this exemption framework is exclusively in the context of managing one or more private funds.  This exemption framework does not apply to general wealth advisory services, seperately managed accounts, and other advisory services.

Lastly, as is the case nationwide, managers are eligible to register with the SEC as a registered investment adviser (a “federally covered investment adviser”) at $110m aggregate AUM, and must register as such at $150m+ aggregate AUM, at which point those such adviser can no longer be exempt.

These restrictions ultimately make Arkansas a fairly standard locale in terms of requirements to operate an an exempt hedge fund manager.  There are a handful of states in which a non-NASAA model rule, state-specific exemption framework exists that is arguably more “lenient”, but those such states are in the minority, and there are certainly states that are more restrictive and/or which simply do not provide for an exemption framework whatsoever.

Bear in mind that these restrictions apply to advisers that have their principal place of business in Arkansas, which is generally based on the location of control persons of the fund.  As such, emerging managers that are physically located in Arkansas cannot simply “opt out” by virtue of declaring an arbitrary virtual office, and, like all state securities departments, the Arkansas Securities Department monitors adviser activity for jurisdictional compliance by way of Form ADV, Form D, and other related mandatory filings.

If you are unclear on whether you are able to operate as an ERA in the state of Arkansas, please seek the guidance of counsel.

If you believe you can operate as an ERA in Arkansas and are contemplating a fund launch, Repool can help by way of either end-to-end fund launch and/or standalone fund administration services.