Nebraska

Many states that do allow for private fund advisers to be exempt from being registered as registered investment advisers (“RIAs“) do so by way of adopting the “NASAA model rule,” the most common exemption framework used nationally, outright, or on a slightly modified basis.  A handful of states, however, have a state-specific ruleset for private fund advisers that is more lenient (subjectively) than the model rule, and Nebraska is one of them, at least as of September 17, 2024, under Section 48-42-003 of the Nebraska Administrative Code¹.  This makes Nebraska one of the easiest states to be an emerging manager in – although it seems that nonetheless, there are simply not that many emerging managers in Nebraska.

Instead of an exemption framework, whereby an investment adviser is, well, an investment adviser, and still subject to rules as such, but simply not required to register, which imposes significant additional requirements, Nebrasks is one of only a few states, alongside New York, that has an exclusion framework.  This means that a private fund adviser that meets certain criteria is not considered an investment adviser at all.  That said, that doesn’t mean no constraints apply.  Read more below.

When does state-specific jurisdiction apply?

One common question from emerging managers is when and whether a given state’s adviser rules apply.  The answer is relatively straightforward, but worth clarifying.  Some folks reading this article may be doing so because they are thinking something to the effect of “I am forming a Delaware hedge fund, so I care about Delaware hedge fund adviser laws”; if that’s you, you are probably mistaken unless you actually live there.  If you live in Nebraska, it is almost certainly the case that Nebraska’s rules apply.

A state’s jurisdiction applies if:

1. The manager is not yet an SEC-registered investment adviser (aka a “federally covered investment adviser”).
2. Any personnel of the manager involved in providing investment advice is based in that state.

An important note is that restrictions on allowable investor types stem from the adviser’s state’s requirements, not those of the state the investor is based in.  In other words, it does not matter what state an investor is in in terms of the restrictions described herein.

Practically speaking, and except for the rare case where personnel both (i) work in an office almost all of the time; and (ii) that office is in a different state than where they live, the simple output is that a state’s jurisdiction with respect to adviser matters applies if personnel of the manager live in that state.  Even simpler: if you are reading this article, probably it’s the case that wherever you live is whatever your applicable jurisdiction is.  Managers literally cannot register as SEC-registered investment advisers until they hit $100m in AUM (and must do so at $150m), and, in any case, the purpose of this article and the goal of most managers is to not register if possible.

For clarity, personnel involved in investment decision making or fundraising are considered to be in the business of providing investment advice.  Additionally, the place of formation of the fund is irrelevant; most funds are Delaware entities, but that does not mean Delaware adviser law applies (this is similar to how most companies are Delaware corporations but subject to the laws and taxes of their state of business).   Similarly, the address of the fund doesn’t matter if it doesn’t represent the actual physical presence of its personnel.  A lease or virtual address in some other place does not make that place the place of business from a regulatory structure; if that were the case, the law would have very little teeth and everyone would opt out of unfavorable states.

The NASAA Model Rule for exempt advisers:

(this section is for context; feel free to skip ahead to the next section to read about Nebrasks specifically if desired)

The most common exemption framework is called the “NASAA model rule.”  This is an exemption framework created by the North American Securities Adminstrator’s Association in collaboration with state-level legislators.  Of the many states with exemption frameworks, a large portion have elected to adopt the NASAA model rule essentially outright and/or on a modified basis.

In the NASAA model rule¹, advisers exclusively to private funds are able to be exempt from being required to become RIAs with their state (note that regardless, non-VC private fund advisers must become RIAs with the SEC/federally once they manage $150m+ in assets, so exemption is not possible indefinitely), subject to certain criteria.  There are a variety of criteria, much of which is important but likely a non-issue for most emerging managers (e.g. it is not available to certain “bad actors” or folks with certain prior securities violations, standard filings need to be completed, disclosures need to be given to investors, etc).

The two most subjectively notable requirements are:

1. Investors in exempt manager-managed private funds must be “qualified clients,” ($2.2m+ net worth) and not merely accredited investors.
2. An annual audit is required per each fund (generally within 120 days of calendar year close) and the results must be distributed to investors.

Both of these requirements match those of RIAs for private funds (i.e. RIAs are also restricted to qualified clients in pooled capital vehicles that charge performance-based fees and must have each of their funds undergo an annual, third-party audit).  However, ERAs have significantly less requirements in other respects, such as record-keeping, custody, policies and procedures, etc.

There are other requirements associated with being an ERA under the NASAA model rule that this article does not consider, but generally speaking, such requirements (such as certain disclosures and reporting to investors) are de facto handled in the course of procuring standard hedge fund back office services such as fund administration or fund offering documents, and don’t require specific pre-launch contemplation as such.

The adviser and fund-level filings with the SEC and/or applicable states are generally outsourced, and, if a provider like Repool is utilized, a relative non-issue.  The disclosures requirements are handled by way of a quality set of standard hedge fund offering documents, such as those that Repool creates in the course of our fund-in-a-box offerings.

Thus, assuming (1) and (2) above can be met, and there is less than $150m at play across the fund(s) in question, a private fund adviser can be exempt under the NASAA model rule and states that follow its framework.

Nebraska’s exclusion framework:

Nebraska does not have an exemption regime for private fund advisers. Instead, exclusion regime; that is, if certain criteria met, such private fund advisers are excluded from the definition of “investment adviser” altogether.  We’ll refer to such managers as “excluded advisers” for simplicity.  This is an important distinction from the more common framework utilized by many other states, which is to provide for exemptions from registration as an investment adviser.  Such exempt advisers (commonly referred to as “exempt reporting advisers“, or “ERAs“) are still investment advisers and subject to applicable law, but are, as the name suggests, exempt from a number of requirements that registered investment advisers would have.

An additional implication is that no annual, third-party audit of each fund is required, although many managers will still electively opt for audits.

(As a semantic aside, it is common to hear people still refer to advisers that are excluded as “ERAs”.  This is technically incorrect, given the above, but in practice it’s not a big deal.)

Exclusion threshold:

The qualification to be considered excluded in Nebraska – specifically with respect to private fund advisers – is to:

1. Not itself (or have any employee or affiliate be) subject to a “bad actor” disqualifying event;
2. File any filings otherwise required by the SEC (such as Form ADV beginning at $25m+ in total AUM); and
3. Exclusively advise “qualifying private funds,” which standard hedge funds are.

To remind, even in states with an exemption regime as well as federally, private fund advisers (i.e. hedge fund managers) have to become SEC registered investment advisers (aka “federally covered investment advisers“) at $150m total AUM, so the exclusion is not indefinite; however, for many emerging managers, it is in a practical sense.

Still, certain filings are still required, because the SEC also has a view on emerging managers.  One of those is Form ADV, contemplated below:

Form ADV:

Generally, investment advisers (and therefore, fund managers) must file Form ADV with either or both the state and/or SEC depending on the rules of the state of their place of business as well as their assets under management.  The SEC requires Form ADV to be filed with the SEC beginning at the SEC’s threshold for jurisdiction, which starts at $25m.   However, most states require Form ADV to be used to notice filed with the state for exempt managers at any AUM level.  That puts excluded advisers in a unique spot, because, as described above, excluded advisers are, well, not considered advisers at all by Nebraska, and therefore, they don’t need to notice file with Nebraska by way of Form ADV.

Putting the above together, no Form ADV needs to be filed at all until that SEC threshold of $25m.  This is pretty unique; in almost all other states, Form ADV filing is required from the outset, and then at $25m, Form ADV is filed with both the state and the SEC.

(Bear in mind that Form ADV is by no means the only filing that must be done in association with operating a private funds, and excluded managers must still contemplate those other such filings.)

Investor type restrictions:

Some of you reading this may be aware that the Investment Advisers Act of 1940 (and/or similar state level advisory law) imposes restrictions on the types of investors that may participate in a hedge fund.  Thus, one might think something to the effect of: “okay, then if i’m excluded from being considered an investment adviser entirely, I can take any investor, accredited or not, into my fund(s)”.  That is not an unreasonable line of thinking, but it is, practically speaking, incorrect.

This is because while it is true that there would be no restriction from Nebraska’s investment advisory related laws, hedge funds still need to abide by the Securities Act of 1933.  This article will not contemplate that act in detail (click the link for more), but, in short, the Securities Act of 1933 has its own requirement that hedge funds are restricted to accredited investors.

Thus, hedge funds managed by Nebraska based excluded advisers are still restricted to investors that are at least accredited.

Audit:

Audit requirements come into play either by virtue of (i) registered investment adviser requirements; and/or (ii) state-level exempt reporting adviser related requirements.  By audit, we mean an audit of the fund’s financials on an annual basis.  All RIAs must have their fund(s) undergo an annual audit, and then such audit must be delivered to all underlying investors.  In many states, this is also true even of ERAs – although not always.  But, to be clear, this requirement is from the Investment Advisers Act and/or similar state level advisory law.  As discussed, excluded advisers are, well, excluded from those considerations.

In Nebraska, then, there is no audit requirement for funds managed by an excluded manager.

Conclusion:

As long as a Nebraska-based emerging manager is only managing hedge funds, it will generally be able to be considered excluded.

Outside of these considerations, the process of launching, structuring, and then assembling the required back office functions of a hedge fund is itself a complex process with many moving pieces and traditionally, high costs.

If you are thinking about launching a hedge fund as a NE-based manager, Repool’s deep expertise and fund-in-a-box can help; let’s get in touch.