Yes - exclusion framework
Accredited
No
No
Disclaimer
Summary
Private fund adviser rules in NY
New York has the most hedge funds and managers in the country, and it also has one of the most favorable frameworks for emerging managers. Many hedge fund managers are able to be excluded from NY’s definition of an “investment adviser” altogether; therefore, managers generally do not need to register until they hit $150m+ AUM.
Excluded adviser criteria in New York
New York is relatively unique amongst states - in a manner that many managers would consider favorable - because instead of merely allowing certain advisers to be exempt from registration, it simply does not consider them investment advisers at all. As long as a fund manager has five or fewer funds, it is excluded (assuming no other non-fund advisory services).
Investor restrictions
Investors must all be at least accredited investors (because of the Securities Act, not NY adviser -related laws).
Reporting requirements
Excluded NY-based managers with less than $25m AUM need not file Form ADV.
Audit requirements
No annual audit is required for NY-based excluded managers.
Detailed Summary
New York State does not have an exemption regime for private fund advisers. Instead, it has a de minimus exclusion regime; that is, below a certain threshold (described further herein), private fund advisers are excluded from the definition of “investment adviser” in New York entirely. 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.
Put another way, if you (or the entity to which you belong) are engaging in investment advice, then you are considered an investment adviser, and subject to investment advisory laws. New York says that certain persons are not considered investment advisers at all.
(As a semantic aside, it is common to hear people still refer to New York based advisers that are excluded as “ERAs”. This is technically incorrect, given the above, but in practice the implications are substantially similar so it’s not a big deal.)
Exclusion threshold:
The qualification to be considered excluded in New York – specifically with respect to private fund advisers – is to have five (5) or fewer funds.
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 it would be rare for the five (5) fund limit to be the reason someone has to register; by the time a manager has that many funds, they’ll almost certainly have exceeded the $150m SEC registration threshold anyways!
There is no exemption/ERA regime, so if a private fund adviser is unable to claim the exclusion status, it must become a state or SEC registered investment adviser, as applicable.
Form ADV:
As a brief recap of how Form ADV works, 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 file with the state for exempt managers at any AUM level. That puts New York based advisers in a unique spot, because, as described above, excluded advisers are, well, not considered advisers at all by New York, and therefore, they don’t need to notice file with New York by way of Form ADV.
Putting the above together, you might reasonably conclude that no Form ADV needs to be filed at all until that SEC threshold of $25m. And that’s correct!
Ultimately, then, for New York private fund advisers with five or fewer funds, no ADV is necessary until $25m in AUM. This is pretty unique; in essentially 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 New York’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 New York 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 New York, then, there is no audit requirement for funds managed by an excluded manager.
Summary:
New York has one of the most subjectively favorable regimes for emerging managers. There is no state that has lesser requirements than New York; at best, other states are similar, and a majority of states are “worse” insofar as restrictions, reporting requirements, and audit requirements. This has the practical impact of giving managers in New York the ability to operate with a lower service provider cost structure (audits are expensive!), and they can therefore launch with less capital than would otherwise be the case in other states, allowing such managers to begin accumulating a track record and getting to market faster. However, there are still plenty of general launch and ongoing compliance considerations relating to other, non-adviser related rules and restrictions that apply to private funds, and care should be taken that a manager adapts its operations as it grows in AUM and applicable laws change.
If you are interested in launching a fund in New York as an emerging manager, let us know – Repool is based in the heart of New York City and has launched (and/or administers) a wide variety of emerging and established funds in the state.
