Oregon

Oregon is in the bottom quartile of states in terms of known private fund count, and of those funds, it’s likely that, like other West Coast states, many skew towards alternative assets rather than hedge fund strategies.  Washington and California are both comparitively significantly more prominent as hedge fund locales.  Nonetheless, Oregon actually has one of the most favorable exemption frameworks for a prospective emerging manager.

At a national level, most (but not all) states provide for an exemption framework, and those that do generally utilize what is called the “NASAA model rule” or a substantially similar ruleset.  The NASAA model rule is explained further below for context.  However, Oregon does not, and instead has its own, simpler exemption framework that is amongst the most lenient in the country (see OR Finance and Securities Regulation 441-175-0030¹).  In short, so long as an adviser conducts no public advertising or general solitation and restricts investors to being at least accredited, it may be exempt from registration as a registered investment adviser in Oregon.

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.  It is not uncommon for first-time managers to think 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.  Instead, it’s most likely the case that if you live in Oregon, you care about Oregon’s regime.

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 to the next section if you wish to read about Oregon specifically, since it has neither adopted the NASAA rule nor a modified version of it.

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.

Oregon’s Exemption Framework:

As mentioned, Oregon has its own exemption framework, and has not adopted the NASAA model rule or a modified version thereof.

In OR, an investment adviser can be exempt from registration if:

• No public advertising or general solicitation is conducted
• All clients are accredited investors

There is no annual audit requirement for the adviser’s funds, either.

No public advertising or general solicitation is generally the case for most private funds anyways, as a matter of course since most funds offer their interests to investors by way of Rule 506(b) under the Securities Act.  However, there is another offering type called Rule 506(c) which some funds make use of, which does permit general solicitation, but, because Oregon prohibits an exempt adviser from doing as such, such a 506(c) offering would not be permitted in Oregon unless the adviser was a registered investment adviser.  For context, 506(c) offerings are fairly uncommon anyways.

However, that does not mean that a OR-based hedge fund manager has no restrictions to be aware of.  A number of esoteric filings initially, annually, and point-in-time are still rquired.  Further, the Investment Advisers Act and state-level adviser laws are just one of the regulatory acts that govern hedge funds and fund managers, and these other regulatory acts will still impose restrictions.  This article’s purpose is not to delve into those in great detail (though you can read more about them here).

Conclusion:

Most Oregon based emerging managers can be exempt from registration as an investment adviser, and can raise capital from merely accredited investors while still charging fees.

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.  Done the traditional way, hedge fund launch commonly costs $50-100k year 1 and can take 3-6 months.

If you’d like to explore launching as an emerging manager in OR as an exempt adviser (or as a registered investment adviser), Repool can dramatically simplify the process, reduce costs, and accelerate launch timing.  Let us know how you’re thinking about your fund here and someone will reach out.