Yes, mirrors SEC
Accredited
No
No
Disclaimer
Summary
South Dakota, although not a particularly popular locale for fund managers or hedge funds, does have an exemption framework for private fund advisers that is straightforward and non-restrictive. This makes South Dakota a relatively favorable place for emerging managers.
Private fund adviser rules in SD
South Dakota essentially allows private fund advisers that meet the SEC's criteria for exemption to also be exempt in South Dakota. This is a simpler and more favorable framework than the more common NASAA model rule framework.
Investor restrictions
Investors must be at least accredited, but do not also need to be qualified clients.
Reporting requirements
State notice filing with SD is required via Form ADV. At $25m of AUM, Form ADV must also be concurrently be filed with the SEC.
Audit requirement
No annual fund audit is required for funds managed by exempt private fund advisers.
Detailed Summary
As one of the most sparesely populated states in the U.S., and without a particularly prominent financial industry or neighboring financial hubs, South Dakota is, perhaps unsurprisingly, not exactly a hotbed of private fund managers or hedge funds. On the other hand, for prospective emerging managers based in South Dakota, the state nonetheless happens to have one of the relatively more favorable exemption frameworks available.
In general, private fund advisers seeking to be exempt from registration need to adhere to both state-level rules for private fund managers as well as SEC-level rules for the same, and it is almost always the case that a given state’s rules for exemption are more restrictive than those of the SEC. Put another way, by virtue of meeting their applicable state’s adviser exemption rules, fund managers generally always also meet the SEC’s rules. In South Dakota, though, the rules are identical; this means that South Dakota is relatively more favorable than other states.
The SEC’s private fund adviser exemption (203(m)):
To contextualize, let’s first start by looking at the SEC’s private fund adviser exemption by way of 17 CFR § 275.203(m)-1¹ of the Investment Advisers Act of 1940 (the “Advisers Act“), which governs all investment advisers.
From the SEC’s perspective, at a general level, an investment adviser is exempt from federal registration if:
- It advises only certain “qualifying private funds” (i.e. no seperately managed accounts, general wealth advisory, etc)
- It has less than $150m net assets under management (“AUM“) across the funds it manages.
“Qualifying private fund” has a specific definition that this article will not delve into, but broadly speaking, hedge funds are typically by definition qualifying private funds. It would be fairly unusual for a hedge fund to not meet the definition of a qualifying private fund. Thus, a simpler way of looking at things for most private hedge fund managers is, with respect to SEC exemption criteria, just whether or not they have less than $150m AUM. It should be noted that one of the underlying requirements of operating a qualifying private fund is also that its investors are all at least “accredited investors,” because a private fund must generally offer its securities (i.e. raise from investors) by way of an allowed “safe harbor offering” which generally has the output of requiring investors to be accredited investors.
This means that most emerging managers will be able to be exempt from federal registration. Again, states typically impose a higher level of restriction, and an emerging private fund manager seeking exemption must therefore look to the state as the primary limiting factor.
South Dakota’s private fund adviser exemption:
South Dakota’s Administrative Rules (§ 20:08:05:15(2)²) set forth requirements for investment advisers and says that if an adviser is exempt under 203(m), it is also exempt from registration with South Dakota. Moreover, while many states that have an exemption framework require an annual audit of each fund managed by an exempt adviser, South Dakota does not. State notice filing by way of Form ADV is still required, but that is almost always the case with exemption frameworks. Technically speaking, South Dakota also exempts investment advisers that meet Section 203(b) or 203(l) of the Advisers Act, but for private fund advisers, those are not particularly relevant.
Conclusion:
Most emerging hedge fund managers in South Dakota will be able to operate as exempt from registration. This is one of the shortest state level guides on our site, which speaks to the simplicity and straightforwardness of South Dakota’s exemption framework. Most other states have more complicated considerations and subjectively more restrictive requirements that must be met for a private fund adviser to be exempt.
Still, the Advisers Act and state-level exemption and/or registration considerations are just one piece of the puzzle when it comes to launching and operating a hedge fund as an emerging manager. Repool makes that process as easy as possible with our industry-leading emerging manager launch solutions; if you are interested in launching a hedge fund and are based in South Dakota, tell us about your potential fund and we’d love to see if we can help.
