Virginia

Virginia doesn’t have a particularly prominent hedge fund industry, but, similar to Maryland and DC, still has some amount of hedge fund presence, owing to many financial firms having presence in DC and a decent number of transplants from more prominent hub states.

Despite it’s relative non-prominence, Virginia is a perfectly viable locale for many emerging managers owing to its adoption of the “NASAA model rule,” the most common exemption framework used nationally (and explained further below).  The restrictions that apply to an exempt reporting adviser (an “ERA”) and a registered investment adviser (an “RIA”) in Virginia are similar from a high-level perspective; naturally, however, an ERA has significantly less administrative and dollar costs as compared to an RIA.

The NASAA Model Rule for exempt advisers:

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 states with exemption frameworks, many 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.

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.

Virginia’s Exemption Framework:

While many states adopt a NASAA model rule-like framework, Virginia has adopted the NASAA model rule essentially in its entirety.  Therefore, the above mentioned restrictions accurately describe considerations for private fund managers seeking to be exempt in Virginia.

Conclusion:

So long as an emerging manager is able to raise its capital goals exclusively from investors that are qualified clients in addition to being accredited, and have sufficient minimum capital to support the additional cost implications of an annual audit, most such emerging managers based in Virginia will be able to avoid registration and instead operate as exempt.

Naturally, there are still a wide variety of administrative and regulatory filing obligations to consider, as launching a private fund is far from a trivial task, but Repool’s fund-in-a-box can significantly simplify matters and make operating a fund as an Virginia based emerging manager as simple as possible, allowing managers to launch quickly and focus primarily on fundraising and investing.