SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

Release No. IA-3222; File No. S7-37-10

RIN 3235-AK81

Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than 

$150 Million in Assets Under Management, and Foreign Private Advisers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission (the ―Commission‖) is adopting rules 

to implement new exemptions from the registration requirements of the Investment Advisers Act 

of 1940 for advisers to certain privately offered investment funds; these exemptions were 

enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the ―DoddFrank Act‖). As required by Title IV of the Dodd-Frank Act – the Private Fund Investment 

Advisers Registration Act of 2010 – the new rules define ―venture capital fund‖ and provide an 

exemption from registration for advisers with less than $150 million in private fund assets under 

management in the United States. The new rules also clarify the meaning of certain terms 

included in a new exemption from registration for ―foreign private advisers.‖

DATES: Effective Date: July 21, 2011.

FOR FURTHER INFORMATION CONTACT: Brian McLaughlin Johnson, Tram N. 

Nguyen or David A. Vaughan, at (202) 551-6787 or <IArules@sec.gov>, Division of Investment 

Management, U.S. Securities and Exchange Commission, 100 F Street, NE, Washington, DC 

20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is adopting rules 203(l)-1, 

203(m)-1 and 202(a)(30)-1 (17 CFR 275.203(l)-1, 275.203(m)-1 and 275.202(a)(30)-1) under the 
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Investment Advisers Act of 1940 (15 U.S.C. 80b) (the ―Advisers Act‖).1

Table of Contents

I. BACKGROUND ................................................................................................................ 2

II. DISCUSSION..................................................................................................................... 9

A. Definition of Venture Capital Fund ........................................................................ 9

1. Qualifying Investments............................................................................. 19

2. Short-Term Holdings................................................................................ 32

3. Qualifying Portfolio Company ................................................................. 34

4. Management Involvement ........................................................................ 52

5. Limitation on Leverage............................................................................. 55

6. No Redemption Rights.............................................................................. 61

7. Represents Itself as Pursuing a Venture Capital Strategy......................... 65

8. Is a Private Fund ....................................................................................... 68

9. Application to Non-U.S. Advisers............................................................ 68

10. Grandfathering Provision.......................................................................... 72

B. Exemption for Investment Advisers Solely to Private Funds With Less Than

$150 Million in Assets Under Management ......................................................... 75

1. Advises Solely Private Funds ................................................................... 76

2. Private Fund Assets................................................................................... 81

3. Assets Managed in the United States........................................................ 93

4. United States Person ................................................................................. 99

C. Foreign Private Advisers..................................................................................... 102

1. Clients..................................................................................................... 104

2. Private Fund Investor.............................................................................. 106

3. In the United States................................................................................. 115

4. Place of Business.................................................................................... 120

5. Assets Under Management ..................................................................... 122

D. Subadvisory Relationships and Advisory Affiliates........................................... 124

III. CERTAIN ADMINISTRATIVE LAW MATTERS ...................................................... 128

IV. PAPERWORK REDUCTION ANALYSIS................................................................... 129

V. COST-BENEFIT ANALYSIS........................................................................................ 130

VI. REGULATORY FLEXIBILITY CERTIFICATION..................................................... 197

VII. STATUTORY AUTHORITY ........................................................................................ 199

TEXT OF RULES

I. BACKGROUND

On July 21, 2010, President Obama signed into law the Dodd-Frank Act,2 which, among 

 

1 Unless otherwise noted, all references to rules under the Advisers Act will be to Title 17, Part 275 

of the Code of Federal Regulations (17 CFR 275).

2 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 

1376 (2010).
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other things, repeals section 203(b)(3) of the Advisers Act.3 Section 203(b)(3) exempted any 

investment adviser from registration if the investment adviser (i) had fewer than 15 clients in the 

preceding 12 months, (ii) did not hold itself out to the public as an investment adviser and 

(iii) did not act as an investment adviser to a registered investment company or a company that 

has elected to be a business development company (the ―private adviser exemption‖).4 Advisers 

specifically exempt under section 203(b) are not subject to reporting or recordkeeping provisions 

under the Advisers Act, and are not subject to examination by our staff.5

The primary purpose of Congress in repealing section 203(b)(3) was to require advisers 

to ―private funds‖ to register under the Advisers Act.6 Private funds include hedge funds, private 

equity funds and other types of pooled investment vehicles that are excluded from the definition 

of ―investment company‖ under the Investment Company Act of 19407(―Investment Company 

 

3

In this Release, when we refer to the ―Advisers Act,‖ we refer to the Advisers Act as in effect on 

July 21, 2011.

4

15 U.S.C. 80b-3(b)(3) as in effect before July 21, 2011.

5 Under section 204(a) of the Advisers Act, the Commission has the authority to require an 

investment adviser to maintain records and provide reports, as well as the authority to examine 

such adviser‘s records, unless the adviser is ―specifically exempted‖ from the requirement to 

register pursuant to section 203(b) of the Advisers Act. Investment advisers that are exempt from 

registration in reliance on other sections of the Advisers Act (such as sections 203(l) or 203(m) 

which we discuss below) are not ―specifically exempted‖ from the requirement to register 

pursuant to section 203(b), and thus the Commission has authority under section 204(a) of the 

Advisers Act to require those advisers to maintain records and provide reports and has authority 

to examine such advisers‘ records.

6

See S. Rep. No. 111-176, at 71-3 (2010) (―S. Rep. No. 111-176‖); H. Rep. No. 111-517, at 866 

(2010) (―H. Rep. No. 111-517‖). H. Rep. No. 111-517 contains the conference report 

accompanying the version of H.R. 4173 that was debated in conference. While the Senate voted 

to exempt private equity fund advisers in addition to venture capital fund advisers from the 

requirement to register under the Advisers Act, the Dodd-Frank Act exempts only venture capital 

fund advisers. Compare Restoring American Financial Stability Act of 2010, S. 3217, 111th 

Cong. § 408 (2010) (as passed by the Senate) with The Wall Street Reform and Consumer 

Protection Act of 2009, H.R. 4173, 111th Cong. (2009) (as passed by the House) (―H.R. 4173‖) 

and Dodd-Frank Act (2010), supra note 2.

7

15 U.S.C. 80a.
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Act‖) by reason of section 3(c)(1) or 3(c)(7) of such Act.8 Section 3(c)(1) is available to a fund 

that does not publicly offer the securities it issues9and has 100 or fewer beneficial owners of its 

outstanding securities.10 A fund relying on section 3(c)(7) cannot publicly offer the securities it 

issues11 and generally must limit the owners of its outstanding securities to ―qualified 

purchasers.‖12

Each private fund advised by an adviser has typically qualified as a single client for 

purposes of the private adviser exemption.13 As a result, investment advisers could advise up to 

14 private funds, regardless of the total number of investors investing in the funds or the amount 

 

8

Section 202(a)(29) of the Advisers Act defines the term ―private fund‖ as ―an issuer that would be 

an investment company, as defined in section 3 of the Investment Company Act of 1940 (15 

U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that Act.‖

9

Interests in a private fund may be offered pursuant to an exemption from registration under the 

Securities Act of 1933 (15 U.S.C. 77) (―Securities Act‖). Notwithstanding these exemptions, the 

persons who market interests in a private fund may be subject to the registration requirements of 

section 15(a) under the Securities Exchange Act of 1934 (―Exchange Act‖) (15 U.S.C. 78o(a)). 

The Exchange Act generally defines a ―broker‖ as any person engaged in the business of 

effecting transactions in securities for the account of others. Section 3(a)(4)(A) of the Exchange 

Act (15 U.S.C. 78c(a)(4)(A)). See also Definition of Terms in and Specific Exemptions for Banks, 

Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities 

Exchange Act of 1934, Exchange Act Release No. 44291 (May 11, 2001) [66 FR 27759 (May 18, 

2001)], at n.124 (―Solicitation is one of the most relevant factors in determining whether a person 

is effecting transactions.‘‘); Political Contributions by Certain Investment Advisers, Investment 

Advisers Act Release No. 3043 (July 1, 2010) [75 FR 41018 (July 14, 2010)], n.326 (―Pay to Play 

Release‖).

10 See section 3(c)(1) of the Investment Company Act (providing an exclusion from the definition of 

―investment company‖ for any ―issuer whose outstanding securities (other than short-term paper) 

are beneficially owned by not more than one hundred persons and which is not making and does 

not presently propose to make a public offering of its securities.‖).

11 See supra note 9.

12 See section 3(c)(7) of the Investment Company Act (providing an exclusion from the definition of 

―investment company‖ for any ―issuer, the outstanding securities of which are owned exclusively 

by persons who, at the time of acquisition of such securities, are qualified purchasers, and which 

is not making and does not at that time propose to make a public offering of such securities.‖). 

The term ―qualified purchaser‖ is defined in section 2(a)(51) of the Investment Company Act.

13 See rule 203(b)(3)-1(a)(2) as in effect before July 21, 2011.
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of assets of the funds, without the need to register with us.14

In Title IV of the Dodd-Frank Act (―Title IV‖), Congress generally extended Advisers 

Act registration to advisers to hedge funds and many other private funds by eliminating the 

private adviser exemption.15 In addition to removing the broad exemption provided by 

section 203(b)(3), Congress amended the Advisers Act to create three more limited exemptions 

from registration under the Advisers Act.16 These amendments become effective on July 21, 

2011.17 New section 203(l) of the Advisers Act provides that an investment adviser that solely

advises venture capital funds is exempt from registration under the Advisers Act (the ―venture 

capital exemption‖) and directs the Commission to define ―venture capital fund‖ within one year 

of enactment.18 New section 203(m) of the Advisers Act directs the Commission to provide an 

exemption from registration to any investment adviser that solely advises private funds if the 

 

14 See Staff Report to the United States Securities and Exchange Commission, Implications of the 

Growth of Hedge Funds, at 21 (2003), http://www.sec.gov/news/studies/hedgefunds0903.pdf 

(discussing section 203(b)(3) of the Advisers Act as in effect before July 21, 2011). Concern 

about this lack of Commission oversight led us to adopt a rule in 2004 extending registration to 

hedge fund advisers. See Registration Under the Advisers Act of Certain Hedge Fund Advisers, 

Investment Advisers Act Release No. 2333 (Dec. 2, 2004) [69 FR 72054 (Dec. 10, 2004)] 

(―Hedge Fund Adviser Registration Release‖). This rule was vacated by a federal court in 2006. 

Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006) (―Goldstein‖).

15 Section 403 of the Dodd-Frank Act amended section 203(b)(3) of the Advisers Act by repealing 

the prior private adviser exemption and inserting a ―foreign private adviser exemption.‖ See infra

Section II.C. Unlike our 2004 rule, which sought to apply only to advisers of ―hedge funds,‖ the 

Dodd-Frank Act requires that, unless another exemption applies, all advisers previously eligible 

for the private adviser exemption register with us regardless of the type of private funds or other 

clients the adviser has.

16 Title IV also created exemptions and exclusions in addition to the three discussed at length in this 

Release. See, e.g., sections 403 and 409 of the Dodd-Frank Act (exempting advisers to licensed 

small business investment companies from registration under the Advisers Act and excluding 

family offices from the definition of ―investment adviser‖ under the Advisers Act). We are 

adopting a rule defining ―family office‖ in a separate release (Family Offices, Investment 

Advisers Act Release No. 3220 (June 22, 2011)).

17 Section 419 of the Dodd-Frank Act (specifying the effective date for Title IV).

18 See section 407 of the Dodd-Frank Act (exempting advisers solely to ―venture capital funds,‖ as 

defined by the Commission).
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adviser has assets under management in the United States of less than $150 million (the ―private 

fund adviser exemption‖).19 In this Release, we will refer to advisers that rely on the venture 

capital and private fund adviser exemptions as ―exempt reporting advisers‖ because 

sections 203(l) and 203(m) provide that the Commission shall require such advisers to maintain 

such records and to submit such reports ―as the Commission determines necessary or appropriate 

in the public interest or for the protection of investors.‖20

Section 203(b)(3) of the Advisers Act, as amended by the Dodd-Frank Act, provides an 

exemption for certain foreign private advisers (the ―foreign private adviser exemption‖).21 The 

term ―foreign private adviser‖ is defined in new section 202(a)(30) of the Advisers Act as an 

investment adviser that has no place of business in the United States, has fewer than 15 clients in

the United States and investors in the United States in private funds advised by the adviser,22 and 

less than $25 million in aggregate assets under management from such clients and investors.23

 

19 See section 408 of the Dodd-Frank Act (directing the Commission to exempt private fund 

advisers with less than $150 million in aggregate assets under management in the United States).

20 See sections 407 and 408 of the Dodd-Frank Act.

21 Advisers specifically exempt under section 203(b) are not subject to reporting or recordkeeping 

provisions under the Advisers Act, and are not subject to examination by our staff. See supra

note 5.

22 Subparagraph (B) of section 202(a)(30) refers to the number of ―clients and investors in the 

United States in private funds,‖ while subparagraph (C) refers to the assets of ―clients in the 

United States and investors in the United States in private funds‖ (emphasis added). We interpret 

these provisions consistently so that only clients in the United States and investors in the United 

States should be included for purposes of determining eligibility for the exemption under

subparagraph (B).

23 The exemption is not available to an adviser that ―acts as — (I) an investment adviser to any 

investment company registered under the [Investment Company Act]; or (II) a company that has 

elected to be a business development company pursuant to section 54 of [that Act], and has not 

withdrawn its election.‖ Section 202(a)(30)(D)(ii). We interpret subparagraph (II) to mean that 

the exemption is not available to an adviser that advises a business development company. This 

exemption also is not available to an adviser that holds itself out generally to the public in the 

United States as an investment adviser. Section 202(a)(30)(D)(i).
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These new exemptions are not mandatory.24 Thus, an adviser that qualifies for any of the 

exemptions could choose to register (or remain registered) with the Commission, subject to 

section 203A of the Advisers Act, which generally prohibits most advisers from registering with 

the Commission if they do not have at least $100 million in assets under management.25

On November 19, 2010, the Commission proposed three rules that would implement 

these exemptions.26 First, we proposed rule 203(l)-1 to define the term ―venture capital fund‖ for 

purposes of the venture capital exemption. Second, we proposed rule 203(m)-1 to implement the 

private fund adviser exemption. Third, in order to clarify the application of the foreign private 

adviser exemption, we proposed new rule 202(a)(30)-1 to define several terms included in the 

statutory definition of a foreign private adviser as defined in section 202(a)(30) of the Advisers 

Act.27 On the same day, we also proposed rules to implement other amendments made to the 

 

24 An adviser choosing to avail itself of an exemption under section 203(l), 203(m) or 203(b)(3), 

however, may be required to register as an adviser with one or more state securities authorities. 

See section 203A(b)(1) of the Advisers Act (exempting from state regulatory requirements any 

adviser registered with the Commission or that is not registered because such person is excepted 

from the definition of an investment adviser under section 202(a)(11)). See also infra note 488

(discussing the application of section 222 of the Advisers Act).

25 Section 203A(a)(1) of the Advisers Act generally prohibits an investment adviser regulated by the 

state in which it maintains its principal office and place of business from registering with the 

Commission unless it has at least $25 million of assets under management. Section 203A(b) 

preempts certain state laws regulating advisers that are registered with the Commission. Section 

410 of the Dodd-Frank Act amended section 203A(a) to also prohibit generally an investment 

adviser from registering with the Commission if the adviser has assets under management 

between $25 million and $100 million and the adviser is required to be registered with, and if 

registered, would be subject to examination by, the state security authority where it maintains its 

principal office and place of business. See section 203A(a)(2) of the Advisers Act. In each of 

subparagraphs (1) and (2) of section 203A(a), additional conditions also may apply. See

Implementing Adopting Release, infra note 32, at section II.A.

26 Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers with Less than $150 

Million in Assets under Management, and Foreign Private Advisers, Investment Advisers Act 

Release No. 3111 (Nov. 19, 2010) [75 FR 77190 (Dec. 10, 2010)] (―Proposing Release‖).

27 Proposed rule 202(a)(30)-1 included definitions for the following terms: (i) ―client;‖ 

(ii) ―investor;‖ (iii) ―in the United States;‖ (iv) ―place of business;‖ and (v) ―assets under 

management.‖ See discussion in section II.C of the Proposing Release, supra note 26. We 
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Advisers Act by the Dodd-Frank Act, which included reporting requirements for exempt 

reporting advisers.28

We received over 115 comment letters in response to our proposals to implement the new 

exemptions.29 Most of these letters were from venture capital advisers, other types of private 

fund advisers, and industry associations or law firms on behalf of private fund and foreign 

investment advisers.30 We also received several letters from investors and investor groups.31 

Although commenters generally supported the various proposed rules, many suggested 

modifications designed to expand the breadth of the exemptions or to clarify the scope of one or 

more elements of the proposed rules. Commenters also sought interpretative guidance on certain 

aspects of the scope of each of the rule proposals and related issues.

 

proposed rule 202(a)(30)-1, in part, pursuant to section 211(a) of the Advisers Act, which 

Congress amended to explicitly provide us with the authority to define technical, trade, and other 

terms used in the Advisers Act. See section 406 of the Dodd-Frank Act.

28 Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers 

Act Release No. 3110 (Nov. 19, 2010) [75 FR 77052 (Dec. 10, 2010)] (―Implementing Proposing 

Release‖).

29 The comment letters on the Proposing Release (File No. S7-37-10) are available at: 

http://www.sec.gov/comments/s7-37-10/s73710.shtml. We also considered comments submitted 

in response to the Implementing Proposing Release that were germane to the rules adopted in this 

Release.

30 See, e.g., Comment Letter of Biotechnical Industry Organization (Jan. 24, 2011) (―BIO Letter‖); 

Comment Letter of Coalition of Private Investment Companies (Jan. 28, 2011) (―CPIC Letter‖); 

Comment Letter of European Private Equity and Venture Capital Association (Jan. 24, 2011 

(―EVCA Letter‖); Comment Letter of O‘Melveny & Myers LLP (Jan. 25, 2011) (―O‘Melveny 

Letter‖); Comment Letter of Norwest Venture Partners (Jan. 24, 2011) (―Norwest Letter‖).

31 See, e.g., Comment Letter of the American Federation of Labor and Congress of Industrial 

Organizations (Jan. 24, 2011) (―AFL-CIO Letter‖); Comment Letter of Americans for Financial 

Reform (Jan. 24, 2011) (―AFR Letter‖); Comment Letter of The California Public Employees 

Retirement System (Feb. 10, 2011) (―CalPERS Letter‖). See also, e.g., Comment Letter of 

Adams Street Partners (Jan. 24, 2011); Comment Letter of Private Equity Investors, Inc. (Jan. 21, 

2011) (―PEI Funds Letter‖) (letters from advisers of funds that invest in other venture capital and 

private equity funds).
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II. DISCUSSION

Today, the Commission is adopting rules to implement the three new exemptions from 

registration under the Advisers Act. In response to comments, we have made several 

modifications to the proposals. In a separate companion release (the ―Implementing Adopting

Release‖) we are adopting rules to implement other amendments made to the Advisers Act by 

the Dodd-Frank Act, some of which also concern certain advisers that qualify for the exemptions 

discussed in this Release.32

A. Definition of Venture Capital Fund

We are adopting new rule 203(l)-1 to define ―venture capital fund‖ for purposes of the 

new exemption for investment advisers that advise solely venture capital funds.33 In summary, 

the rule defines a venture capital fund as a private fund that: (i) holds no more than 20 percent of 

the fund‘s capital commitments in non-qualifying investments (other than short-term holdings)

(―qualifying investments‖ generally consist of equity securities of ―qualifying portfolio 

companies‖ that are directly acquired by the fund, which we discuss below); (ii) does not borrow 

or otherwise incur leverage, other than limited short-term borrowing (excluding certain 

guarantees of qualifying portfolio company obligations by the fund); (iii) does not offer its 

investors redemption or other similar liquidity rights except in extraordinary circumstances; 

(iv) represents itself as pursuing a venture capital strategy to its investors and prospective 

investors; and (v) is not registered under the Investment Company Act and has not elected to be 

treated as a business development company (―BDC‖).34 Consistent with the proposal, rule 

 

32 Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers 

Act Release No. 3221 (June 22, 2011).

33 Rule 203(l)-1.

34 Rule 203(l)-1(a).
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203(l)-1 also ―grandfathers‖ any pre-existing fund as a venture capital fund if it satisfies certain 

criteria under the grandfathering provision.35 An adviser is eligible to rely on the venture capital 

exemption only if it solely advises venture capital funds that meet all of the elements of the 

definition or funds that have been grandfathered. 

The proposed rule defined the term venture capital fund in accordance with what we 

believed Congress understood venture capital funds to be, as reflected in the legislative 

materials, including the testimony Congress received.36 As we discussed in the Proposing 

Release, the proposed definition of venture capital fund was designed to distinguish venture 

capital funds from other types of private funds, such as hedge funds and private equity funds, and 

to address concerns expressed by Congress regarding the potential for systemic risk.37

We received over 70 comment letters on the proposed venture capital fund definition, 

most of which were from venture capital advisers or related industry groups.38 A number of 

commenters supported the Commission‘s efforts to define a venture capital fund,39 citing the 

―thoughtful‖ approach taken and the quality of the proposed rule.40 Commenters representing 

 

35 Rule 203(l)-1(b).

36 See Proposing Release, supra note 26, at n.38 and accompanying and following text.

37 See, e.g., Proposing Release, supra note 26, discussion at section II.A. and text accompanying 

nn.43, 60, 61, 82, 99, 136.

38 The National Venture Capital Association submitted a comment letter, dated January 13, 2011 

(―NVCA Letter‖) on behalf of its members, and 27 other commenters expressed their support for 

the comments raised in the NVCA Letter.

39 See BIO Letter; Comment Letter of Charles River Ventures (Jan. 21, 2011) (―Charles River 

Letter‖); NVCA Letter.

40 See, e.g., Comment Letter of Abbott Capital Management, LLC (Jan. 24, 2011) (―Abbott Capital 

Letter‖); Comment Letter of DLA Piper LLP (Jan. 24, 2011) (―DLA Piper VC Letter‖); Comment 

Letter of InterWest General Partners (Jan. 21, 2011) (―InterWest Letter‖); NVCA Letter; 

Comment Letter of Oak Investment Partners (Jan. 24, 2011) (―Oak Investment Letter‖); 

Comment Letter of Pine Brook Road Advisors, LP (Jan. 24, 2011) (―Pine Brook Letter‖).
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investors and investor groups and others generally supported the rule as proposed,41 one of which 

stated that the proposed definition ―succeeds in clearly defining those private funds that will be 

exempt.‖42 Some of these commenters expressed support for a definition that is no broader than 

necessary in order to ensure that only advisers to ―venture capital funds, and not other types of 

private funds, are able to avoid the new mandatory registration requirements.‖43

Generally, however, our proposal prompted vigorous debate among commenters on the 

scope of the definition. For example, a number of commenters wanted us to take a different 

approach from the proposal and supported two alternatives. Two commenters urged us to rely on 

the California definition of ―venture capital operating company.‖44 These commenters did not, 

however, address our concern, discussed in the Proposing Release, that the California definition 

includes many types of private equity and other private funds, and thus incorporation of this 

definition would not appear consistent with our understanding of the intended scope of section 

203(l).45 Our concern was acknowledged in a letter we received from the current Commissioner 

for the California Department of Corporations, stating that ―we understand the [Commission] 

cannot adopt verbatim the California definition of [venture capital fund]. Congressional 

 

41 See AFR Letter; AFL-CIO Letter; EVCA Letter; Comment Letter of U.S. Senator Carl Levin 

(Jan. 25, 2011) (―Sen. Levin Letter‖).

42 AFL-CIO Letter.

43 Sen. Levin Letter. Although they did not object to the approach taken by the proposed rule, 

several commenters cautioned us against defining venture capital fund more broadly than 

necessary to preclude advisers to other types of private funds from qualifying under the venture 

capital exemption. See AFR Letter; CalPERS Letter; Sen. Levin Letter (―a variety of advisers or 

funds are likely to try to seek refuge from the registration requirement by urging an overbroad 

interpretation of the term  ̳venture capital fund‘ . . . It is important for the Commission to define 

the term narrowly to ensure that only venture capital funds, and not other types of private funds, 

are able to avoid the new mandatory registration requirement.‖).

44 Comment Letter of Lowenstein Sandler PC (Jan. 4, 2011) (―Lowenstein Letter‖); Comment 

Letter of Keith Bishop (Jan. 17, 2011).

45 See Proposing Release, supra note 26, at n.72 and accompanying and preceding text.
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directives require the [Commission] to exclude private equity funds, or any fund that pivots its 

investment strategy on the use of debt or leverage, from the definition of [venture capital 

fund].‖46 For these reasons and the other reasons cited in the Proposing Release, we are not 

modifying the proposal to rely on the California definition.47

Several other commenters favored defining a venture capital fund by reference to 

investments in ―small‖ businesses or companies, although they disagreed on the factors that 

would deem a business or company to be ―small.‖48 As discussed in the Proposing Release, we 

considered defining a qualifying fund as a fund that invests in small companies, but noted the 

lack of consensus for defining such a term.49 We also expressed the concern in the Proposing 

Release that defining a ―small‖ company in a manner that imposes a single standardized metric 

such as net income, the number of employees, or another single factor test could ignore the 

complexities of doing business in different industries or regions. This could have the potential 

result that even a low threshold for a size metric could inadvertently restrict venture capital funds 

from funding otherwise promising young small companies.50 For these reasons, we are not 

 

46 Comment Letter of Preston DuFauchard, Commissioner for the California Department of 

Corporations (Jan. 21, 2011) (―DuFauchard Letter‖) (further stating that ―while regulators might 

have an interesting discussion on whether private equity funds contributed to the recent financial 

crisis, in light of the Congressional directives such a dialogue would be academic.‖).

47 See Proposing Release, supra note 26, at n.72 and accompanying and preceding text.

48 See Comment Letter of National Association of Small Business Investment Companies and Small 

Business Investor Alliance (Jan. 24, 2011) (―NASBIC/SBIA Letter‖) (supported a definition of 

―small‖ company by reference to the standards set forth in the Small Business Investment Act 

regulations). But cf. Lowenstein Letter; Comment Letter of Quaker BioVentures (Jan. 24, 2011) 

(―Quaker BioVentures Letter‖); Comment Letter of Venrock (Jan. 23, 2011) (―Venrock Letter‖) 

(each of which supported a definition of small company based on the size of its public float). See 

also Comment Letter of Georg Merkl (Jan. 25, 2011) (―Merkl Letter‖) (referring to ―young, 

negative EBITDA [earnings before interest, taxes, depreciation and amortization] companies‖).

49 See Proposing Release, supra note 26, at section II.A.1.a. and n.69 and accompanying and 

following text.

50 See Proposing Release, supra note 26, at n.69 and accompanying and preceding text.
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persuaded that the tests for a ―small‖ company suggested by commenters address these concerns.

Unlike the commenters who suggested these alternative approaches, most commenters 

representing venture capital advisers and related groups accepted the approach of the proposed 

rule, and many of them acknowledged that the proposed definition would generally encompass 

most venture capital investing activity that typically occurs.51 Several, however, also expressed 

the concern that a venture capital fund may, on occasion, deviate from its typical investing 

pattern with the result that the fund could not satisfy all of the definitional criteria under the 

proposed rule with respect to each investment all of the time.52 Others explained that an 

investment fund that seeks to satisfy the definition of a venture capital fund (a ―qualifying fund‖) 

would desire flexibility to invest small amounts of fund capital in investments that would not 

meet the criteria under the proposed rule, such as shares of other venture capital funds,53 nonconvertible debt,54 or publicly traded securities.55

 Both groups of commenters urged us to 

accommodate them by broadening the definition and modifying the proposed criteria.

Commenters wanted advisers seeking to be eligible for the venture capital exemption to 

 

51 See, e.g., Comment Letter of the Committee on Federal Regulation of Securities of the American 

Bar Association (Jan. 31, 2011) (―ABA Letter‖); ATV Letter; BIO Letter; NVCA Letter; 

Comment Letter of Proskauer LLP (Jan. 23, 2011); Comment Letter of Union Square Ventures,

LLC (Jan. 24, 2011) (―Union Square Letter‖).

52 See, e.g., Comment Letter of Advanced Technology Ventures (Jan. 24, 2011) (―ATV Letter‖); 

BIO Letter; NVCA Letter; Comment Letter of Sevin Rosen Funds (Jan. 24, 2011) (―Sevin Rosen 

Letter‖). One commenter argued that the rule ―should not bar the occasional, but also quite 

ordinary, financial activities‖ of a venture capital fund. Charles River Letter.

53 See, e.g., Comment Letter of Dechert LLP (Jan. 24, 2011) (―Dechert General Letter‖); Comment 

Letter of First Round Capital (Jan. 24, 2011) (―First Round Letter‖); Sevin Rosen Letter.

54 See, e.g., Comment Letter of BioVentures Investors (Jan. 24, 2011) (―BioVentures Letter‖); 

Charles River Letter; Comment Letter of Davis Polk & Wardwell LLP (Jan. 24, 2011) (―Davis 

Polk Letter‖); Merkl Letter.

55 See, e.g., Comment Letter of Cardinal Partners (Jan. 24, 2011) (―Cardinal Letter‖); Davis Polk 

Letter; Comment Letter of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian (Jan. 24, 

2011) (―Gunderson Dettmer Letter‖); Merkl Letter.
- 14 -

have greater flexibility to operate and invest in portfolio companies and to accommodate existing 

(and potentially evolving) business practices that may vary from what commenters characterized

as typical venture capital fund practice.

56

 Some argued that a limited basket for such atypical 

investing activity could facilitate job creation and capital formation.57 They were also concerned 

that the multiple detailed criteria of the proposed rule could result in ―inadvertent‖ violations of 

the criteria under the rule.

58

 Some expressed concern that a Commission rule defining a venture 

capital fund by reference to investing activity would have the result of reducing an adviser‘s 

investment discretion.

59

We are sensitive to commenters‘ concerns that the definition not operate to foreclose 

investment funds from investment opportunities that would benefit investors but would not 

change the character of a venture capital fund.60 On the other hand, we are troubled that the 

cumulative effect of revising the rule to reflect all of the modifications supported by commenters 

 

56 See, e.g., NVCA Letter; Comment Letter of Bessemer Venture Partners (Jan. 24, 2011) 

(―Bessemer Letter‖); Oak Investment Letter. See also supra note 51.

57 See, e.g., NVCA Letter (stating that a low level of 15% would ―allow innovation and job creation 

to flourish within the venture capital industry‖); Sevin Rosen Letter (a 20% limit would be 

―flexible enough not to severely impair the operations of bona fide [venture capital funds], a 

critically important resource for American innovation and job creation‖).

58 See, e.g., NVCA Letter (―Because of the consequence (i.e., federal registration) of having even 

one inadvertent, non-qualifying investment, allowance for unintended or insignificant deviations, 

or differences in interpretations, is appropriate.‖); Comment Letter of SV Life Sciences (Jan. 21, 

2011) (―SV Life Sciences Letter‖) (the ―lack of flexibility and ambiguity in certain 

definitions . . . could cause our firm or other venture firms to inadvertently hold non-qualifying 

investments‖). See also ATV Letter.

59 DuFauchard Letter (―Only the VC Fund advisers/managers are in a position to determine what 

best form  ̳down-round‘ financing should take. Whether that should be new capital, project 

finance, a bridge loan, or some other form of equity or debt, is neither a question for the 

regulators nor should it be a question of strict regulatory control.‖); ESP Letter (―There is no way 

a single regulation can determine what the appropriate level of leverage should be for every 

portfolio company.‖); Merkl Letter (―The Commission should not regulate from whom the 

[portfolio company] securities can be acquired or how the [company‘s] capital can be used.‖).

60 See, e.g., Oak Investment Letter; Sevin Rosen Letter.
- 15 -

could permit reliance on the exemption by advisers to other types of private funds and thus 

expand the exemption beyond what we believe was the intent of Congress.61 A number of 

commenters argued that defining a venture capital fund by reference to multiple detailed criteria 

could result in ―inadvertent‖ violations of the definitional criteria by a qualifying fund.

62

Another commenter acknowledged that providing de minimis carve-outs to the multiple criteria 

under the proposed rule could be ―cumbersome,‖

63 which could lead to the result, asserted by 

some commenters, that an overly prescriptive rule could invite further unintentional violations of 

the registration provisions of the Advisers Act.64

To balance these competing considerations, we are adopting an approach suggested by 

several commenters that defines a venture capital fund to include a fund that invests a portion of 

its capital in investments that would not otherwise satisfy all of the elements of the rule (―nonqualifying basket‖).65

 Defining a venture capital fund to include funds engaged in some amount 

of non-qualifying investment activity provides advisers to venture capital funds with greater 

 

61 For example, one commenter suggested that the definition of venture capital fund include a fund 

that incurs leverage of up to 20% of fund capital commitments without limit on duration and 

invests up to 20% of fund capital commitments in publicly traded securities and an additional 

20% of fund capital commitments in non-conforming investments. Charles River Letter. Under 

these guidelines, it would be possible to structure a fund that borrows up to 20% of the fund‘s 

―capital commitments‖ to acquire highly leveraged derivatives and publicly traded debt securities. 

If the fund only calls 20% of its capital, fund indebtedness would equal 100% of fund assets, all 

of which would be in derivative instruments or publicly traded debt securities.

62 See supra note 58.

63 First Round Letter.

64 See, e.g., generally NVCA Letter. See also Merkl Letter.

65 See, e.g., Abbott Capital Letter; ATV Letter; Bessemer Letter; BioVentures Letter; Cardinal 

Letter; Charles River Letter; Comment Letter of CompliGlobe Ltd. (Jan. 24, 2011) 

(―CompliGlobe Letter‖); Davis Polk Letter; First Round Letter; NVCA Letter; Comment Letter 

of PTV Sciences (Jan. 24, 2011) (―PTV Sciences Letter‖); Quaker BioVentures; Comment Letter 

of Santé Ventures (Jan. 24, 2011) (―Santé Ventures Letter‖); Sevin Rosen Letter; SV Life 

Sciences; Comment Letter of U.S. Venture Partners (Jan. 24, 2011) (―USVP Letter‖); Venrock 

Letter.
- 16 -

investment flexibility, while precluding an adviser relying on the exemption from altering the 

character of the fund‘s investments to such extent that the fund could no longer be viewed as a 

venture capital fund within the intended scope of the exemption. To the extent an adviser uses 

the basket to invest in some non-qualifying investments, it will have less room to invest in 

others, but the choice is left to the adviser. While the definition limits the amount of nonqualifying investments, it allows the adviser to choose how to allocate those investments. Thus, 

one venture capital fund may take advantage of some opportunities to invest in debt whereas 

others may seek limited opportunities in publicly offered securities. The definition of ―business 

development company‖ under the Advisers Act contains a similar basket for non-qualifying 

investments.66

Commenters suggested non-qualifying baskets ranging from 15 to 30 percent of a fund‘s 

capital commitments, although many of these same commenters wanted us to expand the other 

criteria of the proposed rule.67 Several commenters in favor of a non-qualifying basket asserted 

that setting the level for non-qualifying investments at a sufficiently low threshold would 

preclude advisers to other types of private funds from relying on the venture capital exemption 

while providing venture capital advisers the flexibility to take advantage of investment 

 

66 Advisers Act section 202(a)(22) (defining a ―business development company‖ as any company 

that meets the definition set forth in section 2(a)(48) of, and complies with section 55 of, the 

Investment Company Act, except that a BDC under the Advisers Act is defined to mean a 

company that invests 60% of its total assets in the assets specified in section 55 of the Investment 

Company Act).

67 See, e.g., NVCA Letter (more than 25 comment letters expressed general support for the 

comments raised in the NVCA Letter). Two commenters expressed support for a 30% basket for 

non-qualifying investments. See Comment Letter of Shearman & Sterling LLP (Jan. 24, 2011) 

(―Shearman Letter‖) (citing, in support of this position, the BDC definition under the Investment 

Company Act, which specifies a threshold of 30% for non-qualifying activity); Quaker 

BioVentures Letter (citing, in support of this position, the BDC definition under the Investment 

Company Act and the BDC definition under the Advisers Act which increased the non-qualifying 

activity threshold to 40%).
- 17 -

opportunities.68 These commenters properly framed the question before us. We did not, 

however, receive specific empirical analysis regarding the venture capital industry as a whole 

that would help us determine the appropriate size of the basket.69 Many of those supporting a 15 

percent non-qualifying basket also supported expanding some of the other elements of the 

definition, and thus it is unclear whether a 15 percent non-qualifying basket alone would satisfy 

their needs.70 On the other hand, those supporting a much larger basket did not, in our view, 

adequately address our concern that an overly expansive definition would provide room for 

advisers to private equity funds to remain unregistered, a consequence several commenters urged 

us to avoid.71

On balance, and after giving due consideration to the approaches suggested by 

commenters, we are adopting a limit of 20 percent of a qualifying fund‘s capital commitments 

for non-qualifying investments. We believe that a 20 percent limit will provide the flexibility 

sought by many venture capital fund commenters while appropriately limiting the scope of the 

 

68 Norwest Letter; Sevin Rosen Letter (noting that a 20% limit is ―low enough to ensure that only 

true [venture capital funds] are able to qualify for the [venture capital] exemption.‖). See also

NVCA Letter.

69 We did, however, receive much anecdotal evidence of particular advisers‘ experiences with nonqualifying investments. See, e.g., Cardinal Letter (―In a very limited number of cases, it has been 

necessary for us to purchase securities from current shareholders of the portfolio company in 

order for the financing to be completed. However, in NO case have purchases from existing 

shareholders ever exceeded 15% of the total investment by Cardinal in a proposed financing.‖); 

Charles River Letter (―The vast majority of our investments are in the form of Convertible 

Preferred Stock. . . . However, very rarely - - but more often than never - - we invest in the form 

of a straight, non-convertible Demand Note.‖); Pine Brook Letter (―Our fund documents provide 

for investments outside of our core investing practice of up to 25% of our committed capital.‖). 

But cf. Mesirow Financial Private Equity Advisors, Inc. (Jan. 24, 2011) (―Mesirow Letter‖) (a 

Commission-registered adviser that advises funds that invest in other venture capital and private 

equity funds stated that ―[s]ince the main purpose of [venture capital funds] is to invest in and 

help build operating companies, we believe their participation in non-qualifying activity will be 

rare.‖).

70 See supra note 67.

71 See supra note 43.
- 18 -

exemption. We note that several commenters recommended a non-qualifying basket limit of 20 

percent.72

We considered adopting a 40 percent basket for non-qualifying investments by analogy to 

the Advisers Act definition of BDC.73 That basket was established by Congress rather than the 

Commission, and it strikes us as too large in light of our task of implementing a statutory 

provision that does not specify a basket.

74

 We find a better analogy in a rule we adopted in 2001 

under the Investment Company Act. Under rule 35d-1 of that Act, commonly referred to as the 

―names rule,‖ an investment company with a name suggesting that it invests in certain 

investments is limited to investing no more than 20 percent of its assets in other types of 

investments (i.e., non-qualifying investments).75 In adopting that rule, we explained that ―if an

investment company elects to use a name that suggests its investment policy, it is important that 

the level of required investments be high enough that the name will accurately reflect the 

 

72 See, e.g., ATV Letter; Charles River Letter; Sevin Rosen Letter. At least one commenter stated 

that the minimum threshold limit for the non-qualifying basket should be 20%. Charles River 

Letter (―we believe anything less than 20% would be inadequate‖).

73 See supra note 66.

74 A larger non-qualifying basket of 40% could have the result of changing the fundamental 

underlying nature of the investments held by a qualifying fund, such as for example increasing 

the extent to which non-qualifying investments may contribute to the returns of the fund‘s 

portfolio.

75 Rule 35d-1(a)(2) under the Investment Company Act (―a materially deceptive and misleading 

name of a [registered investment company] includes . . . [a] name suggesting that the [registered 

investment company] focuses its investments in a particular type of investment or investments, or 

in a particular industry or group of industries, unless: (i) the [registered investment company] has 

adopted a policy to invest, under normal circumstances, at least 80% of the value of its [total 

assets] in the particular type of investments, or in investments in the particular industry or 

industries, suggested by the [registered investment company‘s] name . . .‖). 

17 CFR 270.35d-1(a)(2).
- 19 -

company‘s investment policy.‖76 We noted that having a registered investment company hold a 

significant amount of investments consistent with its name is an important tool for investor 

protection,

77 but setting the limit at 20 percent gives the investment company management 

flexibility.78 While our policy goal today in defining a ―venture capital fund‖ is somewhat 

different from our goal in prescribing limitations on investment company names, the tensions we 

sought to reconcile are similar.

79

1. Qualifying Investments

Under the rule, to meet the definition of venture capital fund, the fund must hold, 

immediately after the acquisition of any asset (other than qualifying investments or short-term 

holdings), no more than 20 percent of the fund‘s capital commitments in non-qualifying 

investments (other than short-term holdings).

80

 Thus, as discussed above, a qualifying fund 

could invest without restriction up to 20 percent of the fund‘s capital commitments in non-

 

76 Investment Company Names, Investment Company Act Release No. 24828 (Jan. 17, 2001) [66 

FR 8509, 8511 (Feb. 1, 2001), correction 66 FR 14828 (Mar. 14, 2001)] (―Names Rule Adopting 

Release‖).

77 Names Rule Adopting Release, supra note 76, at text accompanying n.3 and text following n.7.

78 See Names Rule Adopting Release, supra note 76, at text accompanying n.14. See also NVCA 

Letter; Sevin Rosen Letter (citing rule 35d-1 in support of recommending that the rule adopt a 

non-qualifying basket); Quaker BioVentures Letter (citing the approach taken by the staff 

generally limiting an investment company excluded by reason of section 3(c)(5)(C) of the 

Investment Company Act to investing no more than 20% of its assets in non-qualifying 

investments).

79 A number of commenters recommended that the rule specify a range for the non-qualifying 

basket, arguing that this approach would provide advisers to venture capital funds with better 

flexibility to manage their investments over time. See, e.g., DLA Piper VC Letter; DuFauchard 

Letter; Norwest Letter; Oak Investment Letter. As we discuss in greater detail below, the nonqualifying basket is determined as of the time immediately following each investment and hence 

a range is not necessary.

80 Rule 203(l)-1(a)(2). The rule specifies that ―immediately after the acquisition of any asset (other 

than qualifying investments or short-term holdings)‖ no more than 20% of the fund‘s aggregate 

capital contributions and uncalled committed capital may be held in assets (other than short-term 

holdings) that are not qualifying investments.‖ See infra Section II.A.1.c. for a discussion on the 

operation of the 20% limit.
- 20 -

qualifying investments and would still fall within the venture capital fund definition.

For purposes of the rule, a ―qualifying investment,‖ which we discuss in greater detail 

below, generally consists of any equity security issued by a qualifying portfolio company that is 

directly acquired by a qualifying fund and certain equity securities exchanged for the directly 

acquired securities.81

a. Equity Securities of Portfolio Companies

Rule 203(l)-1 defines a venture capital fund as a private fund that, excluding investments 

in short-term holdings and non-qualifying investments, generally holds equity securities of 

qualifying portfolio companies.82

We proposed to define ―equity security‖ by reference to the Exchange Act.

83

 

Commenters did not generally object to our proposal to do so, although many urged that we 

expand the definition of venture capital fund to include investments in other types of securities.84 

Commenters asserted that venture capital funds may invest in securities other than equity 

securities (including debt securities) for various business reasons, including to provide ―bridge‖ 

financing to portfolio companies between equity financing rounds,85 for working capital needs86

or for tax or structuring reasons.87 Many of these commenters recommended that the rule also 

 

81 See Sections II.A.1.b.

82 Rule 203(l)-1(a)(2) (specifying the investments of a venture capital fund); (c)(3) (defining 

―qualifying investment‖); and (c)(6) (defining ―short-term holdings‖).

83 Proposed rule 203(l)-1(c)(2).

84 Several commenters opposed any restriction on the definition of equity security. See, 

e.g., Bessemer Letter; ESP Letter; NVCA Letter. 

85 ATV Letter; NVCA Letter.

86 Comment Letter of Cook Children‘s Health Care Foundation Investment Committee (Jan. 20, 

2011) (―Cook Children‘s Letter‖); Comment Letter of Leland Fikes Foundation, Inc. (Jan. 21, 

2011) (―Leland Fikes Letter‖).

87 Bessemer Letter; Merkl Letter.
- 21 -

define a venture capital fund to include funds that invest in non-convertible bridge loans of a 

portfolio company,88 interests in other pooled investment funds (including other venture capital 

funds)89 and publicly offered securities.90 Commenters argued that these types of investments 

facilitate access to capital for a company‘s expansion,91 offer qualifying funds flexibility to 

structure investments in a manner that is most appropriate for the fund (and its investors), 

including for example to obtain favorable tax treatment, manage risks (such as bankruptcy 

protection), maintain the value of the fund‘s equity investment or satisfy the specific financing 

needs of a portfolio company,92 and enable a portfolio company to seek such financing from 

venture capital funds if the company is unable to obtain financing from traditional lending 

sources.93

We recognize that a venture capital fund may, on occasion, make investments other than 

in equity securities.94 Under the rule, as discussed above, a venture capital fund may make these 

investments (as well as other types of investments that commenters may not have suggested) to 

 

88 See, e.g., Comment Letter of CounselWorks LLC (Jan. 24, 2011); ESP Letter; Comment Letter of 

McGuireWoods LLP (Jan. 24, 2011) (―McGuireWoods Letter‖); NVCA Letter; Oak Investment 

Letter. See also BioVentures Letter (supported venture capital fund investments in nonconvertible debt without a time limit); Cook Children‘s Letter; Leland Fikes Letter (each of 

which expressed general support). One commenter indicated that the proposed condition limiting 

investments in portfolio companies to equity securities was too narrow. See Pine Brook Letter. 

89 See, e.g., Cook Children‘s Letter; Leland Fikes Letter; PEI Funds Letter; Comment Letter of SVB 

Financial Group (Jan. 24, 2011) (―SVB Letter‖).

90 See, e.g., ATV Letter; BIO Letter (noted that investments by venture capital funds in ―PIPEs‖ 

(i.e., ―private investments in public equity‖) are ―common‖).

91 See, e.g., Lowenstein Letter; Comment Letter of John G. McDonald (Jan. 21, 2011) (―McDonald 

Letter‖); Quaker BioVentures Letter; Comment Letter of Trident Capital (Jan. 24, 2011) 

(―Trident Letter‖).

92 See, e.g., Merkl Letter; Oak Investments Letter; Sevin Rosen Letter; Comment Letter of Vedanta 

Capital, LP (Jan. 24, 2011) (―Vedanta Letter‖).

93 NVCA Letter; Trident Letter.

94 See, e.g., ESP Letter; Leland Fikes Letter; McGuireWoods Letter; NVCA Letter; Oak Investment 

Letter. See also supra Section II.A.
- 22 -

the extent there is room in the fund‘s non-qualifying basket. Hence, we are adopting the 

definition of equity security as proposed.

The final rule incorporates the definition of equity security in section 3(a)(11) of the 

Exchange Act and rule 3a11-1 thereunder.

95

 Accordingly, equity security includes common 

stock as well as preferred stock, warrants and other securities convertible into common stock in 

addition to limited partnership interests.96 Our definition of equity security is broad. The 

definition includes various securities in which venture capital funds typically invest and provides 

venture capital funds with flexibility to determine which equity securities in the portfolio 

company capital structure are appropriate for the fund. Our use of the definition of equity 

security under the Exchange Act acknowledges that venture capital funds typically invest in 

common stock and other equity instruments that may be convertible into equity common stock 

but does not otherwise specify the types of equity instruments that a venture capital fund could 

hold in deference to the business judgment of venture capital funds.

 

95 Rule 203(l)-1(c)(2) (equity security ―has the same meaning as in section 3(a)(11) of the Securities 

Exchange Act of 1934 (15 U.S.C. 78c(a)(11)) and § 240.3a11-1 of this chapter.‖). See 15 U.S.C. 

78c(a)(11) (defining ―equity security‖ as ―any stock or similar security; or any security future on 

any such security; or any security convertible, with or without consideration, into such a security, 

or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant 

or right; or any other security which the Commission shall deem to be of similar nature and 

consider necessary or appropriate, by such rules and regulations as it may prescribe in the public 

interest or for the protection of investors, to treat as an equity security.‖); rule 3a11-1 under the 

Exchange Act (17 CFR 240.3a11-1) (defining ―equity security‖ to include ―any stock or similar 

security, certificate of interest or participation in any profit sharing agreement, preorganization 

certificate or subscription, transferable share, voting trust certificate or certificate of deposit for

an equity security, limited partnership interest, interest in a joint venture, or certificate of interest 

in a business trust; any security future on any such security; or any security convertible, with or 

without consideration into such a security, or carrying any warrant or right to subscribe to or 

purchase such a security; or any such warrant or right; or any put, call, straddle, or other option or 

privilege of buying such a security from or selling such a security to another without being bound 

to do so.‖).

96 See rule 3a11-1 under the Exchange Act (17 CFR 240.3a11-1) (defining ―equity security‖ to 

include any ―limited partnership interest‖).
- 23 -

b. Capital Used for Operating and Business Purposes

Rule 203(l)-1 defines a venture capital fund as a private fund that holds no more than 

20 percent of the fund‘s capital commitments in non-qualifying investments (other than shortterm holdings). Under the final rule, qualifying investments are generally equity securities that 

were acquired by the fund in one of three ways that suggest that the fund‘s capital is being used 

to finance the operations of businesses rather than for trading in secondary markets. As 

discussed in greater detail below, rule 203(l)-1 defines a ―qualifying investment‖ as: (i) any 

equity security issued by a qualifying portfolio company that is directly acquired by the private 

fund from the company (―directly acquired equity‖); (ii) any equity security issued by a

qualifying portfolio company in exchange for directly acquired equity issued by the same 

qualifying portfolio company; and (iii) any equity security issued by a company of which a 

qualifying portfolio company is a majority-owned subsidiary, or a predecessor, and that is 

acquired by the fund in exchange for directly acquired equity.

97

In the Proposing Release we explained that one of the features of venture capital funds 

that distinguish them from hedge funds and private equity funds is that they invest capital 

directly in portfolio companies for the purpose of funding the expansion and development of the 

companies‘ business rather than buying out existing security holders.98 Thus, we proposed that, 

to meet the definition, at least 80 percent of a fund‘s investment in each portfolio company must 

be acquired directly from the company, in effect limiting a venture capital fund‘s ability to 

acquire secondary market shares to 20 percent of the fund‘s investment in each company.99

 

97 Rule 203(l)-1(c)(3). A security received as a dividend by virtue of the fund‘s holding of a 

qualifying investment would also be a qualifying investment. See generally infra note 480.

98 Proposing Release, supra note 26, at text accompanying n.104.

99 Proposed rule 203(l)-1(a)(2).
- 24 -

A few commenters objected to any limitation on secondary market purchases of a 

qualifying portfolio company‘s shares,100 but did not address the critical role this condition 

played in differentiating venture capital funds from other types of private funds, such as 

leveraged buyout funds, which acquire controlling equity interests in operating companies 

through the ―buyout‖ of existing security holders.101 Nor did they offer an alternative method in 

lieu of the direct acquisition criterion to distinguish venture capital funds from the buyout funds 

that are considered private equity funds. We continue to believe that the limit on secondary 

purchases is an important element for distinguishing advisers to venture capital funds from 

advisers to the types of private equity funds for which Congress did not provide an exemption.102 

Therefore, we are not modifying the definition of qualifying investment to broadly include equity 

securities acquired in secondary transactions.

We are, however, making two changes in this provision in response to commenters. 

First, we have eliminated the 20 percent limit for secondary market transactions that we included 

in this provision in our proposal in favor of the broader 20 percent limit for assets that are not 

qualifying investments.103 Most commenters addressing the limit on secondary market 

acquisitions supported changing the threshold from 80 percent of the fund‘s investment in each 

portfolio company to either 50 percent in each portfolio company,

104 or 80 percent of the fund‘s 

 

100 See, e.g., ESP Letter; Merkl Letter.

101 See also Proposing Release, supra note 26, at section II.A.1.d.

102 See id., at n.112 and accompanying text.

103 Cf. proposed rule 203(l)-1(a)(2) and rule 203(l)-1(a)(2).

104 See DLA Piper VC Letter; Davis Polk Letter; Sevin Rosen Letter (each supported lowering the 

direct purchase requirement from 80% to 50% of each qualifying portfolio company‘s equity 

securities); Dechert General Letter (argued that the 20% allowance for secondary purchases 

should be increased to 45%, consistent with rules 3a-1 and 3c-5 under the Investment Company 

Act). See also ABA Letter (supported lowering the threshold from 80% to 70%); NVCA Letter; 

Mesirow Letter; Oak Investments Letter. Several commenters disagreed with the proposed direct 
- 25 -

total capital commitments.105 These commenters argued that secondary acquisitions provide 

liquidity to founders, angel investors and employees/former employees or align the interests of a 

fund with those of a portfolio company.106

We believe that the limit on secondary purchases remains an important element for 

distinguishing advisers to venture capital funds from advisers to the types of private equity funds 

for which Congress did not provide an exemption.107 However, as discussed above, a venture 

capital fund may purchase shares in secondary markets to the extent it has room for such 

securities in its non-qualifying basket.

Second, the final rule defines qualifying investments as including equity securities issued 

by the qualifying portfolio company that are received in exchange for directly acquired equities 

issued by the same qualifying portfolio company.108 This revision was suggested by a number of 

commenters to enable a qualifying fund to participate in the reorganization of the capital 

structure of a portfolio company, which may require the fund, along with other existing security 

holders, to accept newly issued equity securities in exchange for previously issued equity 

 

acquisition criterion and recommended that venture capital fund investments in portfolio 

company securities through secondary transactions should not be subject to any limit. See, e.g., 

ESP Letter; Merkl Letter.

105 ATV Letter; Bessemer Letter; Charles River Letter; Davis Polk Letter; First Round Letter; 

Gunderson Dettmer Letter; InterWest Letter; Mesirow Letter; Norwest Letter; NVCA Letter; Oak 

Investment Letter; Sevin Rosen Letter; SVB Letter; Union Square Letter; Vedanta Letter. See 

also Comment Letter of Alta Partners (Jan. 24, 2011) (―Alta Partners Letter‖); USVP Letter.

106 See, e.g., Bessemer Letter; Norwest Letter; Sevin Rosen Letter. 

107 See Proposing Release, supra note 26, at n.112 and accompanying text.

108 Under rule 203(l)-1(c)(3)(ii), ―qualifying investments‖ include any equity security issued by a 

qualifying portfolio company in exchange for an equity security issued by the qualifying portfolio 

company that is directly acquired. See infra note 113.
- 26 -

securities.109

The rule similarly treats as a qualifying investment any equity security issued by another 

company in exchange for directly acquired equities of a qualifying portfolio company, provided 

that the qualifying portfolio company becomes a majority-owned subsidiary of the other 

company or is a predecessor company.110 This provision enables a qualifying fund to acquire 

securities in connection with the acquisition (or merger) of a qualifying portfolio company by 

another company,

111 without jeopardizing the fund‘s ability to satisfy the definition of venture 

capital fund. A venture capital fund‘s acquisition of publicly offered securities in these 

circumstances may not present the same degree of interconnectedness with the public markets as 

secondary acquisitions through the open markets that are typical of other types of leveraged 

buyout private funds.112 As a result of the modification to the proposed rule, a venture capital 

fund could hold equity securities of a company subject to reporting under the Exchange Act, if 

 

109 See, e.g., NVCA Letter. See also Sevin Rosen Letter. Although we understand that the securities 

received in an exchange are typically newly issued, the rule would also cover exchanges for 

outstanding securities. See also infra note 113.

110 Under rule 203(l)-1(c)(3)(iii), ―qualifying investments‖ include any equity security issued by a 

company of which a qualifying portfolio company is a majority-owned subsidiary (as defined in 

section 2(a)(24) of the Investment Company Act), or a predecessor company, and that is acquired 

by the private fund in exchange for an equity security described in paragraph (c)(3)(i) or (c)(3)(ii) 

of the rule. See infra note 113.

A ―majority-owned subsidiary‖ is defined by reference to section 2(a)(24) of the Investment 

Company Act, (15 U.S.C. 80a2(a)(24), which defines a ―majority-owned subsidiary‖ of any 

person as ―a company 50 per centum or more of the outstanding voting securities of which are 

owned by such person, or by a company which, within the meaning of this paragraph, is a 

majority-owned subsidiary of such person.‖

111 See, e.g., Davis Polk Letter; Comment Letter of Institutional Venture Partners (Jan. 24, 2011) 

(―IVP Letter‖); Mesirow Letter; PTV Sciences Letter. A number of commenters argued that 

without this expanded definition, typical transactions enabling a venture capital fund to 

restructure its investment in a portfolio company, exit its investment or obtain liquidity for itself 

and its investors, as well as profits, would be precluded. See, e.g., NVCA Letter; PTV Sciences 

Letter.

112 See, e.g., Davis Polk Letter. See also Mesirow Letter.
- 27 -

such equity securities were issued to the fund in exchange for directly acquired equities of a 

qualifying portfolio company that became a majority-owned subsidiary of the reporting 

company.113

c. Operation of the 20 Percent Limit

Under the rule, to meet the definition of venture capital fund, a qualifying fund must 

hold, immediately after the acquisition of any asset (other than qualifying investments or shortterm holdings), no more than 20 percent of the fund‘s capital commitments in non-qualifying 

investments (other than short-term holdings).

114

 Under this approach, a fund need only calculate 

the 20 percent limit when the fund acquires a non-qualifying investment (other than short-term 

holdings); after the acquisition, the fund need not dispose of a non-qualifying investment simply 

because of a change in the value of that investment. A qualifying fund, however, could not 

purchase additional non-qualifying investments until the value of its then-existing non-qualifying 

investments fell below 20 percent of the fund‘s committed capital.

As discussed above, most commenters supporting a basket for non-qualifying 

investments recommended a limit expressed as a percentage of fund capital commitments.115 

One commenter further suggested that the value of investments included in the non-qualifying 

basket be calculated at the time each investment is made to include only those non-qualifying 

investments that are then held by the fund (thus excluding liquidated assets); the commenter 

 

113 Under the rule, a qualifying fund could separately purchase additional securities pursuant to a 

public offering (or recapitalization) from a company after it ceases to be a ―qualifying portfolio 

company‖ (because for example such company has become a reporting or foreign traded 

company), subject to the non-qualifying basket.

114 Rule 203(l)-1(a)(2). The calculation of the 20% limit operates in a fashion similar to the

diversification and ―Second Tier Security‖ tests of rule 2a-7 under the Investment Company Act. 

17 CFR 270.2a-7(a)(24). See Revisions to Rules Regulating Money Market Funds, Investment 

Company Act Release No. 18005 (Feb. 20, 1991) [56 FR 8113, 8118 (Feb. 27, 1991)].

115 See supra note 67.
- 28 -

argued that this approach would give funds certainty that a qualifying investment would not 

become ―non-qualifying‖ and simplify the test for compliance.116

We are persuaded that the non-qualifying basket should be based on a qualifying fund‘s 

total capital commitments, and the fund‘s compliance with the 20 percent limit should be 

calculated at the time any non-qualifying investment is made, based on the non-qualifying 

investments then held in the fund‘s portfolio.

117

 We understand that using a fund‘s capital 

commitments for determining investment thresholds is generally consistent with existing venture 

capital fund practice,

118 and nearly all of the commenters requesting a basket specified the basket 

as a percentage of the fund‘s capital commitments.119 We expect that calculating the size of the 

non-qualifying basket as a percentage of a qualifying fund‘s capital commitments, which will 

remain relatively constant during the fund‘s term, will provide advisers with a degree of 

predictability when managing the fund‘s portfolio and determining how much of the basket 

remains available for new investments.

We acknowledge that limiting non-qualifying investments to a percentage of fund capital 

commitments could result in a qualifying fund that invests its initial capital call in non-qualifying 

 

116 Sevin Rosen Letter. See also BioVentures Letter (endorsing the NVCA Letter supporting a nonqualifying basket determined as a percentage of fund capital commitments, but also arguing in 

favor of determining the basket ―at any point in time, rather than in the aggregate over the life of 

the fund‖).

117 Capital commitments that have been called but returned to investors and subject to a future call 

would be treated as uncalled capital commitments. Capital commitments that are no longer 

subject to a call by the fund would not be treated as uncalled capital commitments.

118 See generally infra notes 240-243 (discussing the use of a qualifying fund‘s capital commitments 

to determine the fund‘s compliance with the leverage criterion). See also DLA Piper VC Letter.

119 See generally supra note 67. For purposes of reporting its ―regulatory assets under management‖ 

on Form ADV, an adviser would include uncalled capital commitments of a private fund advised 

by the adviser.
- 29 -

investments;120 but that ability would be constrained by the adviser‘s need to reconcile that 

investment with the fund‘s required representation that it pursues a venture capital strategy.121 

An investment adviser that manages a fund in such a manner that renders the representation to 

investors and potential investors that the fund pursues a venture capital strategy an untrue 

statement of material fact would violate the antifraud provisions of the Advisers Act.122 We 

understand that a venture capital fund is not typically required to call or fully draw down all of 

its capital commitments. However, only bona fide capital commitments may be included in the 

calculation under rule 203(l)-1.123 For example, commitments made for the purpose of 

increasing the non-qualifying basket and with an understanding with investors that they will not 

be called cannot be included.124

 

120 See AFL-CIO Letter; AFR Letter (discussing issues associated with specifying leverage as a 

percentage of fund capital commitments).

121 See infra Section II.A.7.

122 The Commission does not need to demonstrate that an adviser violating rule 206(4)-8 acted with 

scienter. See Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles, 

Investment Advisers Act Release No. 2628 (Aug. 3, 2007) [72 FR 44756 (Aug. 9, 2007)]

(―Pooled Vehicles Release‖).

123 See also Investment Adviser Performance Compensation, Investment Advisers Act Release 

No. 3198 (May 10, 2011) [76 FR 27959 (May 13, 2011)] at n.17 (in determining whether a 

person holds the requisite amount of assets under management, an investment adviser may 

include ―assets that a client is contractually obligated to invest in private funds managed by the 

adviser. Only bona fide contractual commitments may be included, i.e., those that the adviser has 

a reasonable belief that the investor will be able to meet.‖).

124 Similarly, fee waivers or reductions for the purpose of inducing investors to increase the size of 

their capital commitments with an understanding that they will not be called (and hence enable 

the adviser to increase the size of the non-qualifying basket) would indicate that the commitments 

are not bona fide. In addition, the amount of capital commitments and contributions made by 

investors and the investments made by the fund are indispensable to the functioning of a venture 

capital fund, and we understand advisers to venture capital funds typically maintain records 

reflecting them. See generally supra note 5 (describing the Commission‘s authority to examine 

the records of advisers relying on the venture capital exemption). We note that a person claiming 

an exemption under the federal securities laws has the burden of proving it is entitled to the 

exemption. See, e.g., SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953); Gilligan, Will & Co. 

v. SEC, 267 F.2d 461, 466 (2d Cir. 1959); Swenson v. Engelstad, 626 F.2d 421, 425 (5th Cir. 

1980); SEC v. Wall St. Transcript Corp., 454 F. Supp. 559, 566 (S.D.N.Y. 1978) (stating that the 
- 30 -

Moreover, we believe that by applying the 20 percent limit as of the time of acquisition 

of each non-qualifying investment, a fund is able to determine prospectively how much it can 

invest in the non-qualifying basket. We believe that this simpler approach to determining the 

non-qualifying basket would better limit a qualifying fund‘s non-qualifying investments and ease 

the burden of determining compliance with the criterion under the rule.

To determine compliance with the 20 percent limit, a venture capital fund would, 

immediately after the acquisition of any non-qualifying investment, excluding any short-term 

holdings,125 calculate the total value of all of the fund‘s assets held at that time, excluding shortterm holdings, that are invested in non-qualifying investments, as a percentage of the fund‘s total 

capital commitments.

126 For this purpose, the 20 percent test is determined based on the 

qualifying fund‘s non-qualifying investments after taking into account the acquisition of any 

newly acquired non-qualifying investment.

127

To determine if a fund satisfies the 20 percent limit for non-qualifying investments, the 

fund may use either historical cost or fair value, as long as the same method is applied to all 

investments of a qualifying fund in a consistent manner during the term of the fund.

128

 Under the 

rule, a venture capital fund could use either historical cost or fair value, depending, for example,

 

defendant publisher ―must register unless it can be shown that it is‖ entitled to rely on an 

exclusion from the definition of ―investment adviser‖).

125 Rule 203(l)-1(c)(6) (―Short-term holdings‖ means cash and cash equivalents as defined in 

§ 270.2a51-1(b)(7)(i), U.S. Treasuries with a remaining maturity of 60 days or less, and shares of 

an open-end management investment company registered under section 8 of the Investment 

Company Act of 1940 [15 U.S.C. 80a-8] that is regulated as a money market fund under 

§ 270.2a-7 of this chapter.‖).

126 A qualifying investment that is acquired as a result of an exchange of equity securities provided 

by rule 203(l)-1(c)(3)(ii) and (iii) would not result in a requirement to calculate the 20% limit

under rule 203(l)-1(a)(2).

127 Rule 203(l)-1(a)(2).

128 Id.
- 31 -

on the fund‘s approach to valuing investments since the fund‘s inception. Under the final rule, a 

qualifying fund using historical cost need not account for changes in the value of its portfolio due 

to, for example, market fluctuations in the value of a non-qualifying investment or the sale or 

other disposition of a qualifying investment (including the associated distribution of sale 

proceeds to fund investors). Requiring fair value in this particular instance could make 

investment planning difficult because the amount of dollars allocated to the non-qualifying 

basket would vary depending on changes in the value of investments already made. In addition, 

requiring fair value could complicate compliance for those qualifying funds that make 

investments frequently, because each investment would result in a requirement to value the 

fund‘s assets. Because the rule specifies that the valuation method must be consistently applied, 

this approach is designed to prevent a qualifying fund, or its adviser, from alternating between 

valuation methodologies in order to circumvent the 20 percent limit.

Our rule‘s approach to the valuation method, which allows the use of historical cost in 

determining compliance with the non-qualifying basket limit, is similar in this respect to rules 

under the Employee Retirement Income Security Act of 1974 (―ERISA‖) for funds qualifying as 

―venture capital operating companies,‖ which generally specify that the value of a fund‘s 

investments is determined on a cost basis.129 Many commenters cited the ERISA rule in 

connection with comments on other proposed criteria,130 and hence we believe advisers‘ 

 

129 Under U.S. Department of Labor regulations, a venture capital operating company (―VCOC‖) is 

any entity that, as of the date of the first investment (or other relevant time), has at least 50% of 

its assets (other than short-term investments pending long-term commitment or distribution to 

investors), valued at cost, invested in venture capital investments. 29 CFR 2510.3-101(d). See

also Proposing Release, supra note 26, at n.70.

130 For example, a number of commenters urged us to adopt the approach under ERISA that would 

determine whether or not a fund has satisfied the managerial assistance criterion. See infra note 

225.
- 32 -

familiarity with the ERISA rule will facilitate compliance with our approach to the 20 percent 

limit and reduce the burdens associated with compliance.

2. Short-Term Holdings

A qualifying fund may also invest in cash and cash equivalents, U.S. Treasuries with a 

remaining maturity of 60 days or less and shares of registered money market funds.131 A 

qualifying fund need not include its investments in these short-term holdings when determining 

whether it satisfies the 20 percent limit for non-qualifying investments.132

Most commenters that addressed the cash element of the proposal did not disagree with 

our approach to the cash element but urged us to expand it to include money market funds,133 any 

U.S. Treasury without regard to maturity,134 debt issued by foreign governments,135 repurchase 

agreements,136 and certain highly rated corporate commercial paper.137 Many commenters did 

not provide a rationale, other than business practice, for expanding the cash element to include 

these other types of investments or discuss whether these changes would also permit other types 

 

131 Rule 203(l)-1(c)(6).

132 Rule 203(l)-1(a)(2). As proposed, a venture capital fund would have been defined as a fund that 

invested solely in certain investments, including specified cash instruments. Proposed rule 

203(l)-1(a)(2)(ii). In the final rule, a venture capital fund is defined as a fund that holds no more

than 20% of its committed capital in assets that are not qualifying investments, excluding for this 

purpose short-term holdings (which is defined to include specified cash instruments). Rule 

203(l)-1(a)(2). The general focus of both the proposal and the final rule is on the types of 

investments in which a qualifying fund may invest. As a result of the modifications to the rule to 

incorporate a non-qualifying basket, we are excluding short-term holdings from the calculation of 

qualifying and non-qualifying investments.

133 Comment Letter of Federated Investors, Inc. (Jan. 18, 2011); IVP Letter; Merkl Letter.

134 See, e.g., Dechert General Letter; IVP Letter. See also Shearman Letter; SVB Letter (also argued 

that Treasuries pose no systemic risk issues).

135 Dechert General Letter; Commenter Letter of European Fund and Asset Management Association 

(Jan. 24, 2011) (―EFAMA Letter‖); Merkl Letter.

136 IVP Letter; NVCA Letter.

137 Sevin Rosen Letter.
- 33 -

of funds to meet the definition. One commenter did note, however, that short-term investments 

are typically held during the period between a capital call and funding by investors and invested 

in instruments that may provide higher returns than the cash items identified in the proposed 

rule.138

The Commission recognizes that a broader definition of short-term holdings could yield 

venture capital funds greater returns.139 The exclusion of short-term holdings from a qualifying 

fund‘s assets for purposes of the 20 percent test, however, recognizes that such holdings are not 

ordinarily held as part of the fund‘s investment portfolio but as a cash management tool.140

Advisers to venture capital funds that wish to invest in longer-term or higher yielding debt may 

make use of the non-qualifying basket for such investments. We are, however, modifying the 

definition to include as short-term holdings shares of registered money market funds that are 

regulated under rule 2a-7 under the Investment Company Act,141 which we understand are 

commonly held for purposes of cash management.142

The rule defines short-term holdings to include ―cash and cash equivalents‖ by reference 

to rule 2a51-1(b)(7)(i) under the Investment Company Act.143 We did not receive any comments 

on this aspect of the proposal and are adopting it without modification. Rule 2a51-1, however, is 

 

138 NVCA Letter.

139 See, e.g., NVCA Letter.

140 We do not view investing in short-term holdings as being a venture capital strategy; however, for 

purposes of the exemption, a qualifying fund could invest in short-term holdings as part of 

implementing its investment strategy. See also infra Section II.A.7.

141 Rule 203(l)-1(c)(6).

142 See, e.g., NVCA Letter.

143 Rule 2a51-1(b)(7) under the Investment Company Act provides that cash and cash equivalents 

include foreign currencies ―held for investment purposes‖ and ―(i) [b]ank deposits, certificates of 

deposit, bankers acceptances and similar bank instruments held for investment purposes; and 

(ii) [t]he net cash surrender value of an insurance policy.‖ 17 CFR 270.2a51-1(b)(7).
- 34 -

used to determine whether an owner of an investment company excluded by reason of 

section 3(c)(7) of the Investment Company Act meets the definition of a qualified purchaser by 

examining whether such owner holds sufficient ―investments‖ (generally securities and other 

assets held for investment purposes).144 We are not defining a venture capital fund‘s cash 

holdings by reference to whether the cash is held ―for investment purposes‖ or to the net cash 

surrender value of an insurance policy. Furthermore, since rule 2a51-1 does not explicitly 

include short-term U.S. Treasuries, which we believe would be an appropriate form of cash 

equivalent for a venture capital fund to hold pending investment in a portfolio company or 

distribution to investors, our rule includes short-term U.S. Treasuries with a remaining maturity 

of 60 days or less.145

3. Qualifying Portfolio Company

Under the rule, qualifying investments generally consist of equity securities issued by a 

qualifying portfolio company. A ―qualifying portfolio company‖ is defined as any company 

that: (i) is not a reporting or foreign traded company and does not have a control relationship 

with a reporting or foreign traded company; (ii) does not incur leverage in connection with the 

investment by the private fund and distribute the proceeds of any such borrowing to the private 

fund in exchange for the private fund investment; and (iii) is not itself a fund (i.e., is an operating 

 

144 See generally sections 2(a)(51) and 3(c)(7) of the Investment Company Act; 17 CFR 270.2a51-

1(b) and (c).

145 We have treated debt securities with maturities of 60 days or less differently than debt securities 

with longer maturities under our rules. In particular, we have recognized that the potential for 

fluctuation in those shorter-term securities‘ market value has decreased sufficiently that, under 

certain conditions, we allow certain open-end investment companies to value them using 

amortized cost value rather than market value. See Valuation of Debt Instruments by Money 

Market Funds and Certain Other Open-End Investment Companies, Investment Company Act 

Release No. 9786 (May 31, 1977) [42 FR 28999 (June 7, 1977)]. We believe that the same 

consideration warrants treating U.S. Treasury securities with a remaining maturity of 60 days or 

less as more akin to cash equivalents than Treasuries with longer maturities for purposes of the 

definition of venture capital fund.
- 35 -

company).146 We are adopting the rule substantially as proposed, with modifications to the 

leverage criterion in order to address certain concerns raised by commenters. We describe each 

element of a qualifying portfolio company below. We understand each of the criteria to be 

characteristic of issuers of portfolio securities held by venture capital funds.147 Moreover, 

collectively, we believe these criteria would operate to exclude most private equity funds and 

hedge funds from the definition.

a. Not a Reporting Company

Under the rule, a qualifying portfolio company is defined as a company that, at the time 

of any investment by a qualifying fund, is not a ―reporting or foreign traded‖ company (a 

―reporting company‖) and does not control, is not controlled by or under common control with, a 

reporting company.148 Under the definition, a venture capital fund may continue to treat as a 

qualifying investment any previously directly acquired equity security of a portfolio company 

 

146 Rule 203(l)-1(c)(4). In the Proposing Release, we used the defined term ―publicly traded‖

company, but are modifying the rule to use the defined term ―reporting or foreign traded‖ 

company to match more closely the defined term and to make clear that certain companies that 

have issued securities that are traded on a foreign exchange are covered by the definition. See

proposed rule 203(l)-1(c)(3) and (4).

147 See Proposing Release, supra note 26, sections II.A.1.a.-II.A.1.e.

148 Rule 203(l)-1(c)(4)(i); rule 203(l)-1(c)(5) (defining a ―reporting or foreign traded‖ company as 

one that is subject to the reporting requirements under section 13 or 15(d) of the Exchange Act, or 

has a security listed or traded on any exchange or organized market operating in a foreign 

jurisdiction). This definition is similar to rule 2a51-1 under the Investment Company Act 

(defining ―public company,‖ for purposes of the qualified purchaser standard, as ―a company that 

files reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934‖), and rule 

12g3-2 under the Exchange Act (conditioning a foreign private issuer‘s exemption from 

registering securities under section 12(g) of the Exchange Act if, among other conditions, the 

―issuer is not required to file or furnish reports‖ pursuant to section 13(a) or section 15(d) of the 

Exchange Act). 17 CFR 270.2a51-1; 17 CFR 240.12g3-2. Under the rule, securities of a 

―reporting or foreign traded company‖ include securities of non-U.S. companies that are listed on 

a non-U.S. market or non-U.S. exchange. Rule 203(l)-1(c)(5).
- 36 -

that subsequently becomes a reporting company.

149

 Moreover, after a company becomes a 

reporting company, a qualifying fund could acquire the company‘s publicly traded (or foreign 

traded) securities in the secondary markets, subject to the availability of the fund‘s nonqualifying basket.

As we discussed in the Proposing Release, venture capital funds provide operating capital 

to companies in the early stages of their development with the goal of eventually either selling 

the company or taking it public.150 Unlike other types of private funds, venture capital funds are 

characterized as not trading in the public markets, but may sell portfolio company securities into 

the public markets once the portfolio company has matured.151 As of year-end 2010, U.S. 

 

149 Rule 203(l)-1(c)(4)(i) (defining a qualifying portfolio company as any company that at the time of 

any investment by a venture capital fund is not a reporting or foreign traded company).

150 See Testimony of James Chanos, Chairman, Coalition of Private Investment Companies, July 15, 

2009, at 4 (―[V]enture capital funds are an important source of funding for start-up companies or 

turnaround ventures.‖); National Venture Capital Association Yearbook 2010 (―NVCA Yearbook 

2010‖), at 7-8 (noting that venture capital is a ―long-term investment‖ and the ―payoff [to the 

venture capital firm] comes after the company is acquired or goes public.‖); George W. Fenn, 

Nellie Liang and Stephen Prowse, The Economics of the Private Equity Market, December 1995, 

22, n.61 and accompanying text (―Fenn et al.‖) (―Private sales‖ are not normally the most 

important type of exit strategy as compared to IPOs, yet of the 635 successful portfolio company 

exits by venture capitalists between 1991-1993 ―merger and acquisition transactions accounted 

for 191 deals and IPOs for 444 deals.‖ Furthermore, between 1983 and 1994, of the 2,200 venture 

capital fund exits, 1,104 (approximately 50%) were attributed to mergers and acquisitions of 

venture-backed firms.). See also Jack S. Levin, Structuring Venture Capital, Private Equity and 

Entrepreneurial Transactions, 2000 (―Levin‖) at 1-2 to 1-7 (describing the various types of 

venture capital and private equity investment business but stating that ―the phrase  ̳venture 

capital‘ is sometimes used narrowly to refer only to financing the start-up of a new business‖); 

Anna T. Pinedo & James R. Tanenbaum, Exempt and Hybrid Securities Offerings (2009), Vol. 1 

at 12-2 (discussing the role initial public offerings play in providing venture capital investors with 

liquidity).

151 See Testimony of Trevor Loy, Flywheel Ventures, before the Senate Banking Subcommittee on 

Securities, Insurance and Investment Hearing, July 15, 2009 (―Loy Testimony‖), at 5 (―We do not 

trade in the public markets.‖). See also Testimony of Terry McGuire, General Partner, Polaris 

Venture Partners, and Chairman, National Venture Capital Association, before the U.S. House of 

Representatives Committee on Financial Services, October 6, 2009 (―McGuire Testimony‖) at 11 

(―[V]enture capital funds do not typically trade in the public markets and generally limit advisory 

activities to the purchase and sale of securities of private operating companies in private 

transactions‖); Levin, supra note 150, at 1-4 (―A third distinguishing feature of venture 
- 37 -

venture capital funds managed approximately $176.7 billion in assets.152 In comparison, as of 

year-end 2010, the U.S. publicly traded equity market had a market value of approximately 

$15.4 trillion,153 whereas global hedge funds had approximately $1.7 trillion in assets under 

management.154 The aggregate amount invested in venture capital funds is considerably 

smaller.

155 Congressional testimony asserted that these funds may be less connected with the 

public markets and may involve less potential for systemic risk.156 This appears to be a key 

consideration by Congress that led to the enactment of the venture capital exemption.157 As we 

discussed in the Proposing Release, the rule we proposed sought to incorporate this 

 

capital/private equity investing is that the securities purchased are generally privately held as 

opposed to publicly traded . . . a venture capital/private equity investment is normally made in a 

privately-held company, and in the relatively infrequent cases where the investment is into a 

publicly-held company, the [venture capital fund] generally holds non-public securities.‖) 

(emphasis in original).

152 National Venture Capital Association Yearbook 2011 (―NVCA Yearbook 2011‖) at 9, Fig. 1.0.

153 Bloomberg Terminal Database, WCAUUS <Index> (Bloomberg United States Exchange Market 

Capitalization).

154 Credit Suisse, 2010 Hedge Fund Industry Review, Feb. 2011 (―Credit Suisse Report‖), at 1.

155 In 2010, investors investing in newly formed funds committed approximately $12.3 billion to 

venture capital funds compared to approximately $85.1 billion to private equity/buyout funds. 

NVCA Yearbook 2011, supra note 152, at 20 at Fig. 2.02. In comparison, hedge funds raised 

approximately $22.6 billion from investors in 2010. Credit Suisse Report, supra note 154, at 1.

156 See S. Rep. No. 111-176, supra note 6, at 74-5 (noting that venture capital funds ―do not present 

the same risks as the large private funds whose advisers are required to register with the SEC 

under this title [IV]. Their activities are not interconnected with the global financial system, and 

they generally rely on equity funding, so that losses that may occur do not ripple throughout 

world markets but are borne by fund investors alone. Terry McGuire, Chairman of the National 

Venture Capital Association, wrote in congressional testimony that  ̳venture capital did not 

contribute to the implosion that occurred in the financial system in the last year, nor does it pose a 

future systemic risk to our world financial markets or retail investors.‘‖). See also Loy 

Testimony, supra note 151, at 7 (noting the factors by which the venture capital industry is 

exposed to ―entrepreneurial and technological risk not systemic financial risk‖); McGuire 

Testimony, supra note 151, at 6 (noting that the ―venture capital industry‘s activities are not 

interwoven with U.S. financial markets‖). See also Group of Thirty, Financial Reform: A 

Framework for Financial Stability, January 15, 2009, at 9 (discussing the need for registration of 

managers of ―private pools of capital that employ substantial borrowed funds‖ yet recognizing the 

need to exempt venture capital from registration).

157 See supra note 156.
- 38 -

Congressional understanding of the nature of investments of a venture capital fund, and these 

principles guided our consideration of the proposed venture capital fund definition.

158

 The 

proposed rule would have required that a qualifying fund invest primarily in equity securities of 

companies that are not capitalized by the public markets.

159

Several commenters asserted that the definition should not exclude securities of reporting

companies.

160

 Most, however, did not object to the rule‘s limitation on investments in nonreporting companies, but instead sought a more flexible definition that would include some level 

of investments in reporting companies under certain conditions. For example, certain 

commenters supported venture capital fund investments in reporting companies only if, at the 

time the company becomes a reporting company, the fund continued to hold at least a majority of 

its original investment made when the company was a non-reporting company.

161

 Some of these 

commenters asserted that public offerings, which trigger reporting requirements under the federal 

 

158 See Proposing Release, supra note 26, at n.43 and n.60 and following text.

159 Most commenters did not express any objection to our proposed definition of ―publicly traded,‖ 

although one commenter did disagree with the proposed definition‘s approach to foreign traded 

securities. This commenter argued that the proposed rule should be modified to ―cover securities 

that have been publicly offered to investors in a foreign jurisdiction and equity securities that are 

widely held and traded over-the-counter in a foreign jurisdiction.‖ Merkl Letter. We decline to 

adopt this approach because the definition would require us to define what constitutes a ―public 

offering‖ notwithstanding the laws of foreign regulators and legislatures.

160 See Bessemer Letter; IVP Letter (also suggested additional conditions); Merkl Letter. One 

commenter also suggested that the definition should not exclude investments in companies that 

may be deemed to be ―controlled‖ by a public company (or its venture capital investment 

division). See Comment Letter of Berkeley Center for Law, Business and the Economy (Feb. 1, 

2011) (―BCLBE Letter‖). See also Dechert General Letter (argued that restricting the application 

of the control element may be necessary because an adviser to a venture capital fund could be 

controlled by a public company, and might itself be deemed to control a portfolio company as a 

result of its prior investments). Under our rule, a venture capital fund could invest in such 

companies under the non-qualifying basket.

161 ATV Letter; BIO Letter; NVCA Letter. See also Davis Polk Letter; InterWest Letter; McDonald 

Letter; Mesirow Letter; PTV Sciences Letter. A number of commenters supported expanding the 

proposed definition but without additional conditions. See, e.g., BioVentures Letter; ESP Letter; 

Quaker BioVentures Letter; SV Life Sciences Letter.
- 39 -

securities laws, were viewed as an additional financing round, with pre-existing venture investors 

expected to participate.162 Alternatively, several commenters recommended that a venture 

capital fund could limit its investment in reporting companies, such as 15 or 20 percent of the 

fund‘s capital commitments.163

We understand that venture capital funds seek flexibility to invest in promising portfolio 

companies, including companies deemed sufficiently profitable to become reporting companies 

or companies that may be owned directly or indirectly by a public company. Rather than modify 

the rule to impose additional criteria for investing in reporting companies, however, we have 

adopted a limit of 20 percent for non-qualifying investments, which may be used to hold 

securities of reporting companies. We believe that the 20 percent limit appropriately balances 

commenters‘ expressed desire for greater flexibility to accommodate existing business practices 

while providing sufficient limits on the extent of investments that would implicate Congressional

statements regarding the interconnectedness of venture capital funds with the public markets.164

 

162 See, e.g., Alta Partners Letter; Gunderson Dettmer Letter; InterWest Letter; McDonald Letter; 

NVCA Letter; Quaker BioVentures Letter. See also Bessemer Letter; BIO Letter; Lowenstein 

Letter.

163 Alta Partners Letter (supported limiting investments in public companies to 15% of fund capital 

commitments); Gunderson Dettmer Letter (supported limiting investments in public securities to 

20% of fund capital commitments). See also Davis Polk Letter (supported limiting investments 

in public companies to 20% of fund capital commitments provided the fund continues to hold a 

majority of its original investment in the company when it was private); SVB Letter (supported 

investments in public securities but did not identify a percentage threshold).

164 See supra Section II.A.1.b. One commenter argued that, in addition to funds that would satisfy 

the proposed definition, a venture capital fund should include any fund that invests at least 75% 

of its capital in privately held ―domestic small business‖ as defined in the Small Business 

Investment Act (the ―SBIA‖) regulations, regardless of the equity/debt nature of the investment. 

See NASBIC/SBIA Letter. In the Proposing Release, we noted our concerns with adopting a 

definition for a ―small‖ company, including reliance on the SBIA regulatory standards for 

treatment as a ―small‖ company, which generally imposes specific tests for net worth, net income 

or number of employees for each type of company, depending on its geographic location and 

industry classification. See Proposing Release, supra note 26, at n.69 and accompanying and 

following text. We have considered the issues raised in the NASBIC/SBIA Letter and continue to 
- 40 -

Under our rule, a qualifying portfolio company is defined to include a company that is 

not a reporting company (and does not have a control relationship with a reporting company) at 

the time of each fund investment.

165 However, one commenter observed that an existing 

investment in a portfolio company that ultimately becomes a successful venture capital 

investment (such as when the company issues its securities in a public offering or becomes a 

reporting company) should not result in the investment becoming a non-qualifying investment.166 

We agree. Under the rule, such an investment would not become a non-qualifying investment 

because the definition focuses on the time at which the venture capital fund acquires the 

particular equity security issued by a portfolio company and does not limit the definition of 

qualifying portfolio company solely to companies that are and remain non-reporting companies. 

Under this approach, an adviser could continue to rely on the exemption even if the venture 

capital fund‘s portfolio ultimately consisted entirely of securities that become securities of 

reporting companies. We believe that our approach would give advisers to venture capital funds 

sufficient flexibility to exercise their business judgment on the appropriate time to dispose of 

portfolio company investments – whether that occurs at a time when the company is or is not a 

reporting company.

167

 Moreover, under the federal securities laws, a person, such as a venture 

capital fund, that is deemed to be an affiliate of a company may be limited in its ability to 

 

believe that a qualifying portfolio company should not be defined by reference to whether a 

company is ―small‖ for the reasons cited in the Proposing Release.

165 See rule 203(l)-1(c)(4)(i).

166 PTV Sciences Letter (stating that following a merger or public offering of a qualifying portfolio 

company‘s securities, the shares held by the fund ―are turned into profits to our investors‖).

167 See Proposing Release, supra note 26, at n.55 and following text.
- 41 -

dispose of the company‘s securities.168 Under the final rule, a qualifying fund would not be in 

the position of having to dispose of securities of a qualifying portfolio company that 

subsequently becomes a reporting company.

b. Portfolio Company Leverage

Rule 203(l)-1 defines a qualifying portfolio company for purposes of the exemption as 

one that does not borrow or issue debt obligations in connection with the venture capital fund‘s 

investment in the company and distribute to the fund the proceeds of such borrowing or issuance 

in exchange for the fund‘s investment.169 As a consequence, certain types of funds that use 

leverage or finance their investments in portfolio companies or the buyout of existing investors 

with borrowed money (e.g., leveraged buyout funds, which are a different subset of private 

equity funds) would not meet the rule‘s definition of a venture capital fund.170 As discussed in 

greater detail below and in the Proposing Release, we believe that Congress did not intend the 

 

168 See sections 2(a)(11) (defining ―underwriter‖) and 5 of the Securities Act. See also E.H. 

Hawkins, SEC Staff No-Action Letter (June 26, 1997) (staff explained how the term 

―underwriter‖ in the Securities Act restricts resales of securities by affiliates of issuing 

companies).

169 Rule 203(l)-1(c)(4)(ii).

170 Leveraged buyout funds are private equity funds that will ―borrow significant amounts from 

banks to finance their deals—increasing the debt-to-equity ratio of the acquired companies . . . ‖ 

U.S. Govt. Accountability Office, Private Equity: Recent Growth in Leveraged Buyouts Exposed 

Risks that Warrant Continued Attention (2008) (―GAO Private Equity Report‖), at 1. A leverage 

buyout fund in 2005 typically financed a deal with 34% equity and 66% debt. Id. at 13. See also

Fenn et al., supra note 150, at 23 (companies that have been taken private in a leveraged buyout 

(or ―LBO‖) transaction generally ―spend less on research and development, relative to assets, and 

have a greater proportion of fixed assets; their debt-to-assets ratios are high, above 60 percent, 

and are two to four times those of venture-backed firms.‖ Moreover, compared to venture capital 

backed companies, LBO-private equity backed companies that are taken public typically use 

proceeds from an IPO to reduce debt whereas new venture capital backed firms tend to use 

proceeds to fund growth.); Testimony of Mark Tresnowksi, General Counsel, Madison Dearborn 

Partners, LLC, on behalf of the Private Equity Council, before the Senate Banking Subcommittee 

on Securities, Insurance and Investment, July 15, 2009, at 2 (indicating that portfolio companies 

in which private equity funds invest typically have 60% debt and 40% equity).
- 42 -

venture capital fund definition to apply to these types of private equity funds.171

We proposed to define a qualifying portfolio company as a company that does not borrow 

―in connection‖ with a venture capital fund investment. We also proposed to define a qualifying 

portfolio company as a company that does not participate in an indirect buyout involving a 

qualifying fund (as a corollary to our proposed limitation on venture capital fund acquisitions of 

portfolio company securities through secondary transactions, i.e., direct buyouts).172 We 

proposed these elements to distinguish between venture capital funds that provide capital to 

portfolio companies for operating and business purposes (in exchange for an equity investment) 

and leveraged buyout funds, which acquire controlling equity interests in operating companies 

through the ―buyout‖ of existing security holders or which finance such investments or buyouts 

with borrowed money.173 We proposed these elements of the qualifying portfolio company 

definition because of the focus on leverage in the Dodd-Frank Act as a potential contributor to 

systemic risk as discussed by the Senate Committee report,174 and the testimony before Congress 

that stressed the lack of leverage in venture capital investing.175

Some commenters argued that defining a venture capital fund as a fund that does not 

participate in buyouts was too restrictive or too difficult to apply.176 Most of the commenters 

 

171 See discussion in section II.A.1.c. and d. of the Proposing Release, supra note 26.

172 Proposed rules 203(l)-1(a)(2)(i); (c)(4)(ii) and (c)(4)(iii).

173 See generally Proposing Release, supra note 26, at sections II.A.1.c. and d.

174 See S. Rep. No. 111-176, supra note 6, at 74 (―The Committee believes that venture capital funds, 

a subset of private investment funds specializing in long-term equity investment in small or startup businesses, do not present the same risks as the large private funds whose advisers are required 

to register with the SEC under this title.‖); id. at 75 (concluding that private equity funds that use 

limited or no leverage at the fund level engage in activities that do not pose risks to the wider 

markets through credit or counterparty relationships).

175 See Proposing Release, supra note 26, at n.100.

176 See, e.g., McGuireWoods Letter; NVCA Letter; Pine Brook Letter.
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who addressed the issue opposed a definition that excluded any buyouts of portfolio company 

securities by venture capital funds.177 Some commenters argued that because a venture capital 

fund could, under the proposed rule, acquire up to 20 percent of portfolio company securities in 

secondary transactions, indirect buyouts achieved at the portfolio company level should not be 

precluded.178 Some commenters stated that buyouts are an important means of providing 

liquidity to portfolio company founders, employees, former employees and vendors/service 

providers,179 while others argued that buyouts occurring as a result of recapitalizations180 or 

conversions of permissible bridge loans181 should not preclude a fund from relying on the 

definition.182

We have eliminated the proposed indirect buyout criterion in the final rule. Because the 

non-qualifying basket does not exclude secondary market transactions (or other buyouts of 

existing security holders), it would be inconsistent to define a venture capital fund as a fund that 

does not participate in a buyout.

We are retaining and clarifying, however, the leveraged buyout criterion as it relates to 

qualifying portfolio companies. We had proposed to define a qualifying portfolio company as a 

 

177 One commenter sought interpretative guidance on which buyout transactions would be 

considered to be ―in connection with‖ a venture capital fund investment. Mesirow Letter. See 

also McGuireWoods Letter; NVCA Letter (discussing some interpretative issues with the ―in 

connection with‖ language).

178 ATV Letter; NVCA Letter. See also ABA Letter (also recommending that the buyout bucket be 

increased to 30%); Charles River Letter (supported a 20% buyout limit to accommodate the 

increasing industry use of buyouts); First Round Letter (supported 25% buyout limit for each deal 

and a 20% limit for all fund investments in order to facilitate liquidity to founders).

179 See, e.g., Davis Polk Letter; ESP Letter; SVB Letter.

180 Alta Partners Letter; BioVentures Letter.

181 ATV Letter; NVCA Letter.

182 See also Pine Brook Letter (suggesting ―careful drafting‖ that would not preclude transactions in 

the normal course of business by defining a set of prohibited buyout transactions (e.g., ―leveraged 

dividend recapitalizations‖)).
- 44 -

company that, among other things, does not borrow ―in connection‖ with a venture capital fund 

investment. As noted above, we proposed this element to distinguish venture capital funds from 

leveraged buyout funds, and we continue to believe that this remains an important distinction. 

We believe that these differences (i.e., the use of buyouts and associated leverage) distinguish 

venture capital funds from buyout private equity funds for which Congress did not provide an 

exemption.183

One of the distinguishing features of venture capital funds is that, unlike many hedge 

funds and private equity funds, they invest capital directly in portfolio companies for the purpose 

of funding the expansion and development of the company‘s business rather than buying out 

existing security holders, otherwise purchasing securities from other shareholders, or leveraging 

the capital investment with debt financing.184 Testimony received by Congress and our research 

suggest that venture capital funds provide capital to many types of businesses at different stages 

of development,185 generally with the goal of financing the expansion of the company186 and 

 

183 See supra note 174 and accompanying text.

184 See Loy Testimony, supra note 151, at 2 (―Although venture capital funds may occasionally 

borrow on a short-term basis immediately preceding the time when the cash installments are due, 

they do not use debt to make investments in excess of the partner‘s capital commitments or  ̳lever 

up‘ the fund in a manner that would expose the fund to losses in excess of the committed capital 

or that would result in losses to counter parties requiring a rescue infusion from the 

government.‖). See also infra notes 189-191; Mark Heesen & Jennifer C. Dowling, National 

Venture Capital Association, Venture Capital & Adviser Registration (October 2010), materials 

submitted in connection with the Commission‘s Government-Business Forum on Small Business 

Capital Formation (summarizing the differences between venture capital funds and buyout and 

hedge funds), available at http://www.sec.gov/info/smallbus/2010gbforumstatements.htm.

185 See, e.g., McGuire Testimony, supra note 151, at 1; NVCA Yearbook 2010, supra note 150; 

PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, Q4 

2009/Full-year 2009 Report (providing data on venture capital investments in portfolio 

companies); James Schell, Private Equity Funds: Business Structure and Operations (2010), at § 

1.03[1] (―Schell‖), at §1.03[1]; PAUL A. GOMPERS & JOSH LERNER, THE VENTURE CAPITAL 

CYCLE, at 459 (MIT Press 2004), at 178, 180 table 8.2 (displaying percentage of annual venture 

capital investments by stage of development and classifying ―early stage‖ as seed, start-up, or 

early stage and ―late stage‖ as expansion, second, third, or bridge financing).
- 45 -

helping it progress to the next stage of its development through successive tranches of 

investment (i.e., ―follow-on‖ investments) if the company reaches agreed-upon milestones.187

In contrast, private equity funds that are identified as buyout funds typically provide 

capital to an operating company in exchange for majority or complete ownership of the 

company,188 generally achieved through the buyout of existing shareholders or other security 

holders and financed with debt incurred by the portfolio company,189 and compared to venture 

capital funds, hold the investment for shorter periods of time.190 As a result of the use of the 

 

186 See McGuire Testimony, supra note 151, at 1; Loy Testimony, supra note 151, at 3 (―Once the 

venture fund is formed, our job is to find the most promising, innovative ideas, entrepreneurs, and 

companies that have the potential to grow exponentially with the application of our expertise and 

venture capital investment.‖). See also William A. Sahlman, The Structure and Governance of 

Venture-Capital Organizations, Journal of Financial Economics 27 (1990), at 473, 503 

(―Sahlman‖) (noting venture capitalists typically invest more than once during the life of a 

company, with the expectation that each capital investment will be sufficient to take the company 

to the next stage of development, at which point the company will require additional capital to 

make further progress).

187 See Sahlman, supra note 186, at 503; Loy Testimony, supra note 151, at 3 (―[W]e continue to 

invest additional capital into those companies that are performing well; we cease follow-on 

investments into companies that do not reach their agreed upon milestones.‖).

188 GAO Private Equity Report, supra note 170, at 8 (―A private equity-sponsored LBO generally is 

defined as an investment by a private equity fund in a public or private company (or division of a 

company) for majority or complete ownership.‖).

189 See Annalisa Barrett et al., Prepared by the Corporate Library Inc., under contract for the IRRC 

Institute, What is the Impact of Private Equity Buyout Fund Ownership on IPO Companies‘ 

Corporate Governance?, at 7 (June 2009) (―Barrett et al.‖) (―In general, VC firms provide 

funding to companies in early stages of their development, and the money they provide is used as 

working capital for the firm. Buyout firms, in contrast, work with mature companies, and the 

funds they provide are used to compensate the firm‘s existing owners.‖); Ieke van den Burg and 

Poul Nyrup Rasmussen, Hedge Funds and Private Equity: A Critical Analysis (2007), at 16-17 

(―van den Burg‖); Sahlman, supra note 186, at 517. See also Tax Legislation: CRS Report, 

Taxation of Hedge Fund and Private Equity Managers, Tax Law and Estate Planning Course 

Handbook Series, Practicing Law Institute (Nov. 2, 2007) at 2 (noting that in a leveraged buyout 

―private equity investors use the proceeds of debt issued by the target company to acquire all the 

outstanding shares of a public company, which then becomes private‖).

190 Unlike venture capital funds, which generally invest in portfolio companies for 10 years or more, 

private equity funds that use leveraged buyouts invest in their portfolio companies for shorter 

periods of time. See Loy Testimony, supra note 151, at 3 (citing venture capital fund investments 

periods in portfolio companies of five to 10 years or longer); van den Burg, supra note 189, at 19 
- 46 -

capital provided and the incurrence of this debt, following the buyout fund investment, the 

operating company may carry debt several times its equity and may devote significant levels of 

its cash flow and corporate earnings to repaying the debt financing, rather than investing in 

capital improvement or business operations.191

Some commenters agreed that distinguishing between venture capital and other private 

funds with reference to a portfolio company‘s leverage and indirect buyouts is important.192 

Many commenters, however, urged a more narrowly drawn restriction on a portfolio company‘s 

ability to borrow (or issue debt) or to effect indirect buyouts.193 Some argued that the manner in 

which proceeds from indebtedness are used by a portfolio company (e.g., distributed by the 

company to the venture capital fund) better distinguishes venture capital funds from leveraged 

buyout private equity funds.194 Nevertheless, the majority of commenters who addressed this 

criterion supported a leverage criterion that would be more specific, or limited, in scope,195

 

(noting that LBO investors generally retain their investment in a listed company for 2 to 4 years 

or even less after the company goes public). See also Paul A. Gompers, The Rise and Fall of 

Venture Capital, Business And Economic History, vol. 23, no. 2, Winter 1994, at 17 (stating that 

―an LBO investment is significantly shorter than that of a comparable venture capital investment. 

Assets are sold off almost immediately to meet debt burden, and many companies go public again 

(in a reverse LBO) in a very short period of time.‖).

191 See Barrett et al., supra note 189. See also Fenn et al., supra note 150, at 23 (companies that 

have been taken private in an LBO transaction generally ―spend less on research and 

development, relative to assets, and have a greater proportion of fixed assets; their debt-to-assets 

ratios are high, above 60%, and are two to four times those of venture-backed firms.‖ Moreover, 

compared to venture capital backed companies, LBO-private equity backed companies that are 

taken public typically use proceeds from an IPO to reduce debt whereas new venture capital 

backed firms tend to use proceeds to fund growth.).

192 See, e.g., AFL-CIO Letter; Sen. Levin Letter; Pine Brook Letter.

193 See, e.g., ATV Letter; Charles River Letter; NVCA Letter; Oak Investment Letter; Pine Brook 

Letter.

194 See, e.g., NVCA Letter; Pine Brook Letter; SV Life Sciences Letter; Vedanta Letter.

195 See, e.g., ATV Letter; Charles River Letter (supports modifying the rule so that up to 20% of 

fund capital commitments may be invested in portfolio companies that do not adhere to the 

leverage condition provided that the venture capital fund is not the party providing the leverage to 
- 47 -

focusing on the use of proceeds derived from portfolio company leverage.196 Commenters 

suggested that the rule define leverage as leverage incurred for the purpose of buying out 

shareholders at the demand of the venture capital fund197 or for returning capital to the fund,

198

and not, for example, define leverage to include indebtedness incurred to pay for a qualifying 

portfolio company‘s operating expenses.199

Some commenters argued that the proposed ―in connection with‖ element would be 

difficult to apply, arguing that the standard was too vague or raised too many interpretative 

issues.200 In response to our request for comment, many commenters sought confirmation that 

the limitation on portfolio company leverage would be triggered only in the instances of leverage 

provided to the portfolio company by the venture capital fund or if portfolio company borrowing 

 

the company); NVCA Letter; Comment Letter of the Securities Regulation Committee of the 

Business Law Section of the New York State Bar Association, Apr. 1, 2011 (―NYSBA Letter‖); 

SVB Letter.

196 Although two commenters supported the leverage limitation as proposed (see AFL-CIO Letter 

(also supporting a specific prohibition on borrowing by a portfolio company to pay dividends or 

fees to the venture capital fund); Sen. Levin Letter (together with the equity investment 

requirement, the definition appropriately excludes leveraged buyout funds)), two other 

commenters opposed it, arguing that qualifying portfolio company leverage should not be 

restricted at all (see ESP Letter (limits on leverage would prevent portfolio companies from 

receiving lending from venture debt funds and state governments and lenders rather than 

regulators should determine the appropriate level of portfolio company debt); Merkl Letter 

(young negative EBITDA companies would not be able to obtain significant amounts of debt and 

hence no leverage prohibition is required)). See also NASBIC/SBIA Letter (portfolio companies 

should not be precluded from accessing leverage); Sevin Rosen Letter, Pine Brook Letter (each 

expressed support for a use of proceeds approach).

197 See, e.g., Gunderson Dettmer Letter; McDonald Letter; NVCA Letter; SVB Letter.

198 See, e.g., McDonald Letter; NVCA Letter.

199 Gunderson Dettmer Letter; Pine Brook Letter; Trident Letter; Vedanta Letter. One commenter 

suggested that a use of proceeds test would be difficult to enforce because such a test would need 

to be extremely detailed in order to prevent circumvention. See Merkl Letter.

200 See, e.g., Merkl Letter; Sevin Rosen Letter; SVB Letter.
- 48 -

were effected in satisfaction of a contractual obligation with the venture capital fund.201

After careful consideration of the intended purpose of the leverage limitation of the 

proposed rule and the concerns raised by commenters, we are modifying the qualifying portfolio 

company leverage criterion to define a qualifying portfolio company as any company that does 

not both borrow (or issue debt) in connection with a venture capital fund investment and

distribute the proceeds of such borrowing or issuance to the venture capital fund in exchange for

the fund‘s investment. In contrast to the proposed rule, the final rule more specifically delineates 

the types of leveraged transactions involving a qualifying fund (i.e., a company‘s distribution of 

proceeds received in a debt offering to the qualifying fund) that would result in the company 

being excluded from the definition of a qualifying portfolio company. We believe that these 

modifications more closely achieve our goal of distinguishing advisers to venture capital funds 

from other types of private funds for which Congress did not provide an exemption because it 

looks to the substance, not just the form, of a transaction or series of transactions.

This definition of qualifying portfolio company would only exclude companies that 

borrow in connection with a venture capital fund‘s investment and distribute such borrowing 

proceeds to the venture capital fund in exchange for the investment, but would not exclude 

companies that borrow in the ordinary course of their business (e.g., to finance inventory or 

capital equipment, manage cash flows, meet payroll, etc.). Under the rule, a venture capital fund 

could provide financing or loans to a portfolio company, provided that the financing meets the 

definition of equity security or is made subject to the 20 percent limit for non-qualifying 

investments. Although we would generally view any financing to a portfolio company that was 

 

201 See, e.g., ABA Letter; ATV Letter; Bessemer Letter; Mesirow Letter; NVCA Letter; SV Life 

Sciences Letter. See also Proposing Release, supra note 26, discussion at section II.A.1.c.
- 49 -

provided by, or was a condition of a contractual obligation with, a fund or its adviser as part of 

the fund‘s investments in the company as being a type of financing that is ―in connection with‖ 

the fund‘s investment, the definition‘s limitation would only apply if the proceeds of such 

financing were distributed to the venture capital fund in exchange for its investment. Moreover, 

subsequent distributions to the venture capital fund solely because it is an existing investor 

would not be inconsistent with this criterion. We believe that this modification to the rule 

adequately distinguishes between venture capital funds and leveraged buyout funds and provides 

a simpler and clearer approach to determining whether or not a qualifying portfolio company 

satisfies the definition.

c. Operating Company

Rule 203(l)-1 defines the term qualifying portfolio company for the purposes of the 

exemption to exclude any private fund or other pooled investment vehicle.202 Under the rule, a 

qualifying portfolio company could not be another private fund, a commodity pool or other 

―investment companies.‖203 We are adopting this criterion because Congress did not express an 

intent to include venture capital funds of funds within the definition.204 In the Senate Report, 

Congress characterized venture capital as a subset of private equity ―specializing in long-term 

 

202 Rule 203(l)-1(c)(4)(iii). For this purpose, pooled investment vehicles include investment 

companies, issuers relying on rule 3a-7 under the Investment Company Act and commodity 

pools. 17 CFR 270.3a-7.

203 Under the ―holding out‖ criterion (discussed in Section II.A.7. below), a fund that represents itself 

as pursuing a venture capital strategy to investors implies that the fund invests primarily in 

operating companies and not for example in entities that hold oil and gas leases.

204 One commenter agreed that ―there is no indication that Congress intended the venture capital 

exemption to apply to  ̳funds of funds,‘‖ but argued that the qualifying portfolio company 

definition was ―unduly restrictive‖ because it would exclude such funds of funds and discourage 

use of special purpose vehicles. ABA Letter.
- 50 -

equity investment in small or start-up businesses‖205 and did not refer to funds investing in other 

funds. Moreover, testimony to Congress described venture capital investments in operating 

companies rather than other private funds.206

Moreover, without this definitional criterion, a qualifying fund could circumvent the 

intended scope of the rule by investing in other pooled investment vehicles that are not 

themselves subject to the definitional criteria under our rule.207 For example, without this 

criterion, a venture capital fund could circumvent the intent of the rule by incurring off-balance 

sheet leverage or indirectly investing in reporting companies in excess of the 20 percent limit for 

non-qualifying investments.208 Our exclusion is similar to the approach of other definitions of 

―venture capital‖ discussed in the Proposing Release, which limit investments to operating 

companies and thus would exclude investments in other private funds or securitized asset 

vehicles.209

Many commenters opposed the operating company criterion and recommended that the 

rule include fund of venture capital fund structures.210 Some commenters supported no limits on 

 

205 S. Rep. No. 111-176, supra note 6, at 74.

206 See generally Loy Testimony, supra note 151, and McGuire Testimony, supra note 151.

207 One commenter indicated that it was ―sympathetic‖ to the Commission‘s concerns about the use 

of fund of funds structures to circumvent the intended purpose of the exemption, and agreed that 

such ―investments would unacceptably heighten the possibility for abuse.‖ See NVCA Letter 

(suggesting that the Commission address this concern by applying the venture capital fund 

leverage limit on a full ―look-through‖ basis to the underlying funds).

208 Similarly, a qualifying fund could not, for example, invest in an investment management entity 

(e.g., a general partner entity) that in turn invests in another pooled vehicle, except as an 

investment under the non-qualifying basket.

209 See Proposing Release, supra note 26, at nn.70-72 (discussing the California venture capital 

exemption and the VCOC definition under ERISA, 29 CFR 2510.3-101(d)).

210 See, e.g., NVCA Letter; Sevin Rosen Letter; Comment Letter of VCFA Group (Jan. 21, 2011).
- 51 -

investments in other pooled investment vehicles,211 while others supported broadening the 

definition to include funds that invest in other funds if either (i) the underlying funds qualify as 

venture capital funds (i.e., comply with rule 203(l)-1)212 or (ii) investment in underlying funds 

does not exceed a specified threshold (such as a percentage of fund capital).213 Commenters 

argued that broadening the definition of qualifying portfolio company was necessary in order to 

accommodate current business practices,

214 or was appropriate because funds of funds (including 

secondary funds) provide investors with liquidity or do not pose systemic risk.215 Other 

commenters advocated a definition that would permit investments in qualifying portfolio 

companies held through an intermediate holding company structure formed solely for tax, legal 

or regulatory reasons.216

For purposes of the definition of a qualifying portfolio company, we agree that a fund 

may disregard a wholly owned intermediate holding company formed solely for tax, legal or 

 

211 See, e.g., Cook Children‘s Letter; Leland Fikes Letter; Merkl Letter.

212 See, e.g., ATV Letter, Charles River Letter, NVCA Letter, Sevin Rosen Letter (specifically in the 

context of funds of ―seed‖ funds); SVB Letter, Vedanta Letter (85% cap for investments in rule 

203(l)-1 compliant, unleveraged funds). See also Dechert General Letter (suggested that funds 

investing solely in venture capital funds should be permitted or, in the alternative, investments of 

up to 20% of committed capital should be permitted in ―incubator‖ funds).

213 First Round Letter (supported investments in underlying funds representing no more than 10% of 

a fund‘s called capital, measured at the end of the fund‘s term); ATV Letter and Charles River 

Letter (supported investments in underlying funds representing no more than 20% of a fund‘s 

committed capital subject to other conditions); PEI Funds Letter (supports ―substantial‖ 

investment in venture capital investments rather than a specific numerical threshold); Comment 

Letter of Private Equity Investors, Inc. and Willowbridge Partners, Inc. (Jan. 7, 2011) 

(―PEI/Willowbridge Letter‖) (supported investments in other qualifying funds representing at 

least 50% of the qualifying fund‘s assets or committed capital) and Comment Letter of Venture 

Investment Associates (Jan. 24, 2011) (―VIA Letter‖) (supported investments in underlying funds 

representing at least 50% of a qualifying fund‘s capital commitments).

214 See, e.g., ATV Letter, Charles River Letter, Cook Children‘s Letter, Leland Fikes Letter (each of 

which cited the use of technology incubators).

215 See, e.g., PEI/Willowbridge Letter and VIA Letter.

216 See, e.g., ABA Letter; Davis Polk Letter; NVCA Letter.
- 52 -

regulatory reasons to hold the fund‘s investment in a qualifying portfolio company. Such 

structures are used to address the particular needs of venture capital funds or their investors and 

are not intended to circumvent the rule‘s general limitation on investing in other investment 

vehicles.217

We do not agree, however, that Congress viewed funds of venture capital funds as being 

consistent with the exemption, and continue to believe that this criterion remains an important 

tool to prevent circumvention of the intended scope of the venture capital exemption. A fund 

strategy of selecting a venture capital or other private fund in which to invest is different from a 

strategy of selecting qualifying portfolio companies. Nevertheless, we are persuaded that a 

venture capital fund‘s limited ability to invest a limited portion of its assets in other pooled 

investment vehicles would not be inconsistent with the intent of the rule if the fund primarily 

invests directly in qualifying portfolio companies. As a result, for purposes of the exemption, 

investments in other private funds or venture capital funds could be made using the nonqualifying basket.

4. Management Involvement

We are not adopting a managerial assistance element of the rule, as originally proposed. 

We proposed that advisers seeking to rely on the rule have a significant level of involvement in 

developing a fund‘s portfolio companies.

218

 We modeled our proposed approach to managerial 

assistance in part on existing provisions under the Advisers Act and the Investment Company 

Act dealing with BDCs. These provisions were added over the years to ease the regulatory 

 

217 See, e.g., Davis Polk Letter for a discussion of these considerations.

218 See Proposing Release, supra note 26, section II.A.2.
- 53 -

burden on venture capital and other private equity investments.219 Congress did not use the 

existing BDC definitions when determining the scope of the venture capital exemption, and the 

primary policy considerations that led to the adoption of the BDC exemptions differed from 

those under the Dodd-Frank Act.220

Commenters presented several problems with the application of the managerial assistance 

criterion and its intended scope under the proposed rule. Some objected to the managerial 

assistance criterion as proposed, arguing that such assistance to (or control of) a portfolio 

company is not a key or distinguishing characteristic of venture capital investing;221 that 

relationships between qualifying funds and qualifying portfolio companies may be less formal 

and may not constitute management or control of a portfolio company under the proposed 

rule;

222

or that the discretion to determine the extent of involvement with a portfolio company 

should not affect a qualifying fund‘s ability to satisfy the definitional criterion.

223

Most commenters sought guidance on determining what activities would constitute 

managerial assistance or ―control.‖

224 Other commenters specifically requested confirmation 

 

219 See id., at n.123.

220 See id., at section II.A.2.

221 Merkl Letter; SVB Letter (managerial assistance criterion is unnecessary because it does not 

distinguish venture capital funds from other types of funds providing managerial assistance).

222 ESP Letter.

223 Sevin Rosen Letter.

224 BCLBE Letter; Gunderson Dettmer Letter; McGuireWoods Letter; Shearman Letter. Shearman 

sought confirmation on whether control included both direct and indirect control, and BCLBE 

sought confirmation that board representation would be sufficient for control purposes. Other 

commenters, however, acknowledged that the ―offer-only‖ element of the proposed rule would 

provide sufficient flexibility for a venture capital fund to alter its relationship with a portfolio 

company over time. See, e.g., First Round Letter; NVCA Letter. The NVCA and one other 

commenter did not support imposing specific requirements as to what constituted managerial 

assistance. See NVCA Letter (definitive requirements are not appropriate); Sevin Rosen Letter 

(opposed requiring board seat or observer rights).
- 54 -

that a management rights letter for purposes of ―venture capital operating company‖ status under 

ERISA would be sufficient.

225

 Finally, some commenters recommended that the rule address 

syndicated transactions,226 and provide that the managerial assistance criterion would be satisfied 

if one fund within the syndicate provided the requisite assistance or control.227

We appreciate the difficulties of applying the managerial assistance criterion under the 

proposed definition and in particular the issues associated with a qualifying fund proving 

compliance when it participates in a syndicated transaction involving multiple funds. We are 

persuaded that to modify the rule to specify which activities constitute ―managerial assistance‖ 

would introduce additional complexity and require us to insert our judgment for that of a venture 

capital fund‘s adviser regarding the minimum level of portfolio company involvement that would 

be appropriate for the fund, rather than enabling investors to select venture capital funds based in 

part on their level of involvement.

228

 We also appreciate that the offer of managerial assistance 

may not distinguish venture capital funds from other types of funds.

While many venture capital fund advisers do provide managerial assistance, we believe 

that the managerial assistance criterion, as proposed, does not distinguish these advisers from 

other advisers, would be difficult to apply and could be unnecessarily prescriptive without 

creating benefits for investors. As a consequence of our modification to the proposed rule, a 

 

225 ATV Letter; Charles River Letter; NVCA Letter; Oak Investment Letter; Santé Ventures Letter; 

Sevin Rosen Letter; Village Ventures Letter.

226 ABA Letter; ESP Letter; McGuireWoods Letter.

227 ABA Letter (asserted that most deals are syndicated deals). See also Dechert General Letter; ESP 

Letter (indicating that in syndicated transactions, there may be varying degrees of managerial 

involvement by funds participating in the transactions; one fund may take an active role with the 

other funds taking a more passive role with respect to portfolio companies).

228 For example, one commenter indicated that although it may seek to offer assistance to portfolio 

companies, not all of the companies have accepted. Charles River Letter. Similarly, a number of 

venture capital advisers stated that their funds may invest in a significant but non-controlling 

stake in underlying portfolio companies. See, e.g., ATV Letter; First Round Letter.
- 55 -

qualifying fund is not required to offer (or provide) managerial assistance to, or control any, 

qualifying portfolio company in order to satisfy the definition.

5. Limitation on Leverage

Under rule 203(l)-1, a venture capital fund is a private fund that does not borrow, issue 

debt obligations, provide guarantees or otherwise incur leverage, in excess of 15 percent of the 

fund‘s capital contributions and uncalled committed capital, and any such borrowing, 

indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar 

days.229 For purposes of this leverage criterion, any guarantee by the private fund of a qualifying 

portfolio company‘s obligations up to the value of the private fund‘s investment in the qualifying 

portfolio company is not subject to the 120 calendar day limit.

230

The 15 percent threshold is determined based on the venture capital fund‘s aggregate 

capital commitments. In practice, this means that a qualifying fund could leverage an investment 

transaction up to 100 percent when acquiring equity securities of a particular portfolio company 

as long as the leverage amount does not exceed 15 percent of the fund‘s total capital 

commitments.

Although a minority of commenters generally supported the leverage criterion as 

proposed,

231 many commenters sought to broaden it in several ways. Two commenters that 

generally supported the leveraged criterion also recommended that the criterion exclude uncalled 

 

229 Rule 203(l)-1(a)(3).

230 Id.

231 See Sen. Levin Letter; NVCA Letter. See also AFL-CIO Letter, AFR Letter (generally supported 

the leverage limit but also supported excluding uncalled capital commitments); Oak Investment 

Letter (generally supported the leverage limit, but did not agree that the 120-day limit should 

apply to guarantees of portfolio company obligations by venture capital funds).
- 56 -

capital commitments so that a qualifying fund could not incur excessive leverage.232 Although 

determining the leverage criterion as a percentage of total fund capital commitments may enable 

a qualifying fund to incur a degree of leverage that represents a disproportionate percentage of 

the fund‘s assets early in the life of the fund, the leverage criterion is also constrained by the 120 

calendar day limit. Therefore, we do not believe it is necessary to exclude uncalled capital 

commitments from the leverage criterion.

Other commenters proposed to exclude from the 15 percent leverage limitation capital 

call lines of credit (i.e., venture capital fund borrowings repaid with proceeds of capital calls 

from fund investors),233 or borrowings by a venture capital fund in order to meet fee and expense 

obligations.234 One commenter sought to increase the leverage threshold from 15 percent to 20 

percent.235 One commenter, on behalf of many venture capital advisers, however, agreed with 

the proposed leverage criterion, arguing that venture capital fund financing would generally not 

exceed 15 percent of fund capital commitments or remain outstanding for longer than 120 

days.236

We decline to increase the leverage threshold for a qualifying fund under the rule or 

exclude other certain types of borrowings as requested by some commenters. Our rule defines a 

venture capital fund by reference to a maximum of 15 percent of borrowings based on our 

 

232 AFR Letter; AFL-CIO Letter.

233 Cook Children‘s Letter; Leland Fikes Letter; SVB Letter. We would view a line of credit used to 

advance anticipated committed capital that remains available for longer than 120 days to be 

consistent with the criterion, if each drawdown is repaid within 120 days and subsequent 

drawdowns relate to subsequent capital calls.

234 Dechert General Letter.

235 See Charles River Letter (argued that a qualifying fund should be able to borrow, without limit on 

duration, up to 20% of capital commitments with the consent of its investors).

236 NVCA Letter. See also Merkl Letter.
- 57 -

understanding that venture capital funds typically would not incur borrowings in excess of 10 to 

15 percent of the fund‘s total capital contributions and uncalled capital commitments,

237 which 

commenters have confirmed.238 We believe that imposing a maximum at the upper range of 

borrowings typically used by venture capital funds will accommodate existing practices of the 

vast majority of industry participants.

Our rule specifies that the 15 percent calculation must be determined based on the fund‘s 

aggregate capital contributions and uncalled capital commitments.239 Unlike most registered 

investment companies or hedge funds, venture capital funds rely on investors funding their 

capital commitments from time to time in order to acquire portfolio companies.240 A capital 

commitment is a contractual obligation to acquire an interest in, or provide the total commitment 

amount over time to, a fund, when called by the fund. Accordingly, an adviser to venture capital 

funds manages the fund in anticipation of all investors fully funding their commitments when 

due and typically has the right to penalize investors for failure to do so.241 Venture capital funds 

 

237 See Loy Testimony, supra note 151, at 6 (―[M]any venture capital funds significantly limit 

borrowing such that all outstanding capital borrowed by the fund, together with guarantees of 

portfolio company indebtedness, does not exceed the lesser of (i) 10-15% of total limited partner 

commitments to the fund and (ii) undrawn limited partner commitments.‖).

238 NVCA Letter. See also Merkl Letter; Oak Investments Letter.

239 Rule 203(l)-1(a)(3).

240 Schell, supra note 185, at §1.03[8] (―The typical Venture Capital Fund calls for Capital 

Contributions from time to time as needed for investments.‖); id. at §2.05[2] (stating that 

―[venture capital funds] begin operation with Capital Commitments but no meaningful assets. 

Over a specific period of time, the Capital Commitments are called by the General Partner and 

used to acquire Portfolio Investments.‖).

241 See Loy Testimony, supra note 151, at 5 (―[Limited partners] make their investment in a venture 

fund with the full knowledge that they generally cannot withdraw their money or change their 

commitment to provide funds. Essentially they agree to ―lock-up‖ their money for the life of the 

fund . . . ‖). See also Stephanie Breslow & Phyllis Schwartz, Private Equity Funds, Formation 

and Operation 2010 (―Breslow & Schwartz‖), at § 2:5.6 (discussing the various remedies that 

may be imposed in the event an investor fails to fund its contractual capital commitment, 

including, but not limited to, ―the ability to draw additional capital from non-defaulting 
- 58 -

are subject to investment restrictions, and, during the initial years of a fund, calculate fees 

payable to an adviser as a percentage of the total capital commitments of investors, regardless of 

whether or not the capital commitment is ultimately fully funded by an investor.242 Venture 

capital fund advisers typically report and market themselves to investors on the basis of 

aggregate capital commitment amounts raised for prior or existing funds.243 These factors would 

lead to the conclusion that, in contrast to other types of private funds, such as hedge funds, which 

trade on a more frequent basis, a venture capital fund would view the fund‘s total capital 

commitments as the primary metric for managing the fund‘s assets and for determining 

compliance with investment guidelines. Hence, we believe that calculating the leverage 

threshold to include uncalled capital commitments is appropriate, given that capital commitments 

are already used by venture capital funds themselves to measure investment guideline 

compliance.

Thus, we are retaining the 15 percent leverage threshold, as proposed, so that a qualifying 

fund could only incur debt (or provide guarantees of portfolio company obligations) subject to 

this threshold. However, we are modifying the leverage criterion to exclude from the 120-

 

investors;‖ ―the right to force a sale of the defaulting partner‘s interests at a price determined by 

the general partner;‖ and ―the right to take any other action permitted at law or in equity‖).

242 See, e.g., Breslow & Schwartz, supra note 241, at § 2:5.7 (noting that a cap of 10% to 25% of 

remaining capital commitments is a common limitation for follow-on investments). See also

Schell, supra note 185, at §1.01 (noting that capital contributions made by the investors are used 

to ―make investments . . . in a manner consistent with the investment strategy or guidelines 

established for the Fund.‖); id. at §1.03 (―Management fees in a Venture Capital Fund are usually 

an annual amount equal to a fixed percentage of total Capital Commitments.‖); see also Dow 

Jones, Private Equity Partnership Terms and Conditions, 2007 edition (―Dow Jones Report‖) at 

15.

243 See, e.g., NVCA Yearbook 2010, supra note 150, at 16; John Jannarone, Private Equity’s Cash 

Problem, Wall St. J., June 23, 2010, 

http://online.wsj.com/article/SB10001424052748704853404575323073059041024.html#printMo

de. 
- 59 -

calendar day limit any guarantee of qualifying portfolio company obligations by the qualifying 

fund, up to the value of the fund‘s investment in the qualifying portfolio company.

244

 

Commenters generally argued in favor of extending the period during which a qualifying fund‘s 

leverage could remain outstanding. Some recommended extending the 120-day limit with 

respect to leverage to 180 days with one 180-day renewal in the case of non-convertible bridge 

loans extended by the venture capital fund to a portfolio company.245 Others seeking to 

accommodate business practices and provide maximum flexibility for venture capital fund debt 

investments in portfolio companies recommended excluding guarantees of portfolio company 

debt by a venture capital fund from the 120-day limit.246 Other commenters argued that 

guarantees of portfolio company obligations would not result in qualifying funds incurring 

extensive leverage.247

We understand that guarantees of portfolio company leverage by a venture capital fund 

are typically limited to the value of the fund‘s investment in the company (often through a pledge 

of the fund‘s interest in the company).248 Such guarantees by a qualifying fund may help a 

qualifying portfolio company obtain credit for working capital purposes, rather than be used by 

the fund to leverage its investment in the company.249 We are persuaded that such guarantees of 

portfolio company indebtedness do not present the same types of risks identified by Congress. 

Congress cited the implementation of trading strategies that use financial leverage by certain 

 

244 Rule 203(l)-1)(a)(3).

245 See, e.g., NVCA Letter; Davis Polk Letter; Bessemer Letter. 

246 Cook Children‘s Letter; Leland Fikes Letter; Gunderson Dettmer Letter; Oak Investment Letter; 

SVB Letter. See also ABA Letter.

247 See, e.g., SVB Letter.

248 See also NVCA Letter.

249 See, e.g., Oak Investments Letter; SVB Letter.
- 60 -

private funds as creating a potential for systemic risk.

250

 In testimony before Congress, the 

venture capital industry identified the lack of financial leverage in venture capital funds as a 

basis for exempting advisers to venture capital funds251 in contrast with other types of private 

funds such as hedge funds, which may engage in trading strategies that may contribute to 

systemic risk and affect the public securities markets.252 For this reason, our proposed rule was

designed to address concerns that financial leverage may contribute to systemic risk by 

excluding funds that incur more than a limited amount of leverage from the definition of venture 

capital fund.253 We believe that the alternative approach to fund leverage we have adopted in the 

final rule better reflects industry practice while still addressing Congress‘ concern that the use of 

financial leverage may create the potential for systemic risk.

 

250 See Proposing Release, supra note 26, at n.136 and accompanying text.

251 See McGuire Testimony, supra note 151, at 7 (―Venture capital firms do not use long term 

leverage, rely on short term funding, or create third party or counterparty risk . . . . [F]rom 

previous testimony submitted by the buy-out industry, the typical capital structure of the 

companies acquired by a buyout fund is approximately 60% debt and 40% equity. In contrast, 

borrowing at the venture capital fund level, if done at all, typically is only used for short-term 

capital needs (pending drawdown of capital from its partners) and does not exceed 90 days. Not 

only are our partnerships run without debt but our portfolio companies are usually run without 

debt as well.‖); Loy Testimony, supra note 151, at 2 (―Although venture capital funds may 

occasionally borrow on a short-term basis immediately preceding the time when the cash 

installments are due, they do not use debt to make investments in excess of the partner‘s capital 

commitments or  ̳lever up‘ the fund in a manner that would expose the fund to losses in excess of 

the committed capital or that would result in losses to counter parties requiring a rescue infusion 

from the government.‖).

252 See S. Rep. No. 111-176, supra note 6, at 74-75.

253 In proposing an exemption for advisers to private equity funds, which would have required the 

Commission to define the term ―private equity fund,‖ the Senate Banking Committee noted the 

difficulties in distinguishing some private equity funds from hedge funds and expected the 

Commission to exclude from the exemption private equity funds that raise significant potential 

systemic risk concerns. S. Rep. No. 111-176, supra note 6, at 75. See also G20 Working Group 

1, Enhancing Sound Regulation and Strengthening Transparency, at 7 (March 25, 2009) (noting 

that unregulated entities such as hedge funds may contribute to systemic risks through their 

trading activities).
- 61 -

6. No Redemption Rights

We are adopting as proposed the definitional element under which a venture capital fund 

is a private fund that issues securities that do not provide investors redemption rights except in 

―extraordinary circumstances‖ but that entitle investors generally to receive pro rata

distributions.254 Unlike hedge funds, a venture capital fund does not typically permit investors to 

redeem their interests during the life of the fund,255 but rather distributes assets generally as 

investments mature.256

Although venture capital funds typically return capital and profits to investors only 

through pro rata distributions, such funds may also provide extraordinary rights for an investor 

to withdraw from the fund under foreseeable but unexpected circumstances or to be excluded 

from particular investments due to regulatory or other legal requirements.257 These events may

 

254 Rule 203(l)-1(a)(4).

255 See Schell, supra note 185, at §1.03[7] (venture capital fund ―redemptions and withdrawals are 

rarely allowed, except in the case of legal compulsion‖); Breslow & Schwartz, supra note 241, at 

§2:14.2 (―the right to withdraw from the fund is typically provided only as a last resort‖).

256 Loy Testimony, supra note 151, at 2-3 (―As portfolio company investments are sold in the later 

years of the [venture capital] fund–when the company has grown so that it can access the public 

markets through an initial public offering (an IPO) or when it is an attractive target to be bought–

the liquidity from these  ̳exits‘ is distributed back to the limited partners. The timing of these 

distributions is subject to the discretion of the general partner, and limited partners may not 

otherwise withdraw capital during the life of the venture [capital] fund.‖). Id. at 5 (Investors 

―make their investment in a venture [capital] fund with the full knowledge that they generally 

cannot withdraw their money or change their commitment to provide funds. Essentially they 

agree to  ̳lock-up‘ their money for the life of the fund, generally 10 or more years as I stated 

earlier.‖). See also Dow Jones Report, supra note 242, at 60 (noting that an investor in a private 

equity or venture capital fund typically does not have the right to transfer its interest). See 

generally Proposing Release, supra note 26, section II.A.4.

257 See Hedge Fund Adviser Registration Release, supra note 14, at n.240 and accompanying text 

(―Many partnership agreements provide the investor the opportunity to redeem part or all of its 

investment, for example, in the event continuing to hold the investment became impractical or 

illegal, in the event of an owner‘s death or total disability, in the event key personnel at the fund 

adviser die, become incapacitated, or cease to be involved in the management of the fund for an 

extended period of time, in the event of a merger or reorganization of the fund, or in order to 

avoid a materially adverse tax or regulatory outcome. Similarly, some investment pools may 
- 62 -

be ―foreseeable‖ because they are circumstances that are known to occur (e.g., changes in law, 

corporate events such as mergers, etc.) but are unexpected in their timing or scope. Thus, 

withdrawal, exclusion or similar ―opt-out‖ rights would be deemed ―extraordinary 

circumstances‖ if they are triggered by a material change in the tax law after an investor invests 

in the fund, or the enactment of laws that may prohibit an investor‘s participation in the fund‘s 

investment in particular countries or industries.258 The trigger events for these rights are 

typically beyond the control of the adviser and fund investor (e.g., tax and regulatory changes).

Most commenters addressing the redeemability criterion did not oppose it, but rather 

sought clarification or guidance on the scope of its application.259 For example, commenters 

specifically requested confirmation that the lack of redeemability criterion would not preclude a 

 

offer redemption rights that can be exercised only in order to keep the pool‘s assets from being 

considered  ̳plan assets‘ under ERISA [Employee Retirement Income Security Act of 1974].‖). 

See, e.g., Breslow & Schwartz, supra note 241, at § 2:14.1 (―Private equity funds generally 

provide for mandatory withdrawal of a limited partner [i.e., investor] only in the case where the 

continued participation by a limited partner in a fund would give rise to a regulatory or legal 

violation by the investor or the fund (or the general partner [i.e., adviser] and its affiliates). Even 

then, it is often possible to address the regulatory issue by excusing the investor from particular 

investments while leaving them otherwise in the fund.‖).

258 See, e.g., Breslow & Schwartz, supra note 241, at § 2:14.2 (―The most common reason for 

allowing withdrawals from private equity funds arises in the case of an ERISA violation where 

there is a substantial likelihood that the assets of the fund would be treated as  ̳plan assets‘ of any 

ERISA partner for purposes of Title I of ERISA or section 4975 of the Code.‖). See also Schell, 

supra note 185, at §9.04[3] (―Exclusion provisions allow the General Partner to exclude a 

Limited Partner from participation in any or all investments if a violation of law or another 

material adverse effect would otherwise occur.‖); id. at Appendix D-31 (attaching model limited 

partnership agreement providing ―The General Partner at any time may cancel the obligations of 

all Partners to make Capital Contributions for Portfolio Instruments if . . . changes in applicable 

law . . . make such cancellation necessary or advisable . . .‖).

259 A number of commenters agreed with the redeemability criterion. See, e.g., ATV Letter; Charles 

River Letter; Gunderson Dettmer Letter. However, one commenter argued that a fund‘s 

redeemability is not necessarily characteristic of venture capital funds. Comment Letter of 

Cooley LLP (Jan. 21, 2011).
- 63 -

qualifying fund from (i) making distributions of carried interest to a general partner,260

(ii) specifying redemption rights for certain categories of investors under certain 

circumstances261 or (iii) specifying opt-out rights for investors.262 Several commenters, however,

indicated that the term ―extraordinary circumstances‖ is sufficiently clear,

263 suggesting that the 

proposal did not require further clarification.

We believe that the term ―extraordinary circumstances‖ is sufficiently clear. Whether or 

not specific redemption or ―opt out‖ rights for certain categories of investors under certain 

circumstances should be treated as ―extraordinary‖ will depend on the particular facts and 

circumstances.

For these purposes, for example, a fund that permits quarterly or other periodic 

withdrawals would be considered to have granted investors redemption rights in the ordinary 

course even if those rights may be subject to an initial lock-up or suspension or restrictions on 

redemption. We believe, and several commenters confirmed, that the phrase ―extraordinary 

circumstances‖ is sufficiently clear to distinguish the terms for investor liquidity of venture 

capital funds, as they operate today, from hedge funds.264 Congressional testimony cited an 

investor‘s inability to withdraw from a venture capital fund as a key characteristic of venture 

 

260 See, e.g., NVCA Letter. The rule specifies that a qualifying fund is a private fund that ―issues 

securities the terms of which do not provide a holder with any right, except in extraordinary 

circumstances, to withdraw . . .‖ If a general partner interest is not a ―security,‖ then the 

redeemability criterion of the rule would not be implicated. Whether or not a general partner 

interest is a ―security‖ depends on the particular facts and circumstances. See generally

Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981), cert. denied, 454 U.S. 897 (1981).

261 ABA Letter (sought guidance on whether granting redemption rights to certain types of investors 

such as ERISA funds and state plans, in the event of certain ERISA, tax or regulatory changes 

would be considered extraordinary).

262 McGuireWoods Letter.

263 See Gunderson Dettmer Letter; Merkl Letter; SVB Letter.

264 See, e.g., id.
- 64 -

capital funds and a factor for reducing their potential for systemic risk.265 Although a fund 

prohibiting redemptions would satisfy the redeemability criterion of the venture capital fund 

definition, the rule does not specify a minimum period of time for an investor to remain in the 

fund.

In the Proposing Release, we expressed the general concern that a venture capital fund 

might seek to circumvent the intended scope of this criterion by providing investors with 

nominally ―extraordinary‖ rights to redeem that effectively result in de facto redemption rights in 

the ordinary course.266 One commenter expressly disagreed with this view, asserting that in the 

case of transfers effected with the consent of a general partner, such transactions are intended to 

accommodate an investor‘s internal corporate restructurings, bankruptcies or portfolio 

allocations rather than to provide investors with liquidity from the fund.267 While consents to 

transfer do not raise the same level of concern as de facto redemption rights, we do not believe 

that an adviser or its related persons could, while relying on the venture capital exemption, create 

de facto periodic redemption or transfer rights by, for example, regularly identifying potential 

investors on behalf of fund investors seeking to transfer or redeem fund interests.

268

We are not modifying the rule to include additional conditions for fund redemptions, such 

 

265 See supra notes 255-256 and accompanying text.

266 For example, in the Proposing Release, we stated that a private fund‘s governing documents 

might provide that investors do not have any right to redeem without the consent of the general 

partner. In practice, if the general partner typically permits investors to redeem their otherwise 

non-redeemable interests on a periodic basis, then the fund would not be considered to have 

issued securities that ―do not provide a holder with any right, except in extraordinary 

circumstances, to withdraw.‖ Rule 203(l)-1(a)(4). See Proposing Release, supra note 26, at 

n.154.

267 See NVCA Letter (disagreeing with statements in the Proposing Release regarding the de facto

creation of redemption rights but generally agreeing with the general prohibition on redemptions 

except in extraordinary circumstances).

268 Section 208(d) of the Advisers Act.
- 65 -

as specifying a minimum holding or investment period by investors or a maximum amount that 

may be redeemed at any time. Commenters generally did not support the imposition of such 

conditions,

269 and we agree that imposing such conditions would not appear to be necessary to 

achieve the purposes of the rule.

7. Represents Itself as Pursuing a Venture Capital Strategy

Under the rule, a qualifying fund must represent itself as pursuing a venture capital 

strategy to its investors and potential investors.270 Without this element, a fund that did not 

engage in typical venture capital activities could be treated as a venture capital fund simply 

because it met the other elements specified in our rule (because for example it only invests in 

short-term holdings, does not borrow, does not offer investors redemption rights, and is not a 

registered investment company).271 We believe that only funds that do not significantly differ 

from the common understanding of what a venture capital fund is,272 and that are actually offered 

to investors as funds that pursue a venture capital strategy, should qualify for the exemption. 

Thus, for example, an adviser to a venture capital fund that is otherwise relying on the exemption 

could not (i) identify the fund as a hedge fund or multi-strategy fund (i.e., venture capital is one 

of several strategies used to manage the fund) or (ii) include the fund in a hedge fund database or 

hedge fund index.

As proposed, rule 203(l)-1 defined a venture capital fund as a private fund that 

 

269 See, e.g., SVB Letter (expressing opposition to a rule that would limit redemptions following a 

minimum investment period or limit redemptions to a specified maximum threshold).

270 Rule 203(1)-1(a)(1).

271 We also note that a fund that represents to investors that it is one type of fund while pursuing a 

different type of fund strategy may raise concerns under rule 206(4)-8 of the Advisers Act.

272 See Proposing Release, supra note 26, at n.157.
- 66 -

―represents itself as being a venture capital fund to its investors and potential investors.‖

273

 

Although several commenters generally supported the ―holding out‖ criterion as proposed,274

many sought confirmation that the use of specific self-identifying terminology by a fund in its 

name (e.g., ―private equity‖ fund, ―multi-strategy‖ fund or ―growth capital‖ fund) would not 

automatically disqualify the fund under the definition.

275

 Several commenters argued that 

historically, some funds have avoided referring to themselves as ―venture capital funds.‖

276

 One 

commenter argued that the proposed condition was too restrictive because it focuses on the 

fund‘s name rather than its investment strategy and suggested that the definition instead exclude 

any fund that markets itself as a hedge fund, multi-strategy fund, buyout fund or fund of funds.277

We believe that the ―holding out‖ criterion remains an important distinction between 

funds that are eligible to rely on the definition and funds that are not, because an investor‘s 

understanding of the fund and its investment strategy must be consistent with an adviser‘s 

reliance on the exemption. However, we also recognize that it is not necessary (nor indeed 

sufficient) for a qualifying fund to name itself as a ―venture capital fund‖ in order for its adviser 

to rely on the venture capital exemption. Hence, we are modifying the proposed definition to 

refer to the way a qualifying fund describes its investment strategy to investors and prospective 

investors.

A qualifying fund name that does not use the words ―venture capital‖ and is not 

inconsistent with pursuing a venture capital strategy would not preclude a qualifying fund from 

 

273 Proposed Rule 203(l)-1(a)(1).

274 See Gunderson Dettmer Letter; Sen. Levin Letter; Merkl Letter.

275 See, e.g., IVP Letter; Comment Letter of MissionPoint Capital Partners, Jan. 24, 2011; PEI Funds 

Letter.

276 See, e.g., NVCA Letter; Pine Brook Letter. See also IVP Letter; PEI Funds Letter.

277 See Pine Brook Letter.
- 67 -

satisfying the definition.

278

 Whether or not a fund represents itself as pursuing a venture capital 

strategy, however, will depend on the particular facts and circumstances. Statements made by a 

fund to its investors and prospective investors, not just what the fund calls itself, are important to 

an investor‘s understanding of the fund and its investment strategy.279 The appropriate 

framework for analyzing whether a qualifying fund has satisfied the holding out criterion 

depends on all of the statements (and omissions) made by the fund to its investors and 

prospective investors. While this includes the fund name, it is only part of the analysis.

This approach is similar to our general approach to antifraud provisions under the federal 

securities laws, including Advisers Act rule 206(4)-8 regarding pooled investment vehicles.280 

The general antifraud rule under rule 206(4)-8 looks to the private fund‘s statements and 

omissions in light of the circumstances under which such statements or omissions are made.281 

Similarly, the holding out criterion under our venture capital fund definition looks to all of the 

relevant statements made by the qualifying fund regarding its investment strategy.

 

278 Similarly, misleadingly including the words ―venture capital‖ in the name of a fund pursuing a 

different strategy would not satisfy the definition.

279 One commenter requested confirmation and examples of what constituted appropriate 

representations to investors given that ―many‖ venture capital funds do not use private placement 

memoranda or other offering materials during fundraising. See Gunderson Dettmer Letter 

(expressed the view that the following would be sufficient: (i) checking the ―venture capital‖ box 

on Form D or (ii) stating on the adviser‘s website that all of the funds advised by the adviser are 

venture capital funds). As we noted above, whether or not a venture capital fund satisfies the 

―holding out‖ criterion will depend on the particular facts and circumstances surrounding all of 

the statements and omissions made by the fund in light of the circumstances under which they 

were made. Moreover, a venture capital fund that seeks to rely on the safe harbor for non-public 

offerings under rule 506 of Regulation D is subject to all of the conditions of such rule, including 

the prohibition on general solicitation and general advertising applicable to statements 

attributable to the fund on a publicly available website. See 17 CFR 230.502(c).

280 17 CFR 275.206(4)-8.

281 See Pooled Vehicles Release, supra note 122, at n.27 (―A fact is material if there is a substantial 

likelihood that a reasonable investor in making an investment decision would consider it as 

having significantly altered the total mix of information available,‖ citing Basic, Inc. v. Levinson, 

485 U.S. 224, 231-32 (1988)).
- 68 -

8. Is a Private Fund

We define a venture capital fund for purposes of the exemption as a private fund, which 

is defined in the Advisers Act, and exclude from the definition funds that are registered 

investment companies (e.g., mutual funds) or have elected to be regulated as BDCs.

282

 We are 

adopting this provision as proposed.

There is no indication that Congress intended the venture capital exemption to apply to 

advisers to these publicly available funds,

283 referring to venture capital funds as a ―subset of 

private investment funds.‖284 The comment letters that addressed this proposed criterion

generally supported it.

285

9. Application to Non-U.S. Advisers

The final rule does not define a venture capital fund as a fund advised by a U.S. adviser 

(i.e., an adviser with a principal office and place of business the United States). Thus, a non-U.S. 

adviser, as well as a U.S. adviser, may rely on the venture capital exemption provided that such 

adviser solely advises venture capital funds that satisfy all of the elements of the rule or satisfy 

the grandfathering provision (discussed in greater detail below). A non-U.S. adviser may rely on 

the venture capital exemption if all of its clients, whether U.S. or non-U.S., are venture capital 

funds.

 

282 Rule 203(l)-1(a) and (a)(5). See also discussion infra note 319.

283 Legislative history does not indicate that Congress addressed this matter, nor does testimony 

before Congress suggest that this was contemplated. See, e.g., McGuire Testimony, supra note

151, at 3 (noting that venture capital funds are not directly accessible by individual investors); 

Loy Testimony, supra note 151, at 2 (―Generally . . . capital for the venture fund is provided by 

qualified institutional investors such as pension funds, universities and endowments, private 

foundations, and to a lesser extent, high net worth individuals.‖). See generally

section 202(a)(29) of the Advisers Act (definition of ―private fund‖).

284 See S. Rep. No. 111-176, supra note 6, at 74 (describing venture capital funds as a subset of 

―private investment funds‖).

285 Gunderson Dettmer Letter; Merkl Letter; NYSBA Letter; Sen. Levin Letter.
- 69 -

Neither the statutory text of section 203(l) nor the legislative reports provide an 

indication of whether Congress intended the exemption to be available to advisers that operate 

principally outside of the United States but that invest in U.S. companies or solicit U.S. 

investors.286 Testimony before Congress presented by members of the U.S. venture capital 

industry discussed the industry‘s role primarily in the U.S. economy including its lack of 

interconnection with the U.S. financial markets and ―interdependence‖ with the world financial 

system.287 Nevertheless, we expect that venture capital funds with advisers operating principally 

outside of the United States may seek to access the U.S. capital markets by investing in U.S. 

companies or soliciting U.S. investors; investors in the United States may also have an interest in 

venture capital opportunities outside of the United States.

Commenters generally did not support defining venture capital fund or qualifying 

portfolio company by reference to the jurisdiction of formation of the fund or portfolio 

company.

288

 Several commenters, however, supported modifying the rule to apply the venture 

capital exemption in the same manner as the proposed private fund adviser exemption, with the 

result that a non-U.S. adviser could disregard its non-U.S. activities when assessing eligibility for 

the venture capital exemption.289 Under this approach, only U.S.-domiciled private funds would 

 

286 See section 203(l) of the Advisers Act; H. Rep. No. 111-517, supra note 6, at 867; S. Rep. No. 

111-176, supra note 6, at 74-75.

287 See Loy Testimony, supra note 151, at 4-5; McGuire Testimony, supra note 151, at 5-6.

288 See, e.g., Bessemer Letter; EVCA Letter; McDonald Letter; Merkl Letter; NVCA Letter; SV Life 

Sciences Letter.

289 See McGuireWoods Letter; Shearman Letter. See also EFAMA Letter (also noting that as a 

practical matter, the rule should account for non-U.S. specific practices so that non-U.S. advisers 

could rely on the exemption); Gunderson Dettmer Letter (exemption should be available to nonU.S. advisers even if non-U.S. funds do not satisfy definitional elements); Dechert General Letter 

(non-U.S. advisers that manage funds that are not venture capital funds outside of the U.S. should 

be able to rely on rule 203(l) for funds that are managed in the U.S. or that are marketed to U.S. 

investors).
- 70 -

be required to satisfy our definition of a venture capital fund in order for the adviser to rely on 

the venture capital exemption.290 One commenter suggested that the same policy rationale 

underlying the private fund adviser exemption justified this approach to the venture capital 

exemption.291 Two other commenters supported this approach arguing that non-U.S. funds may 

operate in a manner that does not resemble venture capital fund investing in the United States or 

by U.S. venture capital fund advisers.292

We do not agree that the private fund adviser exemption is the appropriate framework for 

the venture capital exemption in the case of non-U.S. advisers. Section 203(l) provides an 

exemption for an investment adviser based on the strategy of the funds that the adviser manages 

(i.e., venture capital funds). This exemption thus specifies the activities in which an adviser‘s 

clients may engage, and does not refer to activities in the United States.293 By contrast, 

section 203(m) is based upon the location where the advisory activity is conducted. 

Accordingly, we do not believe it would be appropriate for an adviser relying on section 203(l) 

to disregard its non-U.S. activities. Moreover, a non-U.S. adviser could circumvent the intended 

scope of the exemption by merely sponsoring and advising solely non-U.S. domiciled funds that 

are not venture capital funds.

Under our rule, only a private fund may qualify as a venture capital fund. As we noted in 

the Proposing Release, a non-U.S. fund that uses U.S. jurisdictional means in the offering of the 

securities it issues and that relies on section 3(c)(1) or 3(c)(7) of the Investment Company Act 

 

290 See EFAMA Letter (certain conditions of the proposed rule, such as the limitation on cash 

investments to U.S. Treasuries, are inconsistent with practices outside the United States). We 

believe that these concerns are adequately addressed by the non-qualifying basket.

291 See Shearman Letter.

292 See EFAMA Letter; McGuireWoods Letter.

293 See also infra note 322 and accompanying and following text. 
- 71 -

would be a private fund.294 A non-U.S. fund that does not use U.S. jurisdictional means to 

conduct an offering would not be a private fund and therefore could not qualify as a venture 

capital fund, even if it operated as a venture capital fund in a manner that would otherwise meet 

the criteria under our definition.295 As a result, under the proposed rule, if a non-U.S. fund did 

not qualify as a venture capital fund, then the fund‘s adviser would not be able to rely on the 

exemption.296

In light of this result, we asked in the Proposing Release whether we should adopt a 

broader interpretation of the term ―private fund.‖297 In response, commenters supported making 

the venture capital exemption available to non-U.S. advisers even if they advise venture capital 

 

294 An issuer that is organized under the laws of the United States or of a state is a private fund if it is 

excluded from the definition of an investment company for most purposes under the Investment 

Company Act pursuant to section 3(c)(1) or 3(c)(7). Section 7(d) of the Investment Company Act 

prohibits a non-U.S. fund from using U.S. jurisdictional means to make a public offering, absent 

an order permitting registration. A non-U.S. fund may conduct a private U.S. offering in the 

United States without violating section 7(d) only if the fund complies with either section 3(c)(1) 

or 3(c)(7) with respect to its U.S. investors (or some other available exemption or exclusion). 

Consistent with this view, a non-U.S. fund is a private fund if it makes use of U.S. jurisdictional 

means to, directly or indirectly, offer or sell any security of which it is the issuer and relies on 

either section 3(c)(1) or 3(c)(7). See Hedge Fund Adviser Registration Release, supra note 14, at 

n.226; Offer and Sale of Securities to Canadian Tax-Deferred Retirement Savings Accounts, 

Securities Act Release No. 7656 (Mar. 19, 1999) [64 FR 14648 (Mar. 26, 1999)] (―Canadian TaxDeferred Retirement Savings Accounts Release‖), at nn.10, 20, 23; Statement of the Commission 

Regarding Use of Internet Web Sites to Offer Securities, Solicit Securities Transactions or 

Advertise Investment Services Offshore, Securities Act Release No. 7516 (Mar. 23, 1998) [63 FR 

14806 (Mar. 27, 1998)], at n.41. See also Dechert LLP, SEC Staff No-Action Letter (Aug. 24, 

2009) at n.8; Goodwin, Procter & Hoar LLP, SEC Staff No-Action Letter (Feb. 28, 1997) 

(―Goodwin Procter No-Action Letter‖); Touche Remnant & Co., SEC Staff No-Action Letter 

(Aug. 27, 1984) (―Touche Remnant No-Action Letter‖); Proposing Release, supra note 26, at 

n.175 and accompanying text.

295 See Proposing Release, supra note 26, at nn.175 and 188 and accompanying text.

296 Under the Advisers Act, an adviser relying on the venture capital exemption must ―solely‖ advise 

venture capital funds and under our rule all of the funds advised by the adviser must be private 

funds.

297 See Proposing Release, supra note 26, at section II.A.8 (―[S]hould a non-U.S. fund be a private 

fund under the proposed rule if the non-U.S. fund would be deemed a private fund upon 

conducting a private offering in the United States in reliance on sections 3(c)(1) or 3(c)(7)?‖). 
- 72 -

funds that are not offered through the use of U.S. jurisdictional means.

298

 We agree. 

Accordingly, as adopted, rule 203(l)-1 contains a note indicating that an adviser may treat as a 

―private fund‖—and thus a venture capital fund, if it meets the rule‘s other criteria—any nonU.S. fund that is not offered through the use of U.S. jurisdictional means but that would be a 

private fund if the issuer were to conduct a private offering in the United States.299 Moreover, a 

non-U.S. fund that is treated as a private fund under these circumstances by an adviser relying on 

the venture capital exemption would also be treated as a private fund under the Advisers Act for 

all purposes. This element is designed to ensure that an adviser relying on the venture capital 

exemption by operation of the note is subject to the same Advisers Act requirements as other 

advisers relying on the venture capital exemption without use of the note.

10. Grandfathering Provision

Under the rule, the definition of ―venture capital fund‖ includes any private fund that: 

(i) represented to investors and potential investors at the time the fund offered its securities that it 

pursues a venture capital strategy; (ii) has sold securities to one or more investors prior to 

December 31, 2010; and (iii) does not sell any securities to, including accepting any capital 

commitments from, any person after July 21, 2011 (the ―grandfathering provision‖).300 A 

grandfathered fund would thus include any fund that has accepted all capital commitments by 

July 21, 2011 (including capital commitments from existing and new investors) even if none of 

 

298 See, e.g., Dechert General Letter; EFAMA Letter; Gunderson Dettmer Letter; McGuireWoods

Letter; Shearman Letter.

299 As discussed below, this issue also is relevant to the exemption provided by rule 203(m)-1. See 

also infra note 319.

300 Rule 203(l)-1(b).
- 73 -

the capital commitments has been called by such date.

301

 The calling of capital after July 21, 

2011 would be consistent with the grandfathering provision, as long as the investor became 

obligated by July 21, 2011 to make a future capital contribution. As a result, any investment 

adviser that solely advises private funds that meet the definition in either rule 203(l)-1(a) or (b) 

would be exempt from registration.

Although several commenters expressed support for the proposed rule,302 two 

commenters indicated that the proposed grandfathering provision was too restrictive because of 

the holding out criterion.

303

 In contrast, the North American Securities Administrators 

Association, Inc. expressed its view that the proposed grandfathering provision was too 

expansive and urged that the rule impose additional substantive requirements similar to those 

included among the definitional elements in rule 203(l)-1(a).

304

 

As in the case of the holding out criterion discussed above, this element of the 

grandfathering provision elicited the most comments. Generally, commenters either (i) did not 

support a grandfathering provision that defined a venture capital fund as a fund that identified 

itself (or called itself) ―venture capital,‖305 or (ii) sought clarification or an expansive 

interpretation of the holding out element so that existing funds would not be excluded from the 

 

301 See also Electronic Filing and Revision of Form D, Securities Act Release No. 8891(Feb. 6, 

2008) [73 FR 10592 (Feb. 27, 2008)], at section VIII, Form D, General Instructions – When to 

File (noting that a Form D is required to be filed within 15 days of the first sale of securities 

which would include ―the date on which the first investor is irrevocably contractually committed 

to invest‖), n.159 (―a mandatory capital commitment call would not constitute a new offering, but 

would be made under the original offering‖).

302 Comment Letter of AustinVentures (Jan. 21, 2011) (―AV Letter‖); Norwest Letter; NYSBA 

Letter. See also NVCA Letter.

303 DLA Piper VC Letter; Pine Brook Letter.

304 Comment Letter of North American Securities Administrators Association, Inc., Feb. 10, 2011 

(―NASAA Letter‖).

305 Davis Polk Letter; DLA Piper VC Letter; Pine Brook Letter.
- 74 -

definition merely because they have identified themselves as ―growth capital,‖ ―multi-strategy‖ 

or ―private equity,‖306 which commenters asserted is typical of some older funds. No commenter 

addressed the dates proposed in the grandfathering provision.307

As discussed above, we believe that the ―holding out‖ requirement is an important 

prophylactic tool to prevent circumvention of the intended scope of the venture capital 

exemption. Thus, we are adopting the grandfathering provision as proposed, with the 

modifications to the holding out criterion discussed above.308 As noted above in the definition of 

a venture capital fund generally, the holding out criterion in the grandfathering provision has also 

been changed to refer to the strategy pursued by the private fund. A fund that seeks to qualify 

under our rule should examine all of the statements and representations made to investors and 

prospective investors to determine whether the fund has satisfied the ―holding out‖ criterion as it 

is incorporated into the grandfathering provision.309

Thus, under the rule, an investment adviser may treat any existing private fund as a 

venture capital fund for purposes of section 203(l) of the Advisers Act if the fund meets the 

elements of the grandfathering provision. The current private adviser exemption does not require 

an adviser to identify or characterize itself as any type of adviser (or impose limits on advising 

any type of fund). Accordingly, we believe that advisers have not had an incentive to mischaracterize the investment strategies pursued by existing venture capital funds that have already 

 

306 Davis Polk Letter; Gunderson Dettmer Letter; IVP Letter; Norwest Letter; NVCA Letter.

307 The NVCA specifically stated that other than clarification on the names that venture capital funds 

may use to identify themselves, no ―further changes to the grandfathering proposal are necessary 

or appropriate and [we] do not believe that this criterion, as it exists for new funds, presents

problems to the industry.‖ See NVCA Letter.

308 See supra discussion at Section II.A.7.

309 Id. 
- 75 -

been marketed to investors. As we note above, a fund that ―represents‖ itself to investors as 

pursuing a venture capital strategy is typically one that discloses it pursues a venture capital 

strategy and identifies itself as such.310 We do not expect existing funds identifying themselves 

as pursuing a ―private equity‖ or ―hedge‖ fund strategy would be able to rely on this element of 

the grandfathering provision.

We believe that most funds previously sold as venture capital funds likely would satisfy 

all or most of the conditions in the grandfathering provision. Nevertheless, we recognize that 

investment advisers that sponsored new funds before the adoption of rule 203(l)-1 faced 

uncertainty regarding the precise terms of the definition and hence uncertainty regarding their 

eligibility for the new exemption. Thus, as proposed, the grandfathering provision specifies that 

a qualifying fund must have commenced its offering (i.e., initially sold securities) by December 

2010 and must have concluded its offering by the effective date of Title IV (i.e., July 21, 2011). 

This provision is designed to prevent circumvention of the intended scope of the exemption. 

Moreover, requiring existing venture capital funds to modify their investment conditions or 

characteristics, liquidate portfolio company holdings or alter the rights of investors in the funds 

in order to satisfy the definition of a venture capital fund would likely be impossible in many 

cases and yield unintended consequences for the funds and their investors.311

B. Exemption for Investment Advisers Solely to Private Funds With Less Than 

$150 Million in Assets Under Management

Section 203(m) of the Advisers Act directs the Commission to exempt from registration 

under the Advisers Act any investment adviser solely to private funds that has less than $150 

 

310 See id.

311 One commenter agreed that it may be difficult for a qualifying fund seeking to rely on the 

grandfathering provision to change fund terms and liquidate its positions to the possible detriment 

of the fund and its investors. AV Letter.
- 76 -

million in assets under management in the United States.312 Rule 203(m)-1, which we are 

adopting today, provides the exemption and, in addition, addresses several interpretive questions 

raised by section 203(m). As noted above, we refer to this exemption as the ―private fund 

adviser exemption.‖

1. Advises Solely Private Funds

Rule 203(m)-1, like section 203(m), limits an adviser relying on the exemption to those 

advising ―private funds‖ as that term is defined in the Advisers Act.313 An adviser that has one 

or more clients that are not private funds is not eligible for the exemption and must register under 

the Advisers Act unless another exemption is available. An adviser may advise an unlimited 

number of private funds, provided the aggregate value of the assets of the private funds is less 

than $150 million.314

In the case of an adviser with a principal office and place of business outside of the 

United States (a ―non-U.S. adviser‖), the exemption is available as long as all of the adviser‘s 

clients that are United States persons are qualifying private funds.315 As a consequence, a non-

 

312 Section 408 of the Dodd-Frank Act, which is codified in section 203(m) of the Advisers Act. See 

supra note 19.

313 See rule 203(m)-1(a) and (b). Section 202(a)(29) of the Advisers Act defines the term ―private 

fund‖ as ―an issuer that would be an investment company, as defined in section 3 of the 

Investment Company Act of 1940 (15 U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that 

Act.‖ A ―private fund‖ includes a private fund that invests in other private funds. See also supra 

note 294; Proposing Release, supra note 26, at n.175 and accompanying text.

314 We note, however, that depending on the facts and circumstances, we may view two or more 

separately formed advisory entities that each has less than $150 million in private fund assets 

under management as a single adviser for purposes of assessing the availability of exemptions 

from registration. See infra note 506. See also section 208(d), which prohibits a person from 

doing, indirectly or through or by another person, any act or thing which it would be unlawful for 

such person to do directly.

315 Rule 203(m)-1(b)(1). As discussed below, we also are adding a note to rule 203(m)-1 that 

clarifies that a client will not be considered a United States person if the client was not a United 

States person at the time of becoming a client. See infra note 403.
- 77 -

U.S. adviser may enter the U.S. market and take advantage of the exemption without regard to 

the type or number of its non-U.S. clients or the amount of assets it manages outside of the 

United States. Under the rule, a non-U.S. adviser would not lose the private fund adviser 

exemption as a result of the size or nature of its advisory or other business activities outside of 

the United States. The rule reflects our long-held view that non-U.S. activities of non-U.S. 

advisers are less likely to implicate U.S. regulatory interests and that this territorial approach is 

in keeping with general principles of international comity.316 Commenters supported the 

proposed rule‘s treatment of non-U.S. advisers.317

Some commenters urged that the rule should also permit U.S. advisers relying on the 

exemption to advise other types of clients.318 Section 203(m) directs us to provide an exemption 

 

316 These considerations have, for example, been incorporated in our rules permitting a non-U.S. 

adviser relying on the private adviser exemption to count only clients that are U.S. persons when 

determining whether it has 14 or fewer clients. Rule 203(b)(3)-1(b)(5) (―If you have your 

principal office and place of business outside the United States, you are not required to count 

clients that are not United States residents, but if your principal office and place of business is in 

the United States, you must count all clients.‖). See infra note 392. The Dodd-Frank Act repeals

the private adviser exemption as of July 21, 2011, and we are rescinding rule 203(b)(3)-1 in the 

Implementing Adopting Release. See Implementing Adopting Release, supra note 32, at section 

II.D.2.a.

317 See, e.g., ABA Letter; Comment Letter of Debevoise & Plimpton LLP (Jan. 24, 2011) 

(―Debevoise Letter‖); Comment Letter of Dechert LLP (on behalf of Foreign Adviser) (Jan. 24, 

2011) (―Dechert Foreign Adviser Letter‖); Gunderson Dettmer Letter; Merkl Letter; Comment 

Letter of Katten Muchin Rosenman LLP (on behalf of Certain Non-U.S. Advisers) (Jan. 24, 

2011) (―Katten Foreign Advisers Letter‖); Comment Letter of MAp Airports Limited (Jan. 24, 

2011) (―MAp Airports Letter‖); Comment Letter of Wellington Financial LP (Jan. 24, 2011) 

(―Wellington Letter‖).

318 See, e.g., Letter of Sadis & Goldberg (Jan. 11, 2011) (submitted in connection with the 

Implementing Proposing Release, avail. at http://www.sec.gov/comments/s7-36-10/s73610.shtml) 

(―Sadis & Goldberg Implementing Release Letter‖) (exemption should be available to advisers 

who, in addition to advising private funds, also have five or fewer clients that are separately 

managed accounts); Comment Letter of Seward & Kissel LLP (Jan. 31, 2011) (―Seward Letter‖) 

(advisers should be permitted to rely on multiple exemptions and advisers relying on the private 

fund adviser exemption should be permitted to engage in ―some activities that do not involve 

advising clients and have no effect on assets under management,‖ such as providing research to 

institutional investors).
- 78 -

to advisers that act solely as advisers to private funds.319 Our treatment of non-U.S. advisers 

with respect to their non-U.S. clients, as we note above, establishes certain appropriate limits on 

the extraterritorial application of the Advisers Act.320 In contrast, permitting U.S. advisers with 

additional types of clients to rely on the exemption would appear to directly conflict with section 

203(m), and we therefore are not revising the rule as the commenters proposed.

Some commenters suggested that the rule permit advisers to combine other exemptions 

with rule 203(m)-1 so that, for example, an adviser could advise venture capital funds with assets 

under management in excess of $150 million in addition to other types of private funds with less 

than $150 million in assets under management.321 We believe that the commenters‘ proposed 

interpretation runs contrary to the language of section 203(m), which limits advisers relying on 

the exemption to advising solely private funds with assets under management in the United 

States of less than $150 million or solely venture capital funds in the case of section 203(l).322

A few commenters also asked us to address whether a fund with a single investor could 

 

319 One commenter argued that a U.S. adviser should be permitted to treat as a private fund for 

purposes of rule 203(m)-1 a non-U.S. fund that has not made an offering to U.S. persons. See 

Comment Letter of Fox Horan & Camerini LLP (Dec. 22, 2010). See also supra notes 294 and 

313. We agree. 

320 In contrast to the foreign private adviser exemption discussed in Section II.C, a non-U.S. adviser 

relying on the private fund adviser exemption may have a U.S. place of business, but a non-U.S. 

adviser need not have a U.S. place of business to rely on the private fund adviser exemption.

321 NASBIC/SBIA Letter; Seward Letter.

322 The same analysis also would apply to non-U.S. advisers, which may not for example combine 

the private fund adviser exemption and the foreign private adviser exemption (e.g., a non-U.S. 

adviser could not advise private funds that are United States persons with assets in excess of $25 

million in reliance on the private fund adviser exemption and also advise other clients in the 

United States that are not private funds in reliance on the foreign private adviser exemption). We 

also note that depending on the facts and circumstances, we may view two or more separately 

formed advisory entities, each of which purports to rely on a separate exemption from 

registration, as a single adviser for purposes of assessing the availability of exemptions from 

registration. See infra note 506. See also section 208(d), which prohibits a person from doing, 

indirectly or through or by another person, any act or thing which it would be unlawful for such 

person to do directly. 
- 79 -

be a ―private fund‖ for purposes of the exemption.323 Whether a single-investor fund could be a 

private fund for purposes of the exemption depends on the facts and circumstances. We are 

concerned that an adviser simply could convert client accounts to single-investor funds in order 

to avoid registering under the Advisers Act. These ―funds‖ would be tantamount to separately 

managed accounts. Section 208(d) of the Advisers Act anticipates these and other artifices and 

thus prohibits a person from doing, indirectly or through or by another person, any act or thing 

which it would be unlawful for such person to do directly.324 We recognize, however, that there 

are circumstances in which it may be appropriate for an adviser to treat a single-investor fund as 

a private fund for purposes of rule 203(m)-1.325

One commenter argued that advisers should be permitted to treat as a private fund for 

purposes of rule 203(m)-1 a fund that also qualifies for another exclusion from the definition of 

―investment company‖ in the Investment Company Act in addition to section 3(c)(1) or 3(c)(7), 

 

323 See ABA Letter (single-investor funds formed at the request of institutional investors should be 

considered private funds if they are managed in a manner similar to the adviser‘s related multiinvestor private funds, have audited financial statements, and are treated as private funds for 

purposes of the custody rule); Comment Letter of Alternative Investment Management 

Association (Jan. 24, 2011) (―AIMA Letter‖) (sought guidance concerning single-investor funds 

and managed accounts structured as funds); Commenter Letter of Managed Funds Association 

(Jan. 24, 2011) (―MFA Letter‖) (asserted that single-investor funds are ―private funds‖). 

324 We would view a structure with no purpose other than circumvention of the Advisers Act as 

inconsistent with section 208(d). See, e.g., Custody of Funds or Securities of Clients by 

Investment Advisers, Investment Advisers Act Release No. 2968 (Dec. 30, 2009) [75 FR 1456 

(Jan. 11, 2010)] at n.132 (the use of a special purpose vehicle in certain circumstances could 

constitute a violation of section 208(d) of the Advisers Act). Thus, for example, an adviser would 

not be eligible for the exemption if it advises what is nominally a ―private fund‖ but that in fact 

operates as a means for providing individualized investment advice directly to the investors in the 

―private fund.‖ In this case, the investors would also be clients of the adviser. Cf. Advisers Act 

rule 202(a)(30)-1(b)(1) (an adviser ―must count an owner [of a legal organization] as a client if 

[it] provide[s] investment advisory services to the owner separate and apart from the investment 

advisory services [it] provide[s] to the legal organization‖). 

325 For example, a fund that seeks to raise capital from multiple investors but has only a single, initial 

investor for a period of time could be a private fund, as could a fund in which all but one of the 

investors have redeemed their interests.
- 80 -

such as section 3(c)(5)(C), which excludes certain real estate funds.326 These funds would not be 

private funds, because a ―private fund‖ is a fund that would be an investment company as 

defined in section 3 of the Investment Company Act but for section 3(c)(1) or 3(c)(7) of that 

Act.327 

The commenter argued, and we agree, that an adviser should nonetheless be permitted to 

advise such a fund and still rely on the exemption. Otherwise, for example, an adviser to a 

section 3(c)(1) or 3(c)(7) fund would lose the exemption if the fund also qualified for another 

exclusion, even though the adviser may be unaware of the fund so qualifying and the fund does 

not purport to rely on the other exclusion. We do not believe that Congress intended that an 

adviser would lose the exemption in these circumstances. Accordingly, the definition of a 

―qualifying private fund‖ in rule 203(m)-1 permits an adviser to treat as a private fund for 

purposes of the exemption a fund that qualifies for an exclusion from the definition of 

investment company as defined in section 3 of the Investment Company Act in addition to the 

exclusions provided by section 3(c)(1) or 3(c)(7).328 

An adviser relying on this provision must treat the fund as a private fund under the 

Advisers Act and the rules thereunder for all purposes.329 This is to ensure that an adviser 

 

326 Dechert General Letter. See also Comment Letter of Baker McKenzie LLP (Jan. 26, 2011) 

(submitted in connection with the Implementing Proposing Release, avail. at 

http://www.sec.gov/comments/s7-36-10/s73610.shtml) (recommended that the Commission 

revise the calculation of assets under management on Form ADV to exclude assets in certain 

funds relying on section 3(c)(5)(C) of the Investment Company Act); Comment Letter of DLA 

Piper LLP (US) (submitted by John H. Heuberger and Hal M. Brown) (similarly sought to 

exempt advisers to certain funds relying on section 3(c)(5)(C)).

327 Section 202(a)(29) of the Advisers Act (defining the term ―private fund‖). 

328 Rule 203(m)-1(d)(5). This provision may also apply to non-U.S. funds that seek to comply with 

section 7(d) of the Investment Company Act and exclusions in addition to those provided by 

section 3(c)(1) or 3(c)(7) of that Act. 

329 Rule 203(m)-1(d)(5). 
- 81 -

relying on the exemption as a result of our modification of the definition of a ―qualifying private 

fund‖ is subject to the same Advisers Act requirements as other advisers relying on the 

exemption. Therefore, an adviser to a fund that also qualifies for another exclusion in addition to 

section 3(c)(1) or 3(c)(7) may treat the fund as a private fund and rely on rule 203(m)-1 if the 

adviser meets the rule‘s other conditions, provided that the adviser treats the fund as a private 

fund under the Advisers Act and the rules thereunder for all purposes including, for example,

reporting on Form ADV, which requires advisers to report certain information about the private 

funds they manage.330

2. Private Fund Assets

a. Method of Calculation 

Under rule 203(m)-1, an adviser must aggregate the value of all assets of private funds it 

manages to determine if the adviser is below the $150 million threshold.331 Rule 203(m)-1 

requires advisers to calculate the value of private fund assets pursuant to instructions in Form 

ADV, which provide a uniform method of calculating assets under management for regulatory 

purposes under the Advisers Act.332 

In the Implementing Adopting Release, we are revising the instructions to Form ADV to 

 

330 See Item 7.B of Form ADV, Part 1A.

331 Rule 203(m)-1(d)(4). 

332 See rules 203(m)-1(a)(2); 203(m)-1(b)(2); 203(m)-1(d)(1) (defining ―assets under management‖ 

to mean ―regulatory assets under management‖ in item 5.F of Form ADV, Part 1A); 

203(m)-1(d)(4) (defining ―private fund assets‖ to mean the ―assets under management‖ 

attributable to a ―qualifying private fund‖). In the case of a subadviser, an adviser must count 

only that portion of the private fund assets for which it has responsibility. See Form ADV: 

Instructions for Part 1A, instr. 5.b.(2) (explaining that, if an adviser provides continuous and 

regular supervisory or management services for only a portion of a securities portfolio, it should 

include only that portion of the securities portfolio for which it provides such services, and that an 

adviser should exclude, for example, the portion of an account under management by another 

person).
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provide a uniform method to calculate assets under management for regulatory purposes, 

including determining eligibility for Commission, rather than state, registration; reporting assets 

under management for regulatory purposes on Form ADV; and determining eligibility for two of 

the new exemptions from registration under the Advisers Act discussed in this Release.333 Under 

the revised Form ADV instructions, as relevant here, advisers must include in their calculations 

proprietary assets and assets managed without compensation as well as uncalled capital 

commitments.334 In addition, an adviser must determine the amount of its private fund assets 

based on the market value of those assets, or the fair value of those assets where market value is 

unavailable,

335 and must calculate the assets on a gross basis, i.e., without deducting liabilities, 

such as accrued fees and expenses or the amount of any borrowing.336 

Use of this uniform method will, we believe, result in more consistent asset calculations 

and reporting across the industry and, therefore, in a more coherent application of the Advisers 

 

333 See Implementing Adopting Release, supra note 32, discussion at section II.A.3 (discussing the 

rationale underlying the new instructions for calculating assets under management for regulatory 

purposes).

334 See Form ADV: Instructions for Part 1A, instr. 5.b.(1), (4). Advisers also must include in their 

―regulatory assets under management‖ assets of non-U.S. clients. See Implementing Adopting 

Release, supra note 32, at n.76 (explaining that a domestic adviser dealing exclusively with nonU.S. clients must register with the Commission if it uses any U.S. jurisdictional means in 

connection with its advisory business unless the adviser qualifies for an exemption from 

registration or is prohibited from registering with the Commission). See also infra note 415. 

335 This valuation requirement is described in terms similar to the definition of ―value‖ in the 

Investment Company Act, which looks to market value when quotations are readily available and, 

if not, then to fair value. See Investment Company Act section 2(a)(41). See also Implementing 

Adopting Release, supra note 32, at n.91 and accompanying text. Other standards also may be 

expressed as requiring that a determination of fair value be based on market quotations where 

they are readily available. Id.

336 See Form ADV: Instructions for Part 1A, instr. 5.b.(2), (4). See also Implementing Adopting 

Release, supra note 32, discussion at section II.A.3.
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Act‘s regulatory requirements and assessment of risk.337 In addition, the uniform method of 

calculation is designed to ensure that, to the extent possible, advisers with similar amounts of 

assets under management will be treated similarly for regulatory purposes, including their ability 

to rely on the private fund adviser exemption and the foreign private adviser exemption, both of 

which refer to an adviser‘s assets under management.

338

 

Many commenters expressed general support for a uniform method of calculating assets 

under management in order to maintain consistency for registration and risk assessment 

purposes.339 The proposals to use fair value of private fund assets and to include uncalled capital 

commitments in private fund assets also received support.340 As discussed below, however, a 

number of commenters disagreed with or sought changes to one or more of the elements of the 

proposed method of calculating assets under management for regulatory purposes set forth in 

 

337 See Proposing Release, supra note 26, discussion at section II.B.2. See also Implementing 

Adopting Release, supra note 32, discussion at section II.A.3. 

338 See Proposing Release, supra note 26, discussion at section V.B.1 (explaining that, because the 

instructions to Form ADV previously permitted advisers to exclude certain types of managed 

assets, ―it is not possible to conclude that two advisers reporting the same amount of assets under 

management are necessarily comparable because either adviser may elect to exclude all or some 

portion of certain specified assets that it manages‖). 

339 See, e.g., AFL-CIO Letter (―We support the SEC‘s proposal to require funds to use a uniform 

standard to calculate their assets under management and agree that it is important that the 

calculation account for asset appreciation.‖); AFR Letter (―AFR supports the SEC‘s proposal to 

require funds to use a uniform standard to calculate their assets under management, and to 

account for asset appreciation in those calculations‖); AIMA Letter (―We agree that a clear and 

unified approach for calculation of AUM is necessary and we believe that using as a standard the 

assets for which an adviser has  ̳responsibility‘ is appropriate.‖); Dechert General Letter 

(commented on particular aspects of the proposed uniform method but stated ―[w]e generally 

agree with the Commission‘s initiative in creating a single uniform method of calculating an 

adviser‘s assets under management ( ̳AUM‘) for purposes of determining an adviser‘s registration 

status ( ̳Regulatory AUM‘)‖). See also Implementing Adopting Release, supra note 32, at n.68 

and accompanying text.

340 See ABA Letter (supported use of fair value); AIMA Letter (supported including uncalled capital 

commitments, provided that the adviser has full contractual rights to call that capital and would 

be given responsibility for management of those assets).
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Form ADV.341 None of the commenters, however, suggested alternative approaches that could 

accommodate the specific changes they sought and achieve our goals of consistent asset 

calculations and reporting discussed above, and we are not aware of such an alternative 

approach.

For example, some commenters sought to exclude from the calculation proprietary assets 

and assets managed without compensation because such a requirement would be inconsistent 

with the statutory definition of ―investment adviser.‖342 Although a person is not an ―investment 

adviser‖ for purposes of the Advisers Act unless it receives compensation for providing advice to 

others, once a person meets that definition (by receiving compensation from any client to which 

it provides advice), the person is an adviser, and the Advisers Act applies to the relationship 

between the adviser and any of its clients (whether or not the adviser receives compensation 

from them).343 Both the private fund adviser exemption and the foreign private adviser 

 

341 See also Implementing Adopting Release, supra note 32, discussion at section II.A.3. 

342 See, e.g., Dechert General Letter; Seward Letter. See also ABA Letter; AIMA Letter (suggested 

a 12-month exclusion for seed capital consistent with the Volcker rule); Dechert Foreign Adviser 

Letter; EFAMA Letter; Katten Foreign Advisers Letter; MFA Letter. Under section 202(a)(11) 

of the Advisers Act, the definition of ―investment adviser‖ includes, among others, ―any person 

who, for compensation, engages in the business of advising others . . . as to the value of securities 

or as to the advisability of investing in, purchasing, or selling securities . . . .‖ One commenter 

argued that including proprietary assets would deter non-U.S. advisers that manage large amounts 

of proprietary assets from establishing U.S. operations. Katten Foreign Advisers Letter. Such an 

adviser, however, would not be ineligible for the private fund adviser exemption merely because 

it established U.S. operations. As discussed below, a non-U.S. adviser may rely on the private 

fund adviser exemption while also having one or more U.S. places of business, provided it 

complies with the exemption‘s conditions. See infra Section II.B.3.

343 See Implementing Adopting Release, supra note 32, at n.74 and accompanying text. Several 

commenters also asserted that including proprietary assets as proposed would in effect require a 

wholly owned control affiliate to register as an investment adviser. See, e.g., Comment Letter of 

American Insurance Association (Jan. 24, 2011) (―AIA Letter‖); Comment Letter of Katten 

Muchin Rosenman LLP (on behalf of APG Asset Management US Inc.) (Jan. 21, 2011); 

Comment Letter of Katten Muchin Rosenman LLP (Jan. 24, 2011) (on behalf of Certain NonU.S. Insurance Companies) (―Katten Foreign Insurance Letter‖). Whether a control affiliate is 

deemed to be an ―investment adviser‖ under the Advisers Act because, among other things, it 
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exemption are conditioned upon an adviser not exceeding specified amounts of ―assets under 

management.‖344 Neither statutory exemption limits the types of assets that should be included 

in this term, and we do not believe that such limits would be appropriate.345 In our view, the 

source of the assets managed should not affect the availability of the exemptions. 

We also do not expect that advisers‘ principals (or other employees) generally will cease 

to invest alongside the advisers‘ clients as a result of the inclusion of proprietary assets, as some 

commenters suggested.346 If private fund investors value their advisers‘ co-investments as 

suggested by these commenters, we expect that the investors will demand them and their 

advisers will structure their businesses accordingly.347

Other commenters objected to calculating regulatory assets under management on the 

basis of gross, rather than net, assets.348 They argued, among other things, that gross asset 

measurements would be confusing,349 complex,350 and inconsistent with industry practice.351 

 

―engages in the business of advising others‖ will depend on the particular facts and 

circumstances. The calculation of regulatory assets under management, including the mandatory 

or optional inclusion of specified assets in that calculation, is applicable after the entity is 

determined to be an investment adviser.

344 See sections 203(m) and 202(a)(30) of the Advisers Act. 

345 See also Implementing Adopting Release, supra note 32, at n.75 and accompanying text 

(explaining that ―the management of  ̳proprietary‘ assets or assets for which the adviser may not 

be compensated, when combined with other client assets, may suggest that the adviser‘s activities 

are of national concern or have implications regarding the reporting for the assessment of 

systemic risk‖).

346 See, e.g., ABA Letter; Katten Foreign Advisers Letter; Seward Letter.

347 Moreover, we note that an adviser seeking to rely on rule 203(m)-1 may have only private fund

clients and must include the assets of all of its private fund clients when determining if it remains 

under the rule‘s $150 million threshold. 

348 ABA Letter; Dechert General Letter; Merkl Letter; MFA Letter; Seward Letter; Shearman Letter. 

349 Dechert General Letter. See also Implementing Adopting Release, supra note 32, at n.80 and 

accompanying text.

350 MFA Letter.
- 86 -

However, nothing in the current instructions suggests that liabilities should be deducted from the 

calculation of an adviser‘s assets under management. Indeed, since 1997, the instructions have 

stated that an adviser should not deduct securities purchased on margin when calculating its 

assets under management.352 Whether a client has borrowed to purchase a portion of the assets 

managed does not seem to us a relevant consideration in determining the amount an adviser has 

to manage, the scope of the adviser‘s business, or the availability of the exemptions.353

Moreover, we are concerned that the use of net assets could permit advisers to highly 

leveraged funds to avoid registration under the Advisers Act even though the activities of such 

advisers may be significant and the funds they advise may be appropriate for systemic risk 

reporting.

354

 One commenter argued, in contrast, that it would be ―extremely unlikely that a net 

 

351 See, e.g., Merkl Letter; Shearman Letter. One commenter asserted that the ―inclusion of 

borrowed assets may create an incentive for an adviser to reduce client borrowings to qualify for 

an exemption from registration even though reducing leverage may not be in the best interest of

its clients,‖ and that it ―could encourage advisers to use methods other than borrowing to obtain 

financial leverage for their clients (e.g., through swaps or other derivative products, which could 

be disadvantageous to clients due to the counterparty risks and increased costs that they entail).‖ 

Seward Letter. See also Gunderson Dettmer Letter. We note that advisers, as fiduciaries, may 

not subordinate clients‘ interests to their own such as by altering their investing behavior in a way 

that is not in the client‘s best interest in an attempt to remain under the exemption‘s $150 million 

threshold. Another commenter argued that a gross assets calculation would make calculations of 

regulatory assets under management more volatile. See Dechert General Letter. As discussed in 

more detail below, we are permitting advisers relying on rule 203(m)-1 to calculate their private 

fund assets annually, rather than quarterly as proposed, and are extending the period during which 

certain advisers may file their registration applications if their private fund assets exceed the 

exemption‘s $150 million threshold. See infra Section II.B.2.b. We believe these measures will 

substantially mitigate or eliminate any volatility that may be caused by using a gross assets 

measurement, as well as potential volatility in currency exchange rates identified by some 

commenters. See CompliGlobe Letter; EVCA Letter; O‘Melveny Letter.

352 See Form ADV: Instructions for Part 1A, instr. 5.b.(2), as in effect before it was amended by the 

Implementing Adopting Release (―Do not deduct securities purchased on margin.‖). Instruction 

5.b.(2), as amended in the Implementing Adopting Release, provides ―Do not deduct any 

outstanding indebtedness or other accrued but unpaid liabilities.‖ See Implementing Adopting 

Release, supra note 32, discussion at section II.A.3.

353 See id.

354 See id., at n.82 and preceding and accompanying text. 
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asset limit of $150,000,000 in private funds could be leveraged into total investments that would 

pose any systemic risk.‖355 But a comprehensive view of systemic risk requires information 

about certain funds that may not present systemic risk concerns when viewed in isolation, but 

nonetheless are relevant to an assessment of systemic risk across the economy. Moreover, 

because private funds are not subject to the leverage restrictions in section 18 of the Investment 

Company Act, a private fund with less than $150 million in net assets could hold assets far in 

excess of that amount as a result of its extensive use of leverage. In addition, under a net assets 

test such a fund would be treated similarly for regulatory purposes as a fundamentally different 

fund, such as one that did not make extensive use of leverage and had $140 million in net assets.

The use of gross assets also need not cause any investor confusion, as some commenters 

suggested.356 Although an adviser will be required to use gross (rather than net) assets for 

purposes of determining whether it is eligible for the private fund adviser or the foreign private 

adviser exemptions (among other purposes), we would not preclude an adviser from holding 

itself out to its clients as managing a net amount of assets as may be its custom.357

One commenter opposed the requirement that advisers include in the calculation of 

private fund assets uncalled capital commitments, asserting that the uncalled capital remains 

 

355 ABA Letter. 

356 See, e.g., Dechert General Letter. See also Implementing Adopting Release, supra note 32, at 

n.80 and accompanying text.

357 In addition, in response to commenters seeking clarification of the application of the gross assets 

calculation to mutual funds, short positions and leverage, we expect that advisers will continue to 

calculate their gross assets as they do today, even if they currently only calculate gross assets as 

an intermediate step to compute their net assets. See Implementing Adopting Release, supra note 

32, at n.83. In the case of pooled investment vehicles with a balance sheet, for instance, an 

adviser could include in the calculation the total assets of the entity as reported on the balance 

sheet. Id.
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under the management of the fund investor.358 As we noted in the Proposing Release, in the 

early years of a private fund‘s life, its adviser typically earns fees based on the total amount of 

capital commitments, which we presume reflects compensation for efforts expended on behalf of 

the fund in preparation for the investments.359

A number of commenters objected to the requirement to determine private fund assets 

based on fair value, generally arguing that the requirement would cause those advisers that did 

not use fair value methods to incur additional costs, especially if the private funds‘ assets that 

they manage are illiquid and therefore difficult to fair value.360 We noted in the Proposing 

Release that we understood that many private funds already value assets in accordance with U.S. 

generally accepted accounting principles (―GAAP‖) or other international accounting standards 

that require the use of fair value, citing letters we had received in connection with other 

rulemaking initiatives.361 We are sensitive to the costs this new requirement will impose. We 

believe, however, that this approach is warranted in light of the unique regulatory purposes of the 

calculation under the Advisers Act. We estimated these costs in the Proposing Release362 and we 

have taken several steps to mitigate them.363 

While many advisers will calculate fair value in accordance with GAAP or another 

 

358 See Merkl Letter.

359 Proposing Release, supra note 26, discussion at section II.B.2. See also Implementing Adopting 

Release, supra note 32, at n.90 and accompanying text.

360 See, e.g., Gunderson Dettmer Letter; Merkl Letter; O‘Melveny Letter; Seward Letter; Wellington 

Letter. 

361 See Proposing Release, supra note 26, at n.196 and accompanying text.

362 See id., at n.326 and accompanying text.

363 We recognize that although these steps will provide advisers greater flexibility in calculating the 

value of their private fund assets, they also will result in valuations that are not as comparable as 

they could be if we specified a fair value standard (e.g., as specified in GAAP).
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international accounting standard,364 other advisers acting consistently and in good faith may 

utilize another fair valuation standard.365 While these other standards may not provide the 

quality of information in financial reporting (for example, of private fund returns), we expect 

these calculations will provide sufficient consistency for the purposes that regulatory assets 

under management serve in our rules, including rule 203(m)-1.366

Commenters also suggested alternative approaches to valuation, including the use of local 

accounting principles;

367 the methodology used to report to the private fund‘s investors;368 the 

 

364 Several commenters asked that we not require advisers to fair value private fund assets in 

accordance with GAAP for purposes of calculating regulatory assets under management because 

many funds, particularly offshore ones, do not use GAAP and such a requirement would be 

unduly burdensome. See, e.g., EFAMA Letter; Katten Foreign Advisers Letter. We did not 

propose such a requirement, nor are we adopting one. See Implementing Adopting Release, 

supra note 32, at n.98.

365 See id., at n.99 and accompanying text. Consistent with this good faith requirement, we would 

expect that an adviser that calculates fair value in accordance with GAAP or another basis of 

accounting for financial reporting purposes will also use that same basis for purposes of 

determining the fair value of its regulatory assets under management. Id.

366 See id., at n.100 and accompanying text. In addition, the fair valuation process need not be the 

result of a particular mandated procedure and the procedure need not involve the use of a thirdparty pricing service, appraiser or similar outside expert. An adviser could rely on the procedure 

for calculating fair value that is specified in a private fund‘s governing documents. The fund‘s 

governing documents may provide, for example, that the fund‘s general partner determines the 

fair value of the fund‘s assets. Advisers are not, however, required to fair value real estate assets 

only in those limited circumstances where real estate assets are not required to be fair valued for 

financial reporting purposes under accounting principles that otherwise require fair value for 

assets of private funds. For example, in those cases, an adviser may instead value the real estate 

assets as the private fund does for financial reporting purposes. We note that the Financial 

Accounting Standards Board (―FASB‖) has a current project related to investment property 

entities that may require real estate assets subject to that accounting standard to be measured by 

the adviser at fair value. See FASB Project on Investment Properties. We also note that certain 

international accounting standards currently permit, but do not require, fair valuation of certain 

real estate assets. See International Accounting Standard 40, Investment Property. To the extent 

that an adviser follows GAAP or another accounting standard that requires or in the future 

requires real estate assets to be fair valued, this limited exception to the use of fair value 

measurement for real estate assets would not be available.

367 Dechert Foreign Adviser Letter; EFAMA Letter.

368 Merkl Letter; Wellington Letter.
- 90 -

methodologies described in a client‘s governing documents or offering materials;369 historical 

cost;370 and aggregate capital raised by a private fund.

371 Use of these approaches would limit 

our ability to compare data from different advisers and thus would be inconsistent with our goal 

of achieving more consistent asset calculations and reporting across the industry, as discussed 

above, and also could result in advisers managing comparable amounts of assets under 

management being subject to different registration requirements. Moreover, these alternative 

approaches could permit advisers to circumvent the Advisers Act‘s registration requirements. 

Permitting the use of any valuation standard set forth in the governing documents of the private 

fund other than fair value could effectively yield to the adviser the choice of the most favorable 

standard for determining its registration obligation as well as the application of other regulatory 

requirements. 

For these reasons and as we proposed, rule 203(m)-1 requires advisers to calculate the 

value of private fund assets pursuant to the instructions in Form ADV.

b. Frequency of Calculation and Transition Period 

An adviser relying on the exemption provided by rule 203(m)-1 must annually calculate 

the amount of the private fund assets it manages and report the amount in its annual updating 

amendments to its Form ADV.372 If an adviser reports in its annual updating amendment that it 

 

369 AIMA Letter; MFA Letter; Seward Letter.

370 O‘Melveny Letter. 

371 Gunderson Dettmer Letter.

372 An adviser relying on rule 203(m)-1 must file an annual updating amendment to its Form ADV 

within 90 days after the end of its fiscal year, and must calculate its private fund assets in the 

manner described in the instructions to Form ADV within 90 days prior to the date it makes the 

filing. See rule 203(m)-1(c); rule 204-4(a); General Instruction 4 to Form ADV; Form ADV: 

Instructions for Part 1A, instr. 5.b. The adviser must report its private fund assets on Section 2.B 

of Schedule D to Form ADV. Advisers also must report their private fund assets when they file 
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has $150 million or more of private fund assets under management, the adviser is no longer 

eligible for the private fund adviser exemption.373 Advisers thus may be required to register 

under the Advisers Act as a result of increases in their private fund assets that occur from year to 

year, but changes in the amount of an adviser‘s private fund assets between annual updating 

amendments will not affect the availability of the exemption.

We proposed to require advisers relying on the exemption to calculate their private fund 

assets each quarter to determine if they remain eligible for the exemption. Commenters 

persuaded us, however, that requiring advisers to calculate their private fund assets annually in 

connection with their annual updating amendments to Form ADV would be more appropriate 

because it would likely result in the same advisers becoming registered each year while reducing 

the costs and burdens associated with quarterly calculations.374 In addition, annual calculations 

provide a range of dates on which an adviser may calculate its private fund assets, addressing 

concerns raised by commenters about shorter-term fluctuations in assets under management.375 

The rule as adopted also is consistent with the timeframes for valuing assets under management 

 

their initial reports as exempt reporting advisers. See Implementing Adopting Release, supra 

note 32, discussion at section II.B.

373 Under Item 2.B of Part 1A of Form ADV, an adviser relying on rule 203(m)-1 must complete 

Section 2.B of Schedule D, which requires the adviser to provide the amount of the ―private fund 

assets‖ it manages. A note to Section 2.B of Schedule D provides that ―private fund assets‖ has 

the same meaning as under rule 203(m)-1, and that non-U.S. advisers should only include private 

fund assets that they manage at a place of business in the United States. See also infra notes 377-

378 and accompanying text. 

374 A number of commenters argued, among other things, that calculating private fund assets 

quarterly would: (i) impose unnecessary costs and burdens on advisers, some of whom might not 

otherwise perform quarterly valuations; and (ii) inappropriately permit shorter-term fluctuations 

in assets under management to require advisers to register. See ABA Letter; AIMA Letter; 

Dechert Foreign Adviser Letter; Dechert General Letter; EFAMA Letter; Katten Foreign 

Advisers Letter; Merkl Letter; NASBIC/SBIA Letter; Seward Letter.

375 As discussed above, an adviser relying on rule 203(m)-1 must calculate its private fund assets in 

the manner described in the instructions to Form ADV within 90 days prior to the date it files its 

annual updating amendment to its Form ADV.
- 92 -

and registering with the Commission applicable to state-registered advisers switching from state 

to Commission registration.376 

As noted above, if an adviser reports in its annual updating amendment that it has $150 

million or more of private fund assets under management, the adviser is no longer eligible for the 

exemption and must register under the Advisers Act unless it qualifies for another exemption. 

An adviser that has complied with all Commission reporting requirements applicable to an 

exempt reporting adviser as such, however, may apply for registration with the Commission up 

to 90 days after filing the annual updating amendment, and may continue to act as a private fund 

adviser, consistent with the requirements of rule 203(m)-1, during this transition period.377 This 

90-day transition period is not available to advisers that have failed to comply with all 

Commission reporting requirements applicable to an exempt reporting adviser as such or that 

have accepted a client that is not a private fund.378 These advisers therefore should plan to 

 

376 See General Instruction 4 to Form ADV; Form ADV: Instructions for Part 1A, instr. 5.b.; rule 

203A-1(b). See also ABA Letter (―We believe an annual measurement would be most 

appropriate, especially since advisers exempt from registration because they do not meet the 

$100,000,000 asset threshold will calculate their assets for this purpose annually, and an annual 

test for both purposes has a compelling consistency.‖). 

377 General Instruction 15 to Form ADV. See also Implementing Adopting Release, supra note 32, 

discussion at section II.B.5. We removed what was proposed rule 203(m)-1(d), which contained 

the proposed transition period, and renumbered the final rule accordingly. The transition period 

as adopted is described in General Instruction 15 to Form ADV. Rule 203(m)-1(c) refers advisers 

to this instruction. This transition period is available to an adviser that has complied with ―all 

[Commission] reporting requirements applicable to an exempt reporting adviser as such,‖ rather 

than ―all applicable Commission reporting requirements,‖ as proposed. This condition reflects 

the importance of the Advisers Act reporting requirements applicable to advisers relying on the 

private fund adviser exemption.

378 General Instruction 15 to Form ADV. See also Implementing Adopting Release, supra note 32, 

discussion at section II.B.5. An adviser would lose the exemption immediately upon accepting a 

client that is not a private fund. Accordingly, for the adviser to comply with the Advisers Act, the 

adviser‘s Commission registration must be approved before the adviser accepts a client that is not 

a private fund. Moreover, even an adviser to whom the transition period is available could not, 

consistent with the Advisers Act, accept a client that is not a private fund until the Commission 
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register before becoming ineligible for the exemption.

Commenters who addressed the issue generally supported the proposed transition period, 

but requested that we extend the transition period beyond one calendar quarter as proposed or 

otherwise make it more broadly available.379 Requiring annual calculations extends the 

transition period, as commenters recommended, and is consistent with the amount of time 

provided to state-registered advisers switching to Commission registration. Advisers to whom 

the transition period is available will have up to 180 days after the end of their fiscal years to 

register.380

One commenter argued that the transition period should be available to all advisers 

relying on rule 203(m)-1, including those that had not complied with their reporting 

requirements.381 The transition period is a safe harbor that provides advisers flexibility in 

complying with rule 203(m)-1, and we continue to believe that it would be inappropriate to 

extend this benefit to advisers that have not met their reporting requirements.382

3. Assets Managed in the United States

Under rule 203(m)-1, all of the private fund assets of an adviser with a principal office 

and place of business in the United States are considered to be ―assets under management in the 

 

approves its registration. These same limitations apply to non-U.S. advisers with respect to their 

clients that are United States persons. 

379 ABA Letter; AIMA Letter; CompliGlobe Letter; Gunderson Dettmer Letter; Katten Foreign 

Advisers Letter; Sadis & Goldberg Implementing Release Letter; Seward Letter; Shearman 

Letter.

380 An adviser must file its annual Form ADV updating amendment within 90 days after the end of 

its fiscal year and, if the transition period is available, may apply for registration up to 90 days 

after filing the amendment. See also supra note 378.

381 Shearman Letter.

382 See Proposing Release, supra note 26, discussion at n.223 and accompanying text.
- 94 -

United States,‖ even if the adviser has offices outside of the United States.383 A non-U.S. 

adviser, however, need only count private fund assets it manages at a place of business in the 

United States toward the $150 million asset limit under the exemption.384

As discussed in the Proposing Release, the rule deems all of the assets managed by an 

adviser to be managed ―in the United States‖ if the adviser‘s ―principal office and place of 

business‖ is in the United States. This is the location where the adviser controls, or has ultimate 

responsibility for, the management of private fund assets, and therefore is the place where all the 

adviser‘s assets are managed, although day-to-day management of certain assets may also take 

place at another location.385 For most advisers, this approach will avoid difficult attribution 

determinations that would be required if assets are managed by teams located in multiple 

jurisdictions, or if portfolio managers located in one jurisdiction rely heavily on research or other 

advisory services performed by employees located in another jurisdiction.

Most commenters who addressed the issue supported our proposal to treat ―assets under 

management in the United States‖ for non-U.S. advisers as those assets managed at a U.S. place 

 

383 Rule 203(m)-1(a). The rule defines the ―United States‖ to have the same meaning as in rule 

902(l) of Regulation S under the Securities Act, which is ―the United States of America, its 

territories and possessions, any State of the United States, and the District of Columbia.‖ Rule 

203(m)-1(d)(7); 17 CFR 230.902(l). 

384 Rule 203(m)-1(b). Any assets managed at a U.S. place of business for clients other than private 

funds would make the exemption unavailable. See also supra note 378. We revised this 

provision to refer to assets managed ―at‖ a place of business in the United States, rather than 

―from‖ a place of business in the United States as proposed. The revised language is intended to 

reflect more clearly the rule‘s territorial focus on the location at which the asset management 

takes place. 

385 This approach is similar to the way we have identified the location of the adviser for regulatory 

purposes under our current rules, which define an adviser‘s principal office and place of business 

as the location where it ―directs, controls and coordinates‖ its advisory activities, regardless of the 

location where some of the advisory activities might occur. See rule 203A-3(c); rule 222-1. 
- 95 -

of business.386 One commenter did, however, urge us to presume that a non-U.S. adviser‘s assets 

are managed from its principal office and place of business to avoid the inherent difficulties in 

determining the location from which any particular assets of a private fund are managed if an 

adviser operates in multiple jurisdictions.387 As we stated in the Proposing Release, this 

commenter‘s approach ignores situations in which day-to-day management of some assets of the 

private fund does in fact take place ―in the United States.‖388 It also would permit an adviser 

engaging in substantial advisory activities in the United States to escape our regulatory oversight 

merely because the adviser‘s principal office and place of business is outside of the United 

States. This consequence is at odds not only with section 203(m), but also with the foreign 

private adviser exemption discussed below in which Congress specifically set forth 

circumstances under which a non-U.S. adviser may be exempt provided it does not have any 

place of business in the United States, among other conditions.389

In addition, some commenters supported an alternative approach under which we would 

interpret ―assets under management in the United States‖ by reference to the source of the assets 

(i.e., U.S. private fund investors).390 One of the commenters argued that our interpretation would 

 

386 ABA Letter; Comment Letter of Association Française de la Gestion financière (Jan. 24, 2011) 

(―AFG Letter‖) (sought clarification that assets managed from non-U.S. offices are exempted); 

AIMA Letter; Comment Letter of Avoca Capital Holdings (Dec. 21, 2010) (―Avoca Letter‖); 

Debevoise Letter; Dechert Foreign Adviser Letter; EFAMA Letter; Gunderson Dettmer Letter; 

Katten Foreign Advisers Letter; MAp Airports Letter; Merkl Letter; Comment Letter of Non-U.S. 

Adviser (Jan. 24, 2011) (―Non-U.S. Adviser Letter‖). Cf. Sen. Levin Letter (advisers managing 

assets in the United States of funds incorporated outside of the United States ―are exactly the type 

of investment advisers to which the Dodd-Frank Act‘s registration requirements are intended to 

apply‖).

387 Katten Foreign Advisers Letter.

388 See Proposing Release, supra note 26, at nn.204-205 and accompanying text.

389 See infra Section II.C.

390 Comment Letter of Portfolio Manager (Jan. 24, 2011) (―Portfolio Manager Letter‖); Merkl Letter 

(suggested that it ―may be useful‖ to look both to assets managed from a U.S. place of business 
- 96 -

disadvantage U.S.-based advisers by permitting non-U.S. advisers to accept substantial amounts 

of money from U.S. investors without having to comply with certain U.S. regulatory 

requirements, and cause U.S. advisers to move offshore or close U.S. offices to avoid 

regulation.391

As we explained in the Proposing Release, we believe that our interpretation recognizes 

that non-U.S. activities of non-U.S. advisers are less likely to implicate U.S. regulatory interests 

and is in keeping with general principles of international comity.392 The rule also is designed to 

encourage the participation of non-U.S. advisers in the U.S. market by applying the U.S. 

securities laws in a manner that does not impose U.S. regulatory and operational requirements on 

a non-U.S. adviser‘s non-U.S. advisory business.393 Non-U.S. advisers relying on rule 203(m)-1 

will remain subject to the Advisers Act‘s antifraud provisions and will become subject to the 

requirements applicable to exempt reporting advisers. 

One commenter proposed an additional interpretation under which we would determine 

the ―assets under management in the United States‖ for U.S. advisers only by reference to the 

 

and assets contributed by U.S. private fund investors to address both investor protection and 

systemic risk concerns). 

391 Portfolio Manager Letter. See also Comment Letter of Tuttle (Nov. 30, 2010) (submitted in 

connection with the Implementing Adopting Release, avail. at http://www.sec.gov/comments/s7-

35-10/s73510.shtml) (―Tuttle Implementing Release Letter‖) (argued that businesses may move 

offshore if they become too highly regulated in the United States).

392 See Proposing Release, supra note 26, at n.207 (identifying Regulation S and Exchange Act rule 

15a-6 as examples of Commission rules that adopt a territorial approach).

393 See generally Division of Investment Management, SEC, Protecting Investors: A Half Century 

of Investment Company Regulation, May 1992 (―1992 Staff Report‖), at 223-227 (recognizing 

that non-U.S. advisers that registered with the Commission were arguably subject to all of the 

substantive provisions of the Advisers Act with respect to their U.S. and non-U.S. clients, which 

could result in inconsistent regulatory requirements or practices imposed by the regulations of 

their local jurisdiction and the U.S. securities laws; in response, advisers could form separate and 

independent subsidiaries but this could result in U.S. clients having access to a limited number of 

advisory personnel and reduced access by the U.S. subsidiary to information or research by nonU.S. affiliates).
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amount of assets invested, or ―in play,‖ in the United States.394 We decline to adopt this 

approach because it would be difficult for advisers to ascertain and monitor which assets are 

invested in the United States, and this approach thus could be confusing and difficult to apply on 

a consistent basis. For example, an adviser might invest in the American Depositary Receipts of 

a company incorporated in Bermuda that: (i) engages in mining operations in Canada, the 

principal trading market for its common stock; and (ii) derives the majority of its revenues from 

exports to the United States. It is not clear whether these investments should be considered ―in 

play‖ in the United States. 

Another commenter urged us to exclude assets managed by a U.S. adviser at its non-U.S. 

offices.395 This, the commenter argued, would allow more U.S. advisers to rely on the 

exemption and allow us to focus our resources on larger advisers more likely to pose systemic 

risk. But the management of assets at these non-U.S. offices could have investor protection 

implications in the United States, such as by creating conflicts of interest for an adviser between 

assets managed abroad and those managed in the United States.

In addition, we sought comment as to whether, under the approach we are adopting 

today, some or most U.S. advisers with non-U.S. branch offices would re-organize those offices 

as subsidiaries in order to avoid attributing assets managed to the non-U.S. office.

396

 No 

commenter suggested this would occur. We continue to believe that rule 203(m)-1 will have 

only a limited effect on multi-national advisory firms, which for tax or business reasons keep 

their non-U.S. advisory activities organizationally separate from their U.S. advisory activities. 

 

394 Comment Letter of Richard Dougherty (Dec. 14, 2010) (―Dougherty Letter‖).

395 Comment Letter of T.A. McKay & Co., Inc. (Nov. 23, 2010).

396 See Proposing Release, supra note 26, at discussion following n.208.
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For these reasons, and our substantial interest in regulating all of the activities of U.S. advisers, 

we decline to revise rule 203(m)-1 as this commenter suggested.

Several commenters asked that we clarify whether certain U.S. activities or arrangements 

would result in an adviser having a ―place of business‖ in the United States.397 Commenters also 

sought guidance as to whether limited-purpose U.S. offices of non-U.S. advisers would be 

considered U.S. places of business (e.g., offices conducting research or due diligence).398

Under rule 203(m)-1, if a non-U.S. adviser relying on the exemption has a place of 

business in the United States, all of the clients whose assets the adviser manages at that place of 

business must be private funds and the assets managed at that place of business must have a total 

value of less than $150 million. Rule 203(m)-1 defines a ―place of business‖ by reference to rule 

222-1(a) as any office where the adviser ―regularly provides advisory services, solicits, meets 

with, or otherwise communicates with clients,‖ and ―any other location that is held out to the 

general public as a location at which the investment adviser provides investment advisory 

services, solicits, meets with, or otherwise communicates with clients.‖

Whether a non-U.S. adviser has a place of business in the United States depends on the 

facts and circumstances, as discussed below in connection with the foreign private adviser 

exemption.399 For purposes of rule 203(m)-1, however, the analysis frequently will turn not on 

whether a non-U.S. adviser has a U.S. place of business, but on whether the adviser manages 

assets, or has ―assets under management,‖ at such a U.S. place of business. Under the Advisers 

Act, ―assets under management‖ are the securities portfolios for which an adviser provides 

 

397 See, e.g., EFAMA Letter. 

398 AIMA Letter; Dechert General Letter; EFAMA Letter. See also ABA Letter; Vedanta Letter.

399 See infra Section II.C.4.
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―continuous and regular supervisory or management services.‖400 This is an inherently factual 

determination. We would not, however, view providing research or conducting due diligence to 

be ―continuous and regular supervisory or management services‖ at a U.S. place of business if a 

person outside of the United States makes independent investment decisions and implements 

those decisions.401

4. United States Person

Under rule 203(m)-1(b), a non-U.S. adviser may not rely on the exemption if it has any 

client that is a United States person other than a private fund.402 Rule 203(m)-1 defines a 

―United States person‖ generally by incorporating the definition of a ―U.S. person‖ in Regulation 

S under the Securities Act.403 Regulation S looks generally to the residence of an individual to 

 

400 Section 203A(a)(2) of the Advisers Act. The instructions to Item 5 of Form ADV provide 

guidance on the circumstances under which an adviser would be providing ―continuous and 

regular supervisory or management services with respect to an account.‖ Form ADV: 

Instructions for Part 1A, instr. 5.b. The calculation of an adviser‘s assets under management at a 

U.S. place of business turns on whether the adviser is providing those services with respect to a 

particular account or accounts at a U.S. place of business. 

401 See Form ADV: Instructions for Part 1A, instr. 5.b(3)(b) (an adviser provides continuous and 

regular supervisory or management services with respect to an account if it has ―ongoing 

responsibility to select or make recommendations, based upon the needs of the client, as to 

specific securities or other investments the account may purchase or sell and, if such 

recommendations are accepted by the client, [it is] responsible for arranging or effecting the 

purchase or sale‖). These research or due diligence services, while not ―continuous and regular 

supervisory or management services,‖ may be investment advisory services that, if performed at a 

U.S. location, would cause the adviser to have a place of business in the United States. See infra

note 493 and accompanying text.

402 In response to commenters seeking clarity on this point, we note that a non-U.S. adviser need not 

have one or more private fund clients that are United States persons in order to rely on the 

exemption. 

403 Rule 203(m)-1(d)(8). We are adding a note to rule 203(m)-1 that clarifies that a client will not be 

considered a United States person if the client was not a United States person at the time of 

becoming a client of the adviser. This will permit a non-U.S. adviser to continue to rely on rule 

203(m)-1 if a non-U.S. client that is not a private fund, such as a natural person client residing 

abroad, relocates to the United States or otherwise becomes a United States person. As one 

commenter recognized, this also will establish similar treatment in these circumstances for nonU.S. advisers relying on rule 203(m)-1 or the foreign private adviser exemption, which contains 
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determine whether the individual is a United States person,404 and also addresses the 

circumstances under which a legal person, such as a trust, partnership or a corporation, is a 

United States person.405 Regulation S generally treats legal partnerships and corporations as 

United States persons if they are organized or incorporated in the United States, and analyzes

trusts by reference to the residence of the trustee.406 It treats discretionary accounts generally as 

United States persons if the fiduciary is a resident of the United States.407 Commenters generally 

supported defining ―United States person‖ by reference to Regulation S because, among other 

reasons, the definition is well developed and understood by advisers.408

Rule 203(m)-1 also contains a special rule that requires an adviser relying on the 

exemption to treat a discretionary or other fiduciary account as a United States person if the 

account is held for the benefit of a United States person by a non-U.S. fiduciary who is a related 

person of the adviser.409 One commenter expressed concern that the special rule is unnecessary 

 

an analogous note. See EFAMA Letter. See also Comment Letter of Investment Funds Institute 

of Canada (Jan. 24, 2011) (―IFIC Letter‖). The note applicable to the foreign private adviser 

exemption generally describes the time when an adviser must determine if a person is ―in the 

United States‖ for purposes of that exemption. See infra Section II.C.3.

404 17 CFR 230.902(k)(1)(i).

405 See, e.g., 17 CFR 230.902(k)(1) and (2).

406 17 CFR 230.902(k)(1)(ii) and (iv).

407 17 CFR 230.902(k)(1)(vii).

408 AIMA Letter; CompliGlobe Letter; Debevoise Letter; Dechert General Letter; Gunderson 

Dettmer Letter; Katten Foreign Advisers Letter; O‘Melveny Letter. As we explained in the 

Proposing Release, advisers to private funds and their counsel must today be familiar with the 

definition of ―U.S. person‖ under Regulation S in order to comply with other provisions of the 

federal securities laws. See Proposing Release, supra note 26, at n.217 and accompanying text. 

409 Rule 203(m)-1(d)(8) provides that a ―United States person means any person that is a  ̳U.S. 

person‘ as defined in [Regulation S], except that any discretionary account or similar account that 

is held for the benefit of a United States person by a dealer or other professional fiduciary is a 

United States person if the dealer or professional fiduciary is a related person of the investment 

adviser relying on [rule 203(m)-1] and is not organized, incorporated, or (if an individual) 

resident in the United States.‖ In contrast, under Regulation S, a discretionary account 
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while another who supported the special rule as proposed noted that the special rule should be 

―narrowly drawn‖ to avoid frustrating legitimate subadvisory relationships between non-U.S. 

advisers and their U.S. adviser affiliates.410 We believe that the special rule is narrowly drawn 

and necessary to prevent advisers from purporting to rely on the exemption and establishing 

discretionary accounts for the benefit of U.S. clients with an offshore affiliate that would then 

delegate the actual management of the account back to the adviser.411

Another commenter suggested the rule apply a different approach with respect to 

business entities than that under Regulation S, which as noted above generally treats legal 

partnerships and corporations as U.S. persons if they are organized or incorporated in the United 

States.412 The commenter suggested that advisers should instead look to a business entity‘s 

principal office and place of business in certain instances because an entity organized under U.S. 

law should not necessarily be treated as a United States person if it was formed by a non-United 

States person to pursue the entity‘s investment objectives.413

 

maintained by a non-U.S. fiduciary (such as an investment adviser) is not a ―U.S. person‖ even if 

the account is owned by a U.S. person. See 17 CFR 230.902(k)(1)(vii); 17 CFR 230.902(k)(2)(i). 

410 Katten Foreign Advisers Letter; AIMA Letter (noting that the special rule should be narrowly 

drawn but also stating that ―[w]e understand the rationale for the special rule proposed by the 

Commission for discretionary accounts maintained outside the US for the benefit of US persons 

and we believe that that is an appropriate safeguard against avoidance of the registration 

requirement‖). 

411 See Proposing Release, supra note 26, discussion at section II.B.4. 

412 Debevoise Letter (noted that, for example, ―a private fund, or an entity that is organized as part of 

a private fund, may be organized under Delaware law to meet certain regulatory and tax 

objectives, but the fund‘s principal office and place of business in fact may be outside the U.S.‖). 

413 The commenter asserted that this approach ―would not be inconsistent with Regulation S itself, 

which treats a partnership or corporation organized under the laws of a foreign jurisdiction as a 

U.S. person if it was  ̳[f]ormed by a U.S. person principally for the purpose of investing in 

securities not registered under the [Securities] Act, unless it is organized or incorporated, and 

owned, by accredited investors . . . who are not natural persons, estates or trusts.‘‖ See also

Comment Letter of Fulbright & Jaworski L.L.P. (on behalf of a German asset manager) (Jun. 15, 

2011) (―Fulbright Letter‖).
- 102 -

We decline to adopt this suggestion because we believe it is most appropriate to 

incorporate the definition of ―U.S. person‖ in Regulation S with as few modifications as 

possible. As noted above, Regulation S provides a well-developed body of law with which 

advisers to private funds and their counsel must today be familiar in order to comply with other 

provisions of the federal securities laws. Incorporating this definition in rule 203(m)-1, 

therefore, makes rule 203(m)-1 easier to apply and fosters consistency across the federal 

securities laws. Deviations from the definition used in Regulation S, including an entirely 

different approach to defining a ―United States person,‖ would detract from these benefits. 

Moreover, a test that looks to a business entity‘s principal office and place of business, as 

suggested by the commenter, would be difficult for advisers to apply. It frequently is unclear 

where an investment fund maintains its ―principal office and place of business‖ because 

investment funds typically have no physical presence or employees other than those of their 

advisers. 

C. Foreign Private Advisers

Section 403 of the Dodd-Frank Act replaces the current private adviser exemption from 

registration under the Advisers Act with a new exemption for a ―foreign private adviser,‖ as 

defined in new section 202(a)(30).414 The new exemption is codified as amended 

section 203(b)(3).

Under section 202(a)(30), a foreign private adviser is any investment adviser that: (i) has 

no place of business in the United States; (ii) has, in total, fewer than 15 clients in the United 

 

414 Section 402 of the Dodd-Frank Act (providing a definition of ―foreign private adviser,‖ to be 

codified at section 202(a)(30) of the Advisers Act). See supra notes 22 and 23 and accompanying 

text.
- 103 -

States and investors in the United States in private funds advised by the investment adviser;415

(iii) has aggregate assets under management attributable to clients in the United States and 

investors in the United States in private funds advised by the investment adviser of less than $25 

million;416 and (iv) does not hold itself out generally to the public in the United States as an 

investment adviser.417 Section 202(a)(30) authorizes the Commission to increase the $25 million 

threshold ―in accordance with the purposes of this title.‖418

Today we are adopting, substantially as proposed, new rule 202(a)(30)-1, which defines 

certain terms in section 202(a)(30) for use by advisers seeking to avail themselves of the foreign 

private adviser exemption, including: (i) ―investor;‖ (ii) ―in the United States;‖ (iii) ―place of 

business;‖ and (iv) ―assets under management.‖419 We are also including in rule 202(a)(30)-1 

the safe harbor and many of the client counting rules that appeared in rule 203(b)(3)-1.

 

415 One commenter suggested that a non-U.S. adviser with no place of business in the United States 

would not be subject to the Advisers Act unless the adviser has at least one direct U.S. client. See

Katten Foreign Advisers Letter. See also ABA Letter. We note that section 203(a) of the 

Advisers Act provides that an adviser may not, unless registered, make use of any means or 

instrumentality of interstate commerce in connection with its business as an investment adviser.

Hence, whether a non-U.S. adviser with no place of business in the United States and no U.S. 

clients would be subject to registration depends on whether there is sufficient use of U.S. 

jurisdictional means. See also supra note 334.

416 Subparagraph (B) of section 202(a)(30) refers to the number of ―clients and investors in the 

United States in private funds,‖ while subparagraph (C) refers to assets of ―clients in the United 

States and investors in the United States in private funds‖ (emphasis added). As noted in the 

Proposing Release, we interpret these provisions consistently so that only clients in the United 

States and investors in the United States would be counted for purposes of subparagraph (B). See

Proposing Release, supra note 26, at n.225.

417 In addition, the exemption is not available to an adviser that ―acts as (I) an investment adviser to 

any investment company registered under the [Investment Company Act]; or (II) a company that 

has elected to be a business development company pursuant to section 54 of [that Act], and has 

not withdrawn its election.‖ Section 202(a)(30)(D)(ii). As noted in the Proposing Release, we 

interpret subparagraph (II) to prohibit an adviser that advises a business development company 

from relying on the exemption. See Proposing Release, supra note 26, at n.226.

418 Section 202(a)(30)(C).

419 Rule 202(a)(30)-1(c).
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1. Clients

Rule 202(a)(30)-1 includes a safe harbor for advisers to count clients for purposes of the 

definition of ―foreign private adviser‖ that is similar to the safe harbor that has been included in 

rule 203(b)(3)-1.420 The commenter that generally addressed this aspect of our proposed rule 

agreed with our approach,421 which was designed to apply a well-developed body of law to give 

effect to a statutory provision with a similar purpose. 

New rule 202(a)(30)-1 allows an adviser to treat as a single client a natural person and: 

(i) that person‘s minor children (whether or not they share the natural person‘s principal 

residence); (ii) any relative, spouse, spousal equivalent, or relative of the spouse or of the spousal 

equivalent of the natural person who has the same principal residence;422 (iii) all accounts of 

which the natural person and/or the person‘s minor child or relative, spouse, spousal equivalent, 

or relative of the spouse or of the spousal equivalent who has the same principal residence are 

the only primary beneficiaries; and (iv) all trusts of which the natural person and/or the person‘s 

minor child or relative, spouse, spousal equivalent, or relative of the spouse or of the spousal 

 

420 Rule 203(b)(3)-1, which we are rescinding with the Implementing Adopting Release, provided a 

safe harbor for determining who may be deemed a single client for purposes of the private adviser 

exemption. We are not, however, carrying over from rule 203(b)(3)-1 a provision that 

distinguishes between advisers whose principal places of business are inside or outside of the 

United States. See rule 203(b)(3)-1(b)(5). Under the definition of ―foreign private adviser,‖ an 

adviser relying on the exemption may not have any place of business in the United States. See 

section 402 of the Dodd-Frank Act (defining ―foreign private adviser‖). We are also not 

including rule 203(b)(3)-1(b)(7), which specifies that a client who is an owner of a private fund is 

a resident where the client resides at the time of the client‘s investment in the fund. The 

provision was vacated by a federal court in Goldstein, supra note 14. As discussed below, we are 

including a provision in rule 202(a)(30)-1 that addresses when an adviser must determine if a 

client or investor is ―in the United States‖ for purposes of the exemption. See infra note 476 and 

accompanying text.

421 See Katten Foreign Advisers Letter.

422 As suggested by a commenter, we incorporated in rule 202(a)(30)-1(a)(1) the concept of a 

―spousal equivalent,‖ which we define by reference to rule 202(a)(11)(G)-1(d)(9) as ―a cohabitant 

occupying a relationship generally equivalent to that of a spouse.‖ See ABA Letter.
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equivalent who has the same principal residence are the only primary beneficiaries.

423

 Rule 

202(a)(30)-1 also permits an adviser to treat as a single ―client‖ (i) a corporation, general 

partnership, limited partnership, limited liability company, trust, or other legal organization to 

which the adviser provides investment advice based on the legal organization‘s investment 

objectives, and (ii) two or more legal organizations that have identical shareholders, partners, 

limited partners, members, or beneficiaries.424

As proposed, we are omitting the ―special rule‖ providing advisers with the option of not 

counting as a client any person for whom the adviser provides investment advisory services 

without compensation.425 Some commenters argued that an adviser should not have to count 

such persons, who may be employees and principals of the firm and their family members.426 

But as we explained in the Proposing Release, allowing an adviser not to count as clients 

persons in the United States who do not compensate the adviser would allow certain advisers to 

 

423 Rule 202(a)(30)-1(a)(1). If a client relationship involving multiple persons does not fall within 

the rule, whether the relationship may appropriately be treated as a single ―client‖ depends on the 

facts and circumstances.

424 Rule 202(a)(30)-1(a)(2). In addition, rule 202(a)(30)-1(b)(1) through (3) contain the following 

related ―special rules:‖ (1) an adviser must count a shareholder, partner, limited partner, member, 

or beneficiary (each, an ―owner‖) of a corporation, general partnership, limited partnership, 

limited liability company, trust, or other legal organization, as a client if the adviser provides 

investment advisory services to the owner separate and apart from the investment advisory 

services provided to the legal organization; (2) an adviser is not required to count an owner as a 

client solely because the adviser, on behalf of the legal organization, offers, promotes, or sells 

interests in the legal organization to the owner, or reports periodically to the owners as a group 

solely with respect to the performance of or plans for the legal organization‘s assets or similar 

matters; and (3) any general partner, managing member or other person acting as an investment 

adviser to a limited partnership or limited liability company must count the partnership or limited 

liability company as a client.

425 See rule 203(b)(3)-1(b)(4).

426 See Dechert General Letter (―In many instances, advisers manage the assets of employees and 

principals of the firm and their family members, and use such services as a legitimate 

compensation arrangement to retain talented employees.‖); Katten Foreign Advisers Letter 

(―Such persons are likely to be in a special relationship with the adviser that allows them to 

benefit from the advisers‘ investment advice without having to pay.‖). See also ABA Letter.
- 106 -

avoid registration through reliance on the foreign private adviser exemption despite the fact that, 

as those commenters acknowledge, the adviser provides advisory services to those persons.427

The new rule includes two provisions that clarify that advisers need not double-count 

private funds and their investors under certain circumstances.428 One provision, as proposed, 

specifies that an adviser need not count a private fund as a client if the adviser counted any 

investor, as defined in the rule, in that private fund as an investor in that private fund for 

purposes of determining the availability of the exemption.429 The other provision, recommended 

by commenters,430 clarifies that an adviser is not required to count a person as an investor if the 

adviser counts such person as a client of the adviser.431 Thus, a client who is also an investor in a 

private fund advised by the adviser would only be counted once.

2. Private Fund Investor

Section 202(a)(30) provides that a ―foreign private adviser‖ eligible for the new 

 

427 Cf. Form ADV: Glossary (stating that for purposes of Form ADV, the term ―client‖ ―includes 

clients from which [an adviser] receives no compensation . . . .‖). We also are adopting in the 

Implementing Adopting Release a uniform method for calculating assets under management for 

regulatory purposes, including availability of the foreign private adviser exemption, that requires 

advisers to include in that calculation assets they manage without compensation. See

Implementing Adopting Release, supra note 32, discussion at section II.A.3. Requiring foreign 

private advisers to treat as clients persons from whom they receive no compensation is consistent 

with the use of this new uniform method of calculating assets under management for regulatory 

purposes.

428 See rule 202(a)(30)-1(b)(4)-(5).

429 See rule 202(a)(30)-1(b)(4); 202(a)(30)-1(c)(2). See also infra Section II.C.2 (discussing the 

definition of investor). This provision is applicable only for purposes of determining whether an 

adviser has fewer than 15 clients in the United States and investors in the United States in private 

funds it advises under section 202(a)(30)(B) of the foreign private adviser exemption. It does not 

apply to the determination of the assets under management relevant for purposes of that 

exemption under section 202(a)(30)(C). As a result, an adviser must include the assets of a 

private fund that is a client in the United States even if the adviser may exclude the private fund 

when determining whether the adviser has fewer than 15 clients or investors in the United States. 

See also infra note 499. 

430 See ABA Letter; Katten Foreign Advisers Letter.

431 See rule 202(a)(30)-1(b)(5). 
- 107 -

registration exemption cannot have more than 14 clients ―or investors in the United States in 

private funds‖ advised by the adviser. Rule 202(a)(30)-1 defines an ―investor‖ in a private fund 

as any person who would be included in determining the number of beneficial owners of the 

outstanding securities of a private fund under section 3(c)(1) of the Investment Company Act, or 

whether the outstanding securities of a private fund are owned exclusively by qualified 

purchasers under section 3(c)(7) of that Act.432 In addition, a beneficial owner of short-term 

paper issued by the private fund also is an ―investor,‖ notwithstanding that holders of short-term 

paper need not be counted for purposes of section 3(c)(1).433 Finally, in order to avoid doublecounting, the rule clarifies that an adviser may treat as a single investor any person who is an 

investor in two or more private funds advised by the investment adviser.434 We are adopting rule 

202(a)(30)-1 substantially as proposed. In a modification to the proposal, however, we are not 

including knowledgeable employees in the definition of ―investor.‖435

The term ―investor‖ is not currently defined under the Advisers Act or the rules under the 

Advisers Act. We are adopting the new definition to provide for consistent application of the 

statutory provision and to prevent non-U.S. advisers from circumventing the limitations in 

section 203(b)(3). As discussed in the Proposing Release, we believe that defining the term 

―investor‖ by reference to sections 3(c)(1) and 3(c)(7) of the Investment Company Act will best 

achieve these purposes. 

Commenters who addressed the issue agreed with our decision to define investor for 

 

432 See rule 202(a)(30)-1(c)(2)(i); supra notes 10 and 12 and accompanying text. We note that the 

definition of ―investor‖ in rule 202(a)(30)-1 is for purposes of the foreign private adviser 

exemption and does not limit the scope of that term for purposes of rule 206(4)-8.

433 See rule 202(a)(30)-1(c)(2)(ii).

434 See rule 202(a)(30)-1(c)(2), at note to paragraph (c)(2).

435 See rule 202(a)(30)-1(c)(2). See also infra notes 448-452 and accompanying text. 
- 108 -

purposes of this rule by reference to the well-developed understanding of ownership under 

sections 3(c)(1) and 3(c)(7).436 Funds and their advisers must determine who is a beneficial 

owner for purposes of section 3(c)(1) or whether an owner is a qualified purchaser for purposes 

of section 3(c)(7).437 More importantly, defining the term ―investor‖ by reference to sections 

3(c)(1) and 3(c)(7) places appropriate limits on the ability of a non-U.S. adviser to avoid 

application of the registration provisions of the Advisers Act by setting up intermediate accounts 

through which investors may access a private fund and not be counted for purposes of the 

exemption. Advisers must ―look through‖ nominee and similar arrangements to the underlying 

holders of private fund-issued securities to determine whether they have fewer than 15 clients 

and private fund investors in the United States.438 Holders of both equity and debt securities 

must be counted as investors.439

Under the new rule, an adviser will determine the number of investors in a private fund 

based on the facts and circumstances and in light of the applicable prohibition not to do 

indirectly, or through or by any other person, what is unlawful to do directly.440 Depending upon 

the facts and circumstances, persons other than the nominal holder of a security issued by a 

 

436 See ABA Letter; Dechert General Letter; Katten Foreign Advisers Letter.

437 See supra notes 10 and 12 and accompanying text. In the Proposing Release, we noted that 

typically a prospective investor in a private fund must complete a subscription agreement that 

includes representations or confirmations that it is qualified to invest in the fund and whether it is 

a U.S. person. This information is designed to allow the adviser (on behalf of the fund) to make 

the above determination. Therefore, an adviser seeking to rely on the foreign private adviser 

exemption will have ready access to this information.

438 Rule 202(a)(30)-1(c)(2). See generally sections 3(c)(1) and 3(c)(7) of the Investment Company 

Act.

439 Sections 3(c)(1) and 3(c)(7) of the Investment Company Act refer to beneficial owners and 

owners, respectively, of ―securities‖ (which is broadly defined in section 2(a)(36) of that Act to 

include debt and equity).

440 See section 208(d) of the Advisers Act; section 48(a) of the Investment Company Act.
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private fund may be counted as the beneficial owner under section 3(c)(1), or be required to be a 

qualified purchaser under section 3(c)(7).441 An adviser relying on the exemption would have to 

count such a person as an investor.

For example, the adviser to a master fund in a master-feeder arrangement would have to 

treat as investors the holders of the securities of any feeder fund formed or operated for the 

purpose of investing in the master fund rather than the feeder funds, which act as conduits.

442

 In 

addition, an adviser would need to count as an investor an owner of a total return swap on the 

private fund because that arrangement effectively provides the risks and rewards of investing in 

the private fund to the swap owner.443 Whether an owner of another type of instrument 

 

441 As noted above, we have recognized that in certain circumstances it is appropriate to ―look 

through‖ an investor (i.e., attribute ownership of a private fund to another person who is the 

ultimate owner). See, e.g., Privately Offered Investment Companies, Investment Company Act 

Release No. 22597 (Apr. 3, 1997) [62 FR 17512 (Apr. 9, 1997)] (―NSMIA Release‖) (―The 

Commission understands that there are other forms of holding investments that may raise 

interpretative issues concerning whether a Prospective Qualified Purchaser  ̳owns‘ an 

investment. For instance, when an entity that holds investments is the  ̳alter ego‘ of a Prospective 

Qualified Purchaser (as in the case of an entity that is wholly owned by a Prospective Qualified 

Purchaser who makes all the decisions with respect to such investments), it would be appropriate 

to attribute the investments held by such entity to the Prospective Qualified Purchaser.‖).

442 A ―master-feeder fund‖ is an arrangement in which one or more funds with the same or consistent 

investment objectives (―feeder funds‖) invest all or substantially all of their assets in a single fund 

(―master fund‖) with the same or consistent investment objective and strategies. We have taken 

the same approach within our rules that require a private fund to ―look through‖ any investor that 

is formed or operated for the specific purpose of investing in a private fund. See rule 2a51-3(a) 

under the Investment Company Act (17 CFR 270.2a51-3(a)) (a company is not a qualified 

purchaser if it is ―formed for the specific purpose of acquiring the securities‖ of an investment 

company that is relying on section 3(c)(7) of the Investment Company Act, unless each of the 

company‘s beneficial owners is also a qualified purchaser). See also NSMIA Release, supra note 

441 (explaining that rule 2a51-3(a) would limit the possibility that ―a company will be able to do 

indirectly what it is prohibited from doing directly [by organizing] . . . a  ̳qualified purchaser‘ 

entity for the purpose of making an investment in a particular Section 3(c)(7) Fund available to 

investors that themselves did not meet the definition of  ̳qualified purchaser‘‖).

443 One commenter argued that the swap counterparty is not required to hedge its exposure by 

investing the full notional amount in the private fund. See Dechert General Letter. We do not 

find this distinction persuasive in situations in which the adviser knows or should know of the 

existence of the swap. See infra discussion accompanying and following note 447. 
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referencing a private fund would be counted as the beneficial owner under section 3(c)(1), or be 

required to be a qualified purchaser under section 3(c)(7), would depend on the facts and 

circumstances.

Several commenters generally disagreed that advisers should be required to ―look 

through‖ total return swaps or similar instruments or master-feeder arrangements in at least 

certain circumstances, arguing among other things that these instruments or arrangements serve 

legitimate business purposes.444 As we explain above, however, the requirement to count as 

investors persons other than the nominal holder of a security issued by a private fund is derived

from provisions in both the Advisers Act and the Investment Company Act prohibiting a person 

from doing indirectly, or through or by any other person, what is unlawful to do directly, and 

from sections 3(c)(1) and 3(c)(7).445

Some commenters also argued that ―looking through‖ a total return swap or similar 

instrument would be impractical or unduly burdensome in certain circumstances, including 

situations in which the adviser did not participate in the swap‘s creation or know of its 

existence.446 An issuer relying on section 3(c)(7) may treat as a qualified purchaser any person 

whom the issuer reasonably believes is a qualified purchaser, and the definition of investor that 

we are adopting today provides that an adviser counts as investors those persons who must be 

qualified purchasers under section 3(c)(7). Therefore, an adviser may treat as an investor a 

person the adviser reasonably believes is the actual investor.

447

 Similarly, if an adviser 

 

444 See, e.g., ABA Letter; Dechert General Letter; EFAMA Letter.

445 See supra notes 440-443 and accompanying text. 

446 See, e.g., Dechert General Letter; EFAMA Letter.

447 Rule 202(a)(30)-1(c)(2) defines the term ―investor‖ generally to include persons that must be 

counted for purposes of section 3(c)(1) of the Investment Company Act or qualified purchasers 

for purposes of section 3(c)(7) of that Act. See supra notes 432-443 and accompanying text. 
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reasonably believes that an investor is not ―in the United States,‖ the adviser may treat the 

investor as not being ―in the United States.‖ 

The final rule, unlike the proposal, does not treat as investors beneficial owners who are 

―knowledgeable employees‖ with respect to the private fund, and certain other persons related to 

such employees (we refer to them, collectively, as ―knowledgeable employees‖).448 In 

formulating our proposal to include knowledgeable employees in the definition of investor, we 

were concerned that excluding knowledgeable employees from the definition of investor would 

allow certain advisers to avoid registration by relying on the foreign private adviser 

exemption.449 A number of commenters opposed our proposal.450 In particular, they argued that 

the proposed approach was inconsistent with Congressional and prior Commission 

determinations that such employees do not need the protections of the Investment Company 

Act.451 

 

Advisers to private funds relying on section 3(c)(7) may under Investment Company Act rule 

2a51-1(h) treat as qualified purchasers those persons they reasonably believe are qualified 

purchasers. Persons who must be qualified purchasers for purposes of section 3(c)(7) generally 

would be the same as those who must be counted for purposes of section 3(c)(1). Accordingly, 

advisers may, for purposes of determining their investors in the United States under rule 

202(a)(30)-1, treat as an investor a person the adviser reasonably believes is the actual investor.

448 See proposed rule 202(a)(30)-1(c)(1)(i) (referencing rule 3c-5 under the Investment Company Act 

(17 CFR 270.3c-5(b)), which excludes from the determinations under sections 3(c)(1) and 3(c)(7) 

of that Act any securities beneficially owned by knowledgeable employees of a private fund; a 

company owned exclusively by knowledgeable employees; and any person who acquires 

securities originally acquired by a knowledgeable employee through certain transfers of interests, 

such as a gift or a bequest). 

449 See Proposing Release, supra note 26, at n.250 and accompanying text. 

450 See Dechert General Letter; Katten Foreign Advisers Letter; Seward Letter; Shearman Letter.

451 See, e.g., Dechert General Letter (―[The] Commission promulgated the knowledgeable employee 

safe-harbors for sections 3(c)(1) and 3(c)(7) in response to the Congressional mandate in the 

National Securities Markets Improvement Act of 1996 to allow certain informed insiders to invest 

in a private fund without causing the fund to lose its exception under the 1940 Act.‖); Shearman 

Letter (the proposed approach is ―contrary to a long history of recognizing that knowledgeable 

employees should be treated differently than other investors and that their privileged status with 
- 112 -

Upon further consideration, we have determined that the same policy considerations that 

justify disregarding knowledgeable employees for purposes of other provisions provide a valid 

basis for excluding them from the definition of ―investor‖ under the foreign private adviser 

exemption.452 Treating knowledgeable employees in the same manner for purposes of the 

definition of investor and sections 3(c)(1) and 3(c)(7) will also simplify compliance with 

regulatory requirements imposed by both the Advisers Act and the Investment Company Act. 

The new rule requires advisers to treat as investors beneficial owners of ―short-term 

paper‖453 issued by the private fund.454 These persons are not counted as beneficial owners for 

purposes of section 3(c)(1) but must be qualified purchasers under section 3(c)(7).455 Some 

commenters opposed this approach, arguing that holders of short-term paper do not make an 

investment decision but rather are creditors making a credit risk evaluation.456 We disagree. The 

 

their organizations in terms of influence and access to information reasonably limits the public‘s 

interest in their protection‖).

452 See Advisers Act rule 205-3(d)(1)(iii) (specifying that knowledgeable employees are included 

among the types of clients to whom the adviser may charge performance fees); Advisers Act rule 

202(a)(11)(G)-1 (permitting a family office excluded from the definition of investment adviser 

under the Advisers Act to provide investment advice to its knowledgeable employees). These 

provisions reflect a policy determination that knowledgeable employees are likely to be in a 

position or have a level of knowledge and experience in financial matters sufficient to be able to 

evaluate the risks and take steps to protect themselves.

453 See rule 202(a)(30)-1(c)(2)(ii) (referencing the definition of ―short-term paper‖ contained in 

section 2(a)(38) of the Investment Company Act, which defines ―short-term paper‖ to mean ―any 

note, draft, bill of exchange, or banker‘s acceptance payable on demand or having a maturity at 

the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal 

thereof payable on demand or having a maturity likewise limited; and such other classes of 

securities, of a commercial rather than an investment character, as the Commission may designate 

by rules and regulations‖).

454 See rule 202(a)(30)-1(c)(2)(ii).

455 See sections 3(c)(1) and 3(c)(7) of the Investment Company Act.

456 See ABA Letter (―[H]olders of short-term securities do not view themselves as making an 

investment decision in connection with their extension of credit, but rather assess the risk of 

holding a private fund‘s short-term paper based on credit risk.‖); Shearman Letter (―[A] lender to 
- 113 -

acquisition of those instruments involves an investment decision, although the considerations 

involved in that decision might differ from the considerations involved in a decision to make an 

equity investment.

One commenter asserted that treating holders of short-term paper as investors could result 

in a U.S. commercial lender to a fund being treated as an investor, leading non-U.S. advisers to 

avoid U.S. lenders.457 Unless the extension of credit by a fund‘s broker-dealer or custodian 

bank results in the issuance of a security by the fund to its creditor, the creditor would not be 

considered an investor for purposes of the foreign private adviser exemption.458

As we stated in the Proposing Release, there appears to be no valid reason to treat as 

investors all debt holders except holders of short-term paper.459 Certain issuers continually roll 

over short-term paper and effectively use it as a permanent source of capital, further supporting 

our view that there appears to be no reason to treat holders of short-term paper differently than 

other longer-term debt holders for purposes of the exemption.460 Moreover, a private fund‘s 

 

a fund, while it makes a  ̳credit analysis,‘ does not deploy capital based on the perceived skill of 

the fund manager and so is not an investor by any traditional measure.‖). 

457 See Shearman Letter.

458 See Reves v. Ernst & Young, 494 U.S. 56 (1990).

459 See Proposing Release, supra note 26, at n.251 and accompanying text. One commenter agreed 

that we should not treat short- and longer-term debt holders differently for purposes of the 

exemption. See ABA Letter (asking that we exclude all holders of conventional debt from the 

definition of investor). 

460 As we noted in the Proposing Release, because commercial paper issuers often refinance the 

repayment of maturing commercial paper with newly issued commercial paper, they may face 

roll-over risk, i.e., the risk that investors may not be willing to refinance maturing commercial 

paper. See Proposing Release, supra note 26, at n.134. These risks became particularly apparent 

for issuers of asset-backed commercial paper beginning in August 2007. At that time, structured 

investment vehicles (―SIVs‖), which are off-balance sheet funding vehicles sponsored by 

financial institutions, issued commercial paper to finance the acquisition of long-term assets, 

including residential mortgages. As a result of problems in the residential home mortgage 

market, short-term investors began to avoid asset-backed commercial paper tied to residential 

mortgages, regardless of whether the securities had substantial exposure to sub-prime mortgages. 
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losses directly affect the interests of holders of short-term paper in the fund just as they affect the 

interests of other debt holders in the fund.461 In contrast to the treatment of knowledgeable 

employees, holders of short-term paper must be qualified purchasers under section 3(c)(7), the 

more recent of the two exclusions under the Investment Company Act on which private funds 

rely.462 Thus, we are requiring advisers to count as investors all debt holders, including holders 

of short-term paper. 

Some commenters expressed concern that the look-through requirement contained in the 

statutory definition of a ―foreign private adviser‖ could impose significant burdens on advisers to 

non-U.S. funds, including non-U.S. retail funds publicly offered outside of the United States.463 

Two of these commenters stated, for example, that in their view a non-U.S. fund could be 

considered a private fund as a result of independent actions of U.S. investors, such as if a nonU.S. shareholder of a non-U.S. fund moves to the United States and purchases additional 

 

Unable to roll over their commercial paper, SIVs suffered severe liquidity problems and 

significant losses. See Money Market Fund Reform, Investment Company Act Release No. 28807 

(June 30, 2009) [74 FR 32688 (July 8, 2009)] (―Money Market Fund Reform Release‖) at nn.37-

39 and preceding and accompanying text; MARCIN KACPERCZYK AND PHILIPP SCHNABL, WHEN 

SAFE PROVED RISKY: COMMERCIAL PAPER DURING THE FINANCIAL CRISIS OF 2007-2009 (Nov. 

2009).

461 As discussed in the Proposing Release, various types of investment vehicles make significant use 

of short-term paper for financing purposes so holders of this type of security are, in practice, 

exposed to the investment results of the security‘s issuer. See Proposing Release, supra note 26, 

at n.251. See also Money Market Fund Reform Release, supra note 460, at nn.37-39 and 

preceding and accompanying text (discussing how money market funds were exposed to 

substantial losses during 2007 as a result of exposure to debt securities issued by structured 

investment vehicles).

462 Congress added section 3(c)(7) to the Investment Company in 1996 as part of the National 

Securities Markets Improvement Act of 1996. Section 3(c)(1) was included in the Investment 

Company Act when it was enacted in 1940. 

463 See AFG Letter; Dechert Foreign Adviser Letter; EFAMA Letter; Shearman Letter.
- 115 -

shares.464 If these funds were ―private funds,‖ their advisers would, if seeking to rely on the 

foreign private adviser exemption, be required to determine the number of private fund investors 

in the United States and the assets under management attributable to them. 

As we explain above, if an adviser reasonably believes that an investor is not ―in the 

United States,‖ the adviser may treat the investor as not being ―in the United States.‖ Moreover, 

we understand that non-U.S. private funds currently count or qualify their U.S. investors in order 

to avoid regulation under the Investment Company Act.465 A non-U.S. adviser would need to 

count the same U.S. investors (except for holders of short-term paper with respect to a fund 

relying on section 3(c)(1)) in order to rely on the foreign private adviser exemption. In this 

respect, therefore, the look-through requirement of the foreign private adviser exemption will 

generally not impose any new burden on advisers to non-U.S. funds.

3. In the United States

Section 202(a)(30)‘s definition of ―foreign private adviser‖ employs the term ―in the 

United States‖ in several contexts, including: (i) limiting the number of – and assets under 

management attributable to – an adviser‘s ―clients‖ ―in the United States‖ and ―investors in the 

 

464 Dechert Foreign Adviser Letter; EFAMA Letter. See also Comment Letter of Association 

Française de la Gestion financière (Jun. 14, 2011) (recommended that ―investment funds that 

already are strictly regulated and supervised by European Union regulators should be excluded 

from the scope of Title IV of the Dodd Frank Act and should not be considered as  ̳private 

funds‘‖ because, among other reasons, the commenter‘s management company members ―very 

often‖ do not know the identities of their funds‘ investors, and ―therefore should not [] be held 

responsible if, unbeknownst to them, US persons decide to invest in their funds‖). 

465 This practice is consistent with positions our staff has taken in which the staff has stated it would 

not recommend enforcement action in certain circumstances. See, e.g., Goodwin Procter NoAction Letter, supra note 294; Touche Remnant No-Action Letter, supra note 294. See also 

sections 7(d), 3(c)(1), and 3(c)(7) of the Investment Company Act. See also, e.g., Canadian TaxDeferred Retirement Savings Accounts Release, supra note 294, at n.23 (―The Commission and 

its staff have interpreted section 7(d) to generally prohibit a foreign fund from making a U.S. 

private offering if that offering would cause the securities of the fund to be beneficially owned by 

more than 100 U.S. residents.‖).
- 116 -

United States‖ in private funds advised by the adviser; (ii) exempting only those advisers without 

a place of business ―in the United States;‖ and (iii) exempting only those advisers that do not 

hold themselves out to the public ―in the United States‖ as an investment adviser.466 Today, we 

are defining the term ―in the United States‖ to clarify the term for all of the above purposes as 

well as to provide specific instructions as to the relevant time for making the related 

determination.

New rule 202(a)(30)-1 defines ―in the United States,‖ as proposed, generally by 

incorporating the definition of a ―U.S. person‖ and ―United States‖ under Regulation S.467 In 

particular, we are defining ―in the United States‖ to mean: (i) with respect to any place of 

business, any such place that is located in the ―United States,‖ as defined in Regulation S;468

(ii) with respect to any client or private fund investor in the United States, any person who is a 

―U.S. person‖ as defined in Regulation S,469 except that any discretionary account or similar 

account that is held for the benefit of a person ―in the United States‖ by a non-U.S. dealer or 

other professional fiduciary is deemed ―in the United States‖ if the dealer or professional 

fiduciary is a related person of the investment adviser relying on the exemption; and (iii) with 

respect to the public, in the ―United States,‖ as defined in Regulation S.470 

We believe that the use of Regulation S is appropriate for purposes of the foreign private 

adviser exemption because Regulation S provides more specific rules when applied to various 

 

466 See section 402 of the Dodd-Frank Act. 

467 Rule 202(a)(30)-1(c)(3). As discussed above, we are also referencing Regulation S‘s definition 

of a ―U.S. person‖ for purposes of the definition of ―United States person‖ in rule 203(m)-1. See

supra Section II.B.4. 

468 See 17 CFR 230.902(l).

469 See 17 CFR 230.902(k).

470 See 17 CFR 230.902(l).
- 117 -

types of legal structures.471 Advisers, moreover, already apply the Regulation S definition of 

U.S. person with respect to both clients and investors for other purposes and therefore are 

familiar with the definition.472 The references to Regulation S with respect to a place of business 

―in the United States‖ and the public in the ―United States‖ also allows us to maintain 

consistency across our rules. Two commenters specifically supported our approach.473 

Similar to our approach in new rule 203(m)-1(d)(8) and as we proposed,474 we are 

treating as persons ―in the United States‖ for purposes of the foreign private adviser exemption 

certain persons that would not be considered ―U.S. persons‖ under Regulation S. For example, 

we are treating as ―in the United States‖ any discretionary account owned by a U.S. person and 

managed by a non-U.S. affiliate of the adviser in order to discourage non-U.S. advisers from 

creating such discretionary accounts with the goal of circumventing the exemption‘s limitation 

with respect to advising assets of persons in the United States.475 

We also are including the note to paragraph (c)(3)(i) specifying that for purposes of that 

definition, a person who is ―in the United States‖ may be treated as not being ―in the United 

 

471 See supra notes 404-407 and accompanying text. 

472 As we noted in the Proposing Release, many non-U.S. advisers identify whether a client is a 

―U.S. person‖ under Regulation S in order to determine whether the client may invest in certain 

private funds and certain private placement offerings exempt from registration under the 

Securities Act. See Proposing Release, supra note 26, at n.259. With respect to ―investors,‖ our 

staff has generally taken the interpretive position that an investor that does not meet that 

definition is not a U.S. person when determining whether a non-U.S. private fund meets the 

section 3(c)(1) and 3(c)(7) counting or qualification requirements. See id., at n.217. Many nonU.S. advisers, moreover, currently determine whether a private fund investor is a ―U.S. person‖ 

under Regulation S for purposes of the safe harbor for offshore offers and sales.

473 Dechert Foreign Adviser Letter; Dechert General Letter. Commenters generally addressed our 

proposal to rely on Regulation S to identify U.S. persons within the context of the private fund 

adviser exemption. See supra Section II.B.4.

474 See supra Section II.B.4 (discussing the definition of United States persons and the treatment of 

discretionary accounts).

475 Rule 202(a)(30)-1(c)(3)(i). See supra note 409. 
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States‖ if the person was not ―in the United States‖ at the time of becoming a client or, in the 

case of an investor in a private fund, each time the investor acquires securities issued by the 

fund.476 As we explained in the Proposing Release, the note is designed to reduce the burden of 

having to monitor the location of clients and investors on an ongoing basis, and to avoid placing 

an adviser in a position whereby it might have to choose between registering with the 

Commission or terminating the relationship with any client that moved to the United States, or 

redeeming the interest in the private fund of any investor that moved to the United States.477

Several commenters supported the inclusion of the note.478 Some commenters, however, 

advocated expanding the note to treat a private fund investor in the same way as a client so that 

additional investments in a fund made after moving to the United States would not cause the 

investor to become a U.S. person.479 They argued that, as discussed above, advisers to non-U.S. 

funds should not be required to ―look through‖ these funds to ensure that their investors who 

purchased shares while outside of the United States did not subsequently relocate to the United 

States and purchase additional shares.

As we explain above, if an adviser reasonably believes that an investor is not ―in the 

United States,‖ the adviser may treat the investor as not being ―in the United States.‖ In 

 

476 Rule 202(a)(30)-1, at note to paragraph (c)(3)(i) (―A person who is in the United States may be 

treated as not being in the United States if such person was not in the United States at the time of 

becoming a client or, in the case of an investor in a private fund, each time the investor acquires 

securities issued by the fund.‖). We revised the note to provide that it applies ―each time‖ the 

investor acquires securities issued by the fund. Cf. proposed rule 202(a)(30)-1, at note to 

paragraph (c)(2)(i). This change to the note as proposed more clearly reflects the note‘s intended 

operation. 

477 See Proposing Release, supra note 26, at n.257 and accompanying and following text.

478 See, e.g., Dechert General Letter (―The note provides helpful relief at a time when advisory 

clients often move across international borders while keeping an existing relationship with a 

financial institution.‖). See also ABA Letter; Dechert Foreign Adviser Letter. 

479 See Dechert Foreign Adviser Letter; Dechert General Letter; EFAMA Letter.
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addition, we understand that, based on no-action positions taken by our staff, non-U.S. funds do

not consider for purposes of section 3(c)(1) beneficial owners who were not U.S. persons at the 

time they invested in the fund, but do consider those beneficial owners if they make additional 

purchases in the same fund after relocating to the United States.480 The note is consistent with 

the funds‘ current practices, and thus generally should not impose any new burdens on non-U.S. 

funds. The note also is consistent with section 3(c)(7), which requires an investor to be a 

qualified purchaser at the time the investor acquires the securities. 

The Investment Funds Institute of Canada (IFIC) and the Investment Industry 

Association of Canada (IIAC) urged that, for purposes of the look-through provision, the 

Commission allow non-U.S. advisers not to count persons (and their assets) who invest in a 

foreign private fund through certain Canadian retirement accounts (―Participants‖) after having 

moved to the United States.481 The commenters noted that this treatment would be consistent 

with rule 7d-2 under the Investment Company Act and certain related rules.482 We agree. A 

non-U.S. fund sold to Participants would be deemed a private fund if it conducted a private 

 

480 See Investment Funds Institute of Canada, SEC Staff No-Action Letter (Mar. 4, 1996) (staff also 

stated its belief that, to the extent that a dividend reinvestment plan of a non-U.S. fund is 

consistent with the requirements of Securities Act Release No. 929 (July 29, 1936), such a plan 

would not involve an offer for purposes of Section 7(d) of the Investment Company Act). See 

also Goodwin Procter No-Action Letter, supra note 294; Touche Remnant No-Action Letter, 

supra note 294.

481 See IFIC Letter; Comment Letter of Investment Industry Association of Canada (Jan. 18, 2011) 

(―IIAC Letter‖).

482 We adopted rule 7d-2, along with rule 237 under the Securities Act, in order to allow Participants 

who move to the United States to continue to manage their Canadian retirement accounts. See

Offer and Sale of Securities to Canadian Tax-Deferred Retirement Savings Accounts, Securities 

Act Release No. 7860 (June 7, 2000) [65 FR 37672 (June 15, 2000)]. U.S. registration 

requirements were affecting those Participants‘ ability to purchase or exchange securities for such 

accounts. Rule 7d-2 generally allows non-U.S. funds to treat as a private offering certain 

offerings to Participants who are in the United States.
- 120 -

offering in the United States,483 but we have previously stated that Participants need not be 

counted toward the 100-investor limit for purposes of section 3(c)(1).484 As a result, and based 

on the same policy considerations embodied in rule 7d-2, we believe that a non-U.S. adviser 

should not be required to treat Participants as investors in the United States under rule 

202(a)(30)-1 with respect to investments they make after moving to the United States if the fund 

is in compliance with rule 7d-2.485

4. Place of Business

New rule 202(a)(30)-1, by reference to rule 222-1,486 defines ―place of business‖ to mean 

any office where the investment adviser regularly provides advisory services, solicits, meets 

with, or otherwise communicates with clients, and any location held out to the public as a place 

where the adviser conducts any such activities.487 We are adopting this provision as proposed 

because we believe the definition appropriately identifies a location where an adviser is doing 

business for purposes of section 202(a)(30) of the Advisers Act and thus provides a basis for an 

adviser to determine whether it can rely on the exemption in section 203(b)(3) of the Advisers 

Act for foreign private advisers. As discussed in the Proposing Release, because both the 

Commission and the state securities authorities use this definition to identify an unregistered 

 

483 See supra notes 294 and 313.

484 See Canadian Tax-Deferred Retirement Savings Accounts Release, supra note 294, at n.23.

485 This interpretation only applies with respect to Participants‘ investments in Eligible Securities 

issued by a Qualified Company, as these terms are defined in rule 7d-2.

486 Rule 222-1(a) (defining ―place of business‖ of an investment adviser as: ―(1) An office at which 

the investment adviser regularly provides investment advisory services, solicits, meets with, or 

otherwise communicates with clients; and (2) Any other location that is held out to the general 

public as a location at which the investment adviser provides investment advisory services, 

solicits, meets with, or otherwise communicates with clients.‖).

487 Rule 202(a)(30)-1(c)(4).
- 121 -

foreign adviser‘s place of business for purposes of determining regulatory jurisdiction,488 we 

believe it is logical as well as efficient to use the rule 222-1(a) definition of ―place of business‖ 

for purposes of the foreign private adviser exemption. The two commenters that considered the 

proposed definition of ―place of business‖ by reference to rule 222-1 agreed with this analysis.489

Some commenters asked us to clarify that a ―place of business‖ would not include an

office in the United States where a non-U.S. adviser solely conducts research, communicates 

with non-U.S. clients, or performs administrative services and back-office books and 

recordkeeping activities.490 Under rule 202(a)(30)-1, as under rule 203(m)-1, an adviser must 

determine whether it has a place of business, as defined in rule 222-1, in the United States in 

light of the relevant facts and circumstances.491 For example, any office from which an adviser 

regularly communicates with its clients, whether U.S. or non-U.S., would be a place of 

business.492 In addition, an office or other location where an adviser regularly conducts research 

would be a place of business because research is intrinsic to the provision of investment advisory 

services.493 A place of business would not, however, include an office where an adviser solely 

performs administrative services and back-office activities if they are not activities intrinsic to 

 

488 See Proposing Release, supra note 26, at n.265 (explaining that, under section 222(d) of the 

Advisers Act, a state may not require an adviser to register if the adviser does not have a ―place of 

business‖ within, and has fewer than six clients resident in, the state).

489 See ABA Letter (―[W]e believe that the definition of place of business set forth in Rule 222-1 is 

appropriate . . . .‖); AIMA Letter (―We consider the definition of  ̳place of business‘ by reference 

to Rule 222-1 of the Advisers Act both logical and appropriate.‖). 

490 See, e.g., ABA Letter; AIMA Letter. 

491 As discussed above, investment advisers will also apply this provision for purposes of the private 

fund adviser exemption. See supra Section II.B.3.

492 Rule 222-1 does not distinguish between U.S. and non-U.S. clients.

493 That would include, for example, research conducted in order to produce non-public information 

relevant to the investments of, or the investment recommendations for, any of the adviser‘s 

clients. 
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providing investment advisory services and do not involve communicating with clients. 

A number of commenters sought guidance as to whether the activities of U.S. affiliates of 

non-U.S. advisers would be deemed to constitute places of business in the United States of the 

non-U.S. advisers.494 There is no presumption that a non-U.S. adviser has a place of business in 

the United States solely because it is affiliated with a U.S. adviser.495 A non-U.S. adviser might 

be deemed to have a place of business in the United States, however, if the non-U.S. adviser‘s 

personnel regularly conduct activities at an affiliate‘s place of business in the United States.

496

5. Assets Under Management

For purposes of rule 202(a)(30)-1 we are defining ―assets under management,‖ as 

proposed, by reference to the calculation of ―regulatory assets under management‖ for Item 5 of 

Form ADV.497 As discussed above, in Item 5 of Form ADV we are implementing a uniform 

method of calculating assets under management that can be used for several purposes under the 

Advisers Act, including the foreign private adviser exemption and the private fund adviser 

 

494 See, e.g., Debevoise Letter; Dechert Foreign Adviser Letter; EFAMA Letter. 

495 See infra note 506.

496 We have provided guidance as to whether certain activities would result in an investment adviser 

representative having a place of business as defined in rule 203A-3(b), which we believe also is 

applicable to an adviser‘s determination as to whether it has a U.S. place of business under rule 

222-1 (and therefore under rule 203(m)-1 or rule 203(a)(30)-1). We have explained that the 

definition in rule 203A-3(b) ―encompasses permanent and temporary offices as well as other 

locations at which an adviser representative may provide advisory services, such as a hotel or 

auditorium.‖ Rules Implementing Amendments to the Investment Advisers Act of 1940, 

Investment Advisers Act Release No. 1633 (May 15, 1997) [62 FR 28112 (May 22, 1997)]. We 

further explained that whether a temporary office or location is a place of business ―will turn on 

whether the adviser representative has let it generally be known that he or she will conduct 

advisory business at the location, rather than on the frequency with which the adviser 

representative conducts advisory business there.‖ Id. See also infra Section II.D.

497 See rule 202(a)(30)-1(c)(1); instructions to Item 5.F of Form ADV, Part 1A. As discussed above, 

we are taking the same approach under rule 203(m)-1. See supra Section II.B.2.a.
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exemption.

498

 Because the foreign private adviser exemption is also based on assets under 

management, we believe that all advisers should use the same method for calculating assets 

under management to determine if they are required to register or may be eligible for the 

exemption.499

We believe that uniformity in the method for calculating assets under management will 

result in more consistent asset calculations and reporting across the industry and, therefore, in a 

more coherent application of the Advisers Act‘s regulatory requirements and assessment of 

risk.500 One commenter specifically agreed that the uniform method should be applied for 

purposes of the foreign private adviser exemption.501 Most commenters addressed the

components of the new method of calculation in reference to the calculation of ―regulatory assets 

under management‖ under Form ADV, or with respect to the calculation of private fund assets 

for purposes of the private fund adviser exemption.502 We address these comments in the 

Implementing Adopting Release and in Section II.B.2.503

 

498 See supra Section II.B.2.a; Implementing Adopting Release, supra note 32, discussion at section 

II.A.3.

499 According to the statutory definition of ―foreign private adviser,‖ a non-U.S. adviser calculating 

the assets relevant for purposes of the foreign private adviser exemption would only include those 

assets under management (i.e., regulatory assets under management) that are ―attributable to 

clients in the United States and investors in the United States in private funds advised by the 

investment adviser.‖ See supra notes 416 and 429 and accompanying text and note 417. 

500 See supra Section II.B.2.a; Implementing Adopting Release, supra note 32, discussion at section 

II.A.3.

501 See Seward Letter.

502 See supra Section II.B.2.a; Implementing Adopting Release, supra note 32, discussion at section 

II.A.3. A few commenters raised the same arguments in favor of revising the method of 

calculation also with respect to the calculation under the foreign private adviser exemption. See,

e.g., ABA Letter; EFAMA Letter; Katten Foreign Advisers Letter (arguing that the method 

should exclude proprietary and knowledgeable employee assets, and assets for which the adviser 

receives no compensation).

503 See Implementing Adopting Release, supra note 32, discussion at section II.A.3. In addition, 

several commenters requested that we exercise our authority to increase the $25 million asset 
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D. Subadvisory Relationships and Advisory Affiliates

We generally interpret advisers as including subadvisers,504 and therefore believe it is 

appropriate to permit subadvisers to rely on each of the new exemptions, provided that 

subadvisers satisfy all terms and conditions of the applicable rule. 

We are aware that in many subadvisory relationships a subadviser has contractual privity 

with a private fund‘s primary adviser rather than the private fund itself. Although both the 

private fund and the fund‘s primary adviser may be viewed as clients of the subadviser, we 

would consider a subadviser eligible to rely on rule 203(m)-1 if the subadviser‘s services to the 

primary adviser relate solely to private funds and the other conditions of the rule are met. 

Similarly, a subadviser may be eligible to rely on section 203(l) if the subadviser‘s services to 

the primary adviser relate solely to venture capital funds and the other conditions of the rule are 

met.

We anticipated that an adviser with advisory affiliates could encounter interpretative 

issues as to whether it may rely on any of the exemptions discussed in this Release without 

taking into account the activities of its affiliates. The adviser, for example, might have advisory 

affiliates that are registered or that provide advisory services that the adviser itself could not 

 

threshold applicable to the foreign private adviser exemption. See, e.g., ABA Letter ($100 

million); AFG Letter ($150 million); AIMA Letter (at least $100 million); Comment Letter of 

Autorité des Marchés Financiers (Jan. 18, 2011) ($150 million); EVCA Letter ($100 or $150 

million); DLA Piper VC Letter ($250 million); Fulbright Letter ($500 million). We 

acknowledged in the Proposing Release that Section 204 of the Advisers Act provides us with the 

authority to raise the threshold, but we did not propose to do so. Therefore, we have not 

considered raising the threshold in connection with this rulemaking, but we will evaluate whether 

doing so may be appropriate in the future, consistent with a comment we received. See ABA 

Letter (asked that we ―monitor this issue . . . undertake dialogue with foreign regulators with 

respect to their supervisory regimes over investment advisers, and . . . consider proposing an 

increase in the exemption amount in the near future‖). 

504 See, e.g., Pay to Play Release, supra note 9, at nn.391-94 and accompanying and following text; 

Hedge Fund Adviser Registration Release, supra note 14, at n.243.
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provide while relying on an exemption. In the Proposing Release, we requested comment on 

whether any proposed rule should provide that an adviser must take into account the activities of 

its advisory affiliates when determining eligibility for an exemption, by having the rule, for 

example, specify that the exemption is not available to an affiliate of a registered investment 

adviser.

Commenters that responded to our request for comment generally supported treating each 

advisory entity separately without regard to the activities of, or relationships with, its affiliates.505 

This approach, however, would for example permit an adviser managing $200 million in private 

fund assets simply to reorganize as two separate advisers, each of which could purport to rely on 

the private fund adviser exemption. Such a result would in our view be inconsistent with the 

intent of Congress in establishing the exemption‘s $150 million threshold and would violate 

section 208(d) of the Advisers Act, which prohibits any person from doing indirectly or through 

or by any other person any act or thing which would be unlawful for such person to do directly. 

Accordingly, we would treat as a single adviser two or more affiliated advisers that are 

separately organized but operationally integrated, which could result in a requirement for one or 

both advisers to register.506 Some commenters acknowledged this, but urged that, in the case of 

a non-U.S. advisory affiliate, the Commission affirm the staff‘s positions developed in the 

 

505 See, e.g., AFG Letter (in determining exemption thresholds, each entity‘s assets should be 

determined separately; does not support combining different entities with different business 

activities); Debevoise Letter (in the context of rule 203(m)-1).

506 Generally, a separately formed advisory entity that operates independently of an affiliate may be 

eligible for an exemption if it meets all of the criteria set forth in the relevant rule. However, the 

existence of separate legal entities may not by itself be sufficient to avoid integration of the 

affiliated entities. The determination of whether the advisory businesses of two separately 

formed affiliates may be required to be integrated is based on the facts and circumstances. Our 

staff has taken this position in Richard Ellis, Inc., SEC Staff No-Action Letter (Sept. 17, 1981) 

(discussing the staff‘s views of factors relevant to the determination of whether a separately 

formed advisory entity operates independently of an affiliate). See also discussion infra

following note 515.
- 126 -

Unibanco line of no-action letters (―Unibanco letters‖).507 In the Unibanco letters,508 the staff 

provided assurances that it would not recommend enforcement action, subject to certain 

conditions, against a non-U.S. unregistered adviser that is affiliated with a Commissionregistered adviser, despite sharing personnel and resources.509

The Unibanco letters grew out of recommendations in a 1992 staff study, and sought to 

limit the extraterritorial application of the Advisers Act while also protecting U.S. investors and 

markets.510 In these letters, the staff provided assurances that it would not recommend 

 

507 See, e.g., AIMA Letter, Commenter Letter of Bank of Montreal, Royal Bank of Canada and The 

Toronto-Dominion Bank (Jan. 24, 2011) (―Canadian Banks Letter‖); CompliGlobe Letter; 

Debevoise Letter; Dechert General Letter (also supported extending the Unibanco letters to U.S. 

advisers); Dechert Foreign Adviser Letter; EFAMA Letter; Katten Foreign Advisers Letter; 

McGuireWoods Letter; MFA Letter; Comment Letter of MFS Investment Management (Jan. 24, 

2011) (―MFS Letter‖); Comment Letter of Ropes & Gray LLP (Jan. 24, 2011). 

508 See, e.g., ABA Subcommittee on Private Investment Entities, SEC Staff No-Action Letter (Dec. 

8, 2005) (―ABA No-Action Letter‖); Royal Bank of Canada, SEC Staff No-Action Letter (Jun. 3, 

1998); ABN AMRO Bank, N.V., SEC Staff No-Action Letter (Jul. 7, 1997); Murray Johnstone 

Holdings Limited, SEC Staff No-Action Letter (Oct. 7, 1994); Kleinwort Benson Investment 

Management Limited, SEC Staff No-Action Letter (Dec. 15, 1993); Mercury Asset Management 

plc, SEC Staff No-Action Letter (Apr. 16, 1993); and Uniao de Bancos de Brasileiros S.A., SEC 

Staff No-Action Letter (Jul. 28, 1992) (―Unibanco No-Action Letter‖). See also 1992 Staff 

Report, supra note 393, at Section III.D.

509 Generally, the staff has provided assurances that it will not recommend enforcement action in 

situations in which the unregistered non-U.S. adviser, often termed a ―participating affiliate‖ in 

these letters, and its registered affiliate are separately organized; the registered affiliate is staffed 

with personnel (located in the U.S. or abroad) who are capable of providing investment advice; 

all personnel of the participating affiliate involved in U.S. advisory activities are deemed 

―associated persons‖ of the registered affiliate; and the Commission has adequate access to 

trading and other records of the participating affiliate and to its personnel to the extent necessary 

to enable it to identify conduct that may harm U.S. clients or markets. See supra note 508; Hedge 

Fund Adviser Registration Release, supra note 14, at n.211 and accompanying text.

510 See 1992 Staff Report, supra note 393, at section III.D. In enacting the private fund adviser 

exemption and the foreign private adviser exemption, both of which focus on an adviser‘s 

activities in, or contacts with, the United States, Congress has addressed issues similar to those 

described in the 1992 Staff Report. See section 408 of the Dodd-Frank Act (directing the 

Commission to exempt private fund advisers with less than ―$150 million in assets under 

management in the United States‖) (emphasis added); sections 402 and 403 of the Dodd-Frank 

Act (exempting from registration foreign private advisers with no place of business in the United 

States that have a limited number of clients in the United States and investors in the United States
- 127 -

enforcement action of the substantive provisions of the Advisers Act with respect to a non-U.S. 

adviser‘s relationships with its non-U.S. clients.511 In addition, and as relevant here, the staff 

agreed not to recommend enforcement action if a non-U.S. advisory affiliate of a registered 

adviser, often termed a ―participating affiliate,‖ shares personnel with, and provides certain 

services through, the registered adviser affiliate, without such affiliate registering under the 

Advisers Act.512 Many commenters asserted that affirming these positions would accommodate 

established business practices of global advisory firms without reducing the Commission‘s

ability to protect U.S. markets and investors, because the Commission would continue to have 

access to records and personnel of unregistered non-U.S. advisory entities that are involved in 

the U.S. advisory business of an affiliated and registered adviser.513

A number of commenters asserted that the staff positions in the Unibanco letters are 

consistent with our approach to the territorial application of the Advisers Act with respect to 

non-U.S. advisers.514 As we stated in 2004, we do not apply most of the substantive provisions 

of the Advisers Act to the non-U.S. clients of a non-U.S. adviser registered with the 

Commission.515 However, the Unibanco letters were developed by the staff in the context of the 

 

in private funds and a limited amount of assets attributable to these clients and investors, among 

other conditions).

511 See supra note 508. See also infra note 515.

512 See supra note 508.

513 See, e.g., Canadian Banks Letter; CompliGlobe Letter; MFA Letter; MFS Letter. 

514 See, e.g., Canadian Banks Letter; MFA Letter. See also supra notes 510 and 316 and 

accompanying text.

515 See Hedge Fund Adviser Registration Release, supra note 14, at nn.211 and 216-222 and 

accompanying text (noting that this policy was first set forth in the Unibanco No-Action Letter). 

Although the rules contained in the Hedge Fund Adviser Registration Release were vacated by a 

federal court in Goldstein, supra note 14, the court‘s decision did not address our statement in 

that release that we do not apply most of the substantive provisions of the Advisers Act to the 

non-U.S. clients of a non-U.S. adviser registered with the Commission. In addition, our staff 
- 128 -

private adviser exemption,516 which Congress repealed. Nothing in the rules we are today 

adopting in this Release is intended to withdraw any prior statement of the Commission or the 

views of the staff as expressed in the Unibanco letters. We expect that the staff will provide 

guidance, as appropriate, based on facts that may be presented to the staff regarding the 

application of the Unibanco letters in the context of the new foreign private adviser exemption 

and the private fund adviser exemption.

III. CERTAIN ADMINISTRATIVE LAW MATTERS

The effective date for rules 203(l)-1, 203(m)-1 and 202(a)(30)-1 is July 21, 2011. The 

Administrative Procedure Act generally requires that an agency publish a final rule in the Federal 

Register not less than 30 days before its effective date.517 This requirement does not apply, 

however, if the rule is a substantive rule which grants or recognizes an exemption or relieves a 

restriction or is an interpretative rule.518

As discussed above, effective July 21, 2011, the Dodd-Frank Act amends the Advisers 

 

expressed this view in a 2006 no-action letter issued in response to a request for the staff‘s views 

on matters affecting investment advisers to certain private funds that arose as a result of the 

Goldstein decision. See ABA Subcommittee on Private Investment Companies, SEC Staff NoAction Letter (Aug. 10, 2006) (Commission staff expressed the view that the substantive 

provisions of the Advisers Act do not apply to offshore advisers with respect to such advisers‘ 

dealings with offshore funds and other offshore clients to the extent described in prior staff noaction letters and the Hedge Fund Adviser Registration Release, supra note 14. The staff noted, 

however, that an offshore adviser registered with the Commission under the Advisers Act must 

comply with the Advisers Act and the Commission‘s rules thereunder with respect to any U.S. 

clients (and any prospective U.S. clients) it may have.).

516 Our staff has provided assurances that it would not recommend enforcement action when no 

participating affiliate has any U.S. clients other than clients of the registered affiliate, consistent 

with the private adviser exemption, which was conditioned on the number of a non-U.S. adviser‘s 

U.S. clients. See supra notes 508-509; Hedge Fund Adviser Registration Release, supra note 14, 

at n.211 and accompanying text. Under the Unibanco letters, participating affiliates only share 

personnel with, and provide certain services through, their registered adviser affiliates. See supra 

notes 508-509.

517 See 5 U.S.C. 553(d). 

518 The statute also provides an exception if the agency finds good cause to make the rule effective 

less than 30 days after its date of publication in the Federal Register. Id.
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Act to eliminate the private adviser exemption in pre-existing section 203(b)(3), which will 

require advisers relying on that exemption to register with the Commission as of July 21, 2011

unless another exemption is available.

519

 Also effective July 21, 2011, are the Dodd-Frank Act 

amendments to the Advisers Act that are described immediately below. 

Sections 203(l) and 203(b)(3) of the Advisers Act provide exemptions from registration 

for advisers to venture capital funds and foreign private advisers, respectively. Rule 203(l)-1 

defines venture capital fund, and rule 202(a)(30)-1 defines several terms in the definition of 

―foreign private adviser‖ in section 202(a)(30).520 Thus, these interpretive rules implement the 

new venture capital and foreign private adviser exemptions added to the Advisers Act by the 

Dodd-Frank Act. 

Section 203(m) of the Advisers Act, as amended by the Dodd-Frank Act, directs the 

Commission to provide an exemption for advisers solely to private funds with assets under 

management in the United States of less than $150 million. Rule 203(m)-1, which implements 

section 203(m), grants an exemption and relieves a restriction and in part has interpretive 

aspects. Accordingly, we are making the rules effective on July 21, 2011. 

IV. PAPERWORK REDUCTION ANALYSIS

The rules do not contain a ―collection of information‖ requirement within the meaning of 

the Paperwork Reduction Act of 1995.521 Accordingly, the Paperwork Reduction Act is not 

applicable.

 

519 See sections 403 of the Dodd-Frank Act; sections 203(b)(3) of the Advisers Act; Section I supra.

520 As discussed above, the Dodd-Frank Act amended the Advisers Act to define ―foreign private 

adviser‖ in section 202(a)(30).

521 44 U.S.C. 3501.
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V. COST-BENEFIT ANALYSIS

As discussed above, we are adopting rules 203(l)-1, 203(m)-1 and 202(a)(30)-1 to 

implement certain provisions of the Dodd-Frank Act. As a result of the Dodd-Frank Act‘s repeal 

of the private adviser exemption, some advisers that previously were eligible to rely on that 

exemption will be required to register under the Advisers Act unless they are eligible for a new 

exemption. Thus, the benefits and costs associated with registration for advisers that are not 

eligible for an exemption are attributable to the Dodd-Frank Act.522 Moreover, the Dodd-Frank 

Act provides that, unlike an adviser that is specifically exempt pursuant to section 203(b), an 

adviser relying on an exemption provided by section 203(l) of the Advisers Act or rule 203(m)-1 

thereunder may be subject to reporting and recordkeeping requirements.

523 Hence, the benefits 

and costs associated with being an exempt reporting adviser, relative to being an adviser that is 

registered or specifically exempted by reason of section 203(b), are attributable to the DoddFrank Act. The Commission has discretion, however, to adopt rules to define the terms used in 

the Advisers Act, and we undertake below to discuss the benefits and costs of the rules that we 

are adopting to implement the exemptions discussed in this Release.524

 

522 As we discuss above, although most venture capital advisers agreed with our proposed approach 

to the definition of venture capital fund, a number of commenters disagreed with our approach to 

the proposed definition, and argued that it should be expanded to include investments in small 

companies (regardless of whether they satisfy our definition of qualifying portfolio company) and 

investments in other private funds. See, e.g., NASBIC/SBIA Letter; PEI Funds/Willowbridge 

Letter; VIA Letter. We do not believe that these more expansive positions are consistent with the 

intended scope of the venture capital exemption as expressed by Congress. See supra note 204

and accompanying text. Thus, we believe that the costs of registration for advisers to funds that 

would not satisfy the definition because they hold such investments are attributable to the DoddFrank Act.

523 See supra note 5.

524 The benefits and costs of the reporting requirements applicable to advisers relying on the venture 

capital exemption and the private fund adviser exemption are discussed in greater detail in the 

Implementing Adopting Release, supra note 32, discussion at sections V.A.2 and V.B.2.
- 131 -

We are sensitive to the costs and benefits imposed by our rules, and understand that there 

will be costs and benefits associated with complying with the rules we are adopting today. We 

recognize that certain aspects of these rules may place burdens on advisers that seek to qualify 

for the various exemptions discussed in this Release. We believe that these rules, as modified 

from the proposals, offer flexibility and clarity for advisers seeking to qualify for the exemptions. 

We have designed the rules to balance these concerns with respect to potential costs and burdens 

with what we understand was intended by Congress.

In the Proposing Release, we identified possible costs and benefits of the proposed rules 

and requested comment on the analysis, including identification and assessment of any costs and 

benefits not discussed in the analysis. We requested that commenters provide analysis and 

empirical data to support their views on the costs and benefits associated with the proposals. In 

addition, we requested confirmation of our understanding of how advisers that may seek to rely 

on the exemptions operate and manage private funds and how the proposals may affect them and 

their businesses.

A. Definition of Venture Capital Fund

We define a venture capital fund as a private fund that: (i) holds no more than 20 percent 

of the fund‘s capital commitments in non-qualifying investments (other than short-term 

holdings) (―qualifying investments‖ generally consist of equity securities of ―qualifying portfolio 

companies‖ and are discussed below); (ii) does not borrow or otherwise incur leverage, other 

than limited short-term borrowing (excluding certain guarantees of qualifying portfolio company 

obligations by the fund); (iii) does not offer its investors redemption or other similar liquidity 

rights except in extraordinary circumstances; (iv) represents itself as pursuing a venture capital 

strategy to investors; and (v) is not registered under the Investment Company Act and has not 
- 132 -

elected to be treated as a BDC.525

We define ―qualifying investments‖ as: (i) directly acquired equities; (ii) equity 

securities issued by a qualifying portfolio company in exchange for directly acquired equities 

issued by the same qualifying portfolio company; and (iii) equity securities issued by a company 

of which a qualifying portfolio company is a majority-owned subsidiary, or a predecessor, and is 

received in exchange for directly acquired equities of the qualifying portfolio company (or 

securities exchanged for such directly acquired equities).526 We define a ―qualifying portfolio 

company‖ as any company that: (i) is not a reporting company and does not have a control 

relationship with a reporting company; (ii) does not borrow or issue debt obligations in 

connection with the investment by the private fund and distribute proceeds of the borrowing or 

issuance to the private fund in exchange for the private fund investment; and (iii) is not itself a 

fund (i.e., is an operating company).527

The final rule also grandfathers existing funds by including in the definition of ―venture 

capital fund‖ any private fund that: (i) represented to investors and potential investors at the time 

the fund offered its securities that it pursues a venture capital strategy; (ii) prior to December 31, 

2010, has sold securities to one or more investors that are not related persons of any investment 

adviser of the venture capital fund; and (iii) does not sell any securities to, including accepting 

any additional capital commitments from, any person after July 21, 2011 (the ―grandfathering 

provision‖).528 An adviser seeking to rely on the exemption under section 203(l) of the Advisers 

Act would be eligible for the venture capital exemption only if it exclusively advised venture 

 

525 Rule 203(l)-1(a).

526 Rule 203(l)-1(c)(3).

527 Rule 203(l)-1(c)(4). See also text accompanying note 148.

528 Rule 203(l)-1(b).
- 133 -

capital funds that satisfy all of the elements of the definition of venture capital fund or the 

grandfathering provision.

We have identified certain costs and benefits, discussed below, that may result from our 

definition of venture capital fund, including modifications to the proposal. As we discussed in 

the Proposing Release, the proposed rule was designed to: (i) implement the directive from 

Congress to define the term venture capital fund in a manner that reflects Congress‘ 

understanding of what venture capital funds are, and as distinguished from other private funds 

such as private equity funds and hedge funds; and (ii) facilitate the transition to the new

exemption.529 As discussed above, we have modified the proposed rule to give qualifying funds 

greater flexibility with respect to their investments, partly in response to comments we 

received.530 The final rule defines the term venture capital fund consistently with what we 

believe Congress understood venture capital funds to be,531 and in light of other concerns 

expressed by Congress with respect to the intended scope of the venture capital exemption.532

Approximately 26 comment letters addressed the costs and benefits of the proposed rule 

defining venture capital fund.533 As discussed below, most of these commenters did not provide 

empirical data to support their views. However, a number of venture capital advisers 

commenting on the proposed rule offered observations based upon their experiences managing 

venture capital funds and presented views on the potential impact of the proposed rule on their 

 

529 See Proposing Release, supra note 26, discussion at text immediately preceding text 

accompanying n.273.

530 See generally Section II.A.1.

531 See supra notes 36-37 and accompanying and following text. See also infra note 535.

532 See supra discussion at Section II.A.

533 See, e.g., NVCA Letter; NYSBA Letter; Oak Investments Letter; Sevin Rosen Letter; SVB 

Letter; Trident Letter.
- 134 -

businesses and business practices.

1. Benefits

In the Proposing Release, we stated that based on the testimony presented to Congress 

and our research, we believed that venture capital funds currently in existence would meet most, 

if not all, of the elements of our proposed definition of venture capital fund.534 Several 

commenters agreed that the proposed rule is consistent with Congressional intent.535 Many 

venture capital advisers and related industry groups acknowledged that the proposed definition 

would generally encompass most venture capital investing activity that typically occurs,536 but 

expressed the concern that a venture capital fund may, on occasion, deviate from its typical 

investing pattern with the result that the fund could not satisfy all of the definitional criteria 

under the proposed rule with respect to each investment all of the time.537 Several commenters 

also expressed the concern that the final rule should provide sufficient flexibility to 

accommodate future business practices that are not known or contemplated today.538

For the reasons discussed above, we have modified the definition of venture capital fund. 

 

534 Proposing Release, supra note 26, at section IV.A.1.

535 AFL-CIO Letter (―[T]he SEC has . . . generally provided appropriate definitions for each of the 

factors.‖); AFR Letter (―[W]e believe that the exemption ultimately created in the [Dodd-Frank 

Act] for venture capital funds must be narrowly defined so as to prevent it from undermining the 

requirement all other fund managers register. We believe that the language in the proposed rule 

meets this goal . . .‖); Sen. Levin Letter (―[T]he proposed definition captures the essence of 

venture capital firms whose mission is to encourage the development and expansion of new 

business.‖). See also DuFauchard Letter (―Congressional directives require the SEC to exclude 

private equity funds, or any fund that pivots its investment strategy on the use of debt or leverage, 

from the definition of VC Fund.‖).

536 See, e.g., Cook Children‘s Letter (―The Commission‘s definition of a venture capital fund does a 

thorough job capturing many of the aspects that differentiate venture capital funds from other 

types of private investment funds.‖); Leland Fikes Letter; NVCA Letter (―[T]he Proposed Rules 

are generally consistent with existing venture capital industry practice . . .‖). See also

CompliGlobe Letter; DLA Piper VC Letter.

537 See, e.g., ATV Letter; BIO Letter; NVCA Letter; Sevin Rosen Letter.

538 See, e.g., NVCA Letter; Oak Investments Letter.
- 135 -

Our modifications include specifying a non-qualifying basket539 and excluding from the 120-day 

limit with respect to leverage certain guarantees of portfolio company obligations by a qualifying 

fund.540 For the reasons discussed in greater detail above, we are adopting a limit of 20 percent 

for non-qualifying investments.541 In summary, the non-qualifying basket is designed to address 

commenters‘ concerns regarding occasional deviations from typical venture capital investing 

activity,542 inadvertent violations of the definitional criteria543 and flexibility to address evolving 

or future business practices.544 We considered these comments in light of our concerns that the 

exemption not be expanded beyond what we believe was the intent of Congress545 and that the 

definition not operate to foreclose investment funds from investment opportunities that would 

benefit investors but would not change the character of the fund.546 We concluded that a nonqualifying basket limit of 20 percent would provide the flexibility sought by many venture 

capital fund commenters while appropriately limiting the scope of the exemption.547

We believe that the final rule (including the modifications from the proposal) better 

describes the existing venture capital industry and provides venture capital advisers with greater 

flexibility to accommodate existing (and potentially evolving or future) business practices and 

take advantage of investment opportunities that may arise. We also believe that the criteria 

 

539 Rule 203(l)-1(a)(2).

540 Rule 203(l)-1(a)(3).

541 See generally Section II.A.

542 See supra note 56.

543 See supra note 58.

544 See supra note 56.

545 See supra notes 45 and 61 and accompanying text.

546 See supra note 60.

547 See supra note 72 and following text.
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under the final rule will facilitate transition to the new exemption, because it minimizes the 

extent to which an adviser seeking to rely on the venture capital exemption would need to alter 

its existing business practices, thus, among other things, reducing the likelihood of inadvertent 

non-compliance.548

As we discuss in greater detail above, many commenters arguing in favor of the 

modifications that we are adopting generally cited these benefits to support their views.549 

Specifically, several commenters asserted that providing a limited basket for non-qualifying 

investments would benefit venture capital advisers relying on the venture capital exemption, and 

the U.S. economy, by facilitating job creation and capital formation550 and minimizing the extent 

to which a venture capital fund would need to alter its typical business practices.551 Other 

commenters maintained that an approach providing advisers some flexibility on occasion to take 

advantage of promising investment opportunities that might not be typical of most venture 

capital activity would benefit those funds and their investors.552

We anticipate that a number of benefits, described by commenters, may result from 

 

548 For example, the final rule does not specify that a qualifying fund must provide managerial 

assistance or control each qualifying portfolio company in which the fund invests. A number of 

commenters indicated that venture capital funds may not provide sufficient assistance or exercise 

sufficient control in order to satisfy this element of the proposed definition. See, e.g., ESP Letter; 

Merkl Letter. The final rule also allows a qualifying fund to exclude investments in money 

market funds from the non-qualifying basket. A number of commenters indicated that money 

market funds are typically used by venture capital funds for cash management purposes. See, 

e.g., NVCA Letter. We expect that these modifications to the rule would avoid the cost of 

altering an adviser‘s existing business practices.

549 See, e.g., NVCA Letter; Oak Investments Letter; Quaker BioVentures Letter. See also supra

discussion at Section II.A.1.

550 See, e.g., NVCA Letter (stating that a low level of 15% would ―allow innovation and job creation 

to flourish within the venture capital industry‖); Sevin Rosen Letter (a 20% limit would be 

―flexible enough not to severely impair the operations of bona fide [venture capital funds], a 

critically important resource for American innovation and job creation‖).

551 See, e.g., McDonald Letter; Pine Brook Letter.

552 See, e.g., DuFauchard Letter; Merkl Letter.
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allowing qualifying funds limited investments in non-qualifying investments, including publicly

traded securities, securities that are not equity securities (e.g., non-convertible debt instruments) 

and interests in other private funds.553 For example, increasing the potential pool of investors 

that could provide financing to publicly traded companies to include venture capital funds could 

facilitate access to capital for a portfolio company‘s expansion and growth.554 Including 

investments that are not equity securities could offer funds seeking to qualify as venture capital 

funds the flexibility to structure an investment in a manner that is most appropriate for the fund 

(and its investors), including for example to obtain favorable tax treatment, manage risks (such 

as bankruptcy protection), maintain the value of the fund‘s equity investment or satisfy the 

specific financing needs of a portfolio company.555 Including non-convertible bridge financing 

also would enable a portfolio company to seek such financing from venture capital funds if it is 

unable to obtain financing from traditional lending sources.556 In addition, permitting qualifying 

funds to invest in other underlying private funds could facilitate capital formation and enhance 

liquidity for the underlying private funds.557 Under the final rule, qualifying funds also would 

have increased flexibility to invest in portfolio companies through secondary market 

transactions. Commenters asserted that this would help align the interests of portfolio company 

founders with the interests of venture capital funds558 and prevent dilution of the venture capital 

 

553 Rule 203(l)-1(a)(2) (specifying that a qualifying fund must hold, immediately after the acquisition 

of any asset (excluding short-term holdings) no more than 20% of its committed capital in assets 

that are not qualifying investments); rule 203(l)-1(c)(3) (defining ―qualifying investment‖).

554 See, e.g., Lowenstein Letter; McDonald Letter; Mesirow Letter; Quaker BIO Letter; Trident 

Letter.

555 See, e.g., Merkl Letter; Oak Investments Letter; Sevin Rosen Letter; Vedanta Capital Letter.

556 NVCA Letter; Trident Letter.

557 See, e.g., Cook Children‘s Letter; Leland Fikes Letter; Merkl Letter; SVB Letter.

558 Sevin Rosen Letter.
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fund‘s investment in the portfolio company.559

Under the final rule, the non-qualifying basket is determined as a percentage of a 

qualifying fund‘s capital commitments, and compliance with the 20 percent limit is determined 

each time a qualifying fund makes any non-qualifying investment (excluding short-term 

holdings). We expect that calculating the size of the non-qualifying basket as a percentage of a 

qualifying fund‘s capital commitments, which will remain relatively constant during the fund‘s 

term, will provide advisers with a degree of predictability when managing the fund‘s portfolio 

and determining how much of the basket remains available for new investments. Moreover, we 

believe that by applying the 20 percent limit as of the time of acquisition of each non-qualifying 

investment, a fund is able to determine prospectively how much it can invest in the nonqualifying basket. We believe that this approach to determining the non-qualifying basket will 

appropriately limit a qualifying fund‘s non-qualifying investments and ease the burden of 

determining compliance with the criterion under the rule.

As discussed above, a qualifying fund can only invest up to 20 percent of its capital 

commitments in non-qualifying investments, as measured immediately after it acquires any nonqualifying investment.

560

 The final rule treats as a qualifying investment any equity security of a 

qualifying portfolio company, or a company acquiring the qualifying portfolio company, that is 

exchanged for directly acquired equities issued by the qualifying portfolio company. This 

definition should benefit venture capital funds because it allows funds to participate in the 

 

559 SVB Letter.

560 The rule requires a qualifying fund at the time it acquires an asset, to have no more than 20% of 

its capital commitments invested in assets that are not qualifying investments. Rule 203(l)-

1(a)(2).
- 139 -

reorganization of the capital structure of a portfolio company.561 It also provides qualifying 

funds with liquidity and an opportunity to take profits from their investments because they can 

acquire securities in connection with the acquisition (or merger) of a qualifying portfolio 

company by another company — typical means by which venture capital funds exit an 

investment.562

The final rule excludes from the 120-day limit with respect to leverage any venture 

capital fund guarantees of portfolio company indebtedness, up to the value of the fund‘s 

investment in the company.563 We agree with several commenters who stated that guarantees of 

portfolio company indebtedness under these circumstances will facilitate a portfolio company‘s 

ability to obtain credit for working capital or business operations.564 Thus, we believe this 

provision, which is designed to accommodate existing business practices typical of venture 

capital funds, may contribute to efficiency, competition and capital formation.

The final rule excludes from the definition of qualifying portfolio company any company 

that borrows or issues debt if the proceeds of such borrowing or debt are distributed to the 

venture capital fund in exchange for the fund‘s investment in the company. This will allow 

qualifying funds to provide financing on a short-term basis to portfolio companies as a ―bridge‖ 

 

561 See supra note 109 and following text.

562 See, e.g., NVCA Letter; PTV Sciences Letter. The final rule defines equity securities broadly to 

cover many types of equity securities in which venture capital funds typically invest, rather than 

limit the definition solely to common stock. See supra notes 95-96 and accompanying text. Our 

definition of qualifying portfolio company is similarly broad because it does not restrict 

qualifying companies to ―small or start-up‖ companies. As we have noted in the Proposing 

Release and above, we believe that such definitions would be too restrictive and provide venture 

capital fund advisers with too little flexibility and limited options with respect to potential

portfolio company investments. See supra discussion in Section II.A.1.a.

563 Rule 203(l)-1(a)(3).

564 Oak Investments Letter; SVB Letter.
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between funding rounds.565 In addition, a portfolio company can obtain financing for working 

capital or expansion needs from typical lenders, effect shareholder buyouts and conclude a 

simultaneous debt and equity offering, without affecting the adviser‘s eligibility for the venture 

capital exemption. For the foregoing reasons, commenters maintained, and we agree, that this 

approach would facilitate compliance with the rule without restricting a portfolio company‘s 

access to financing or other capital.566 We believe that this provision of the final rule will benefit 

venture capital funds and their investors because it restricts a portfolio company‘s ability to incur 

debt that may implicate Congressional concerns regarding the use of leverage and effectively 

distinguishes advisers to venture capital funds from advisers to leveraged buyout private equity 

funds for which Congress did not provide an exemption.567

Our final rule clarifies that an adviser seeking to rely on the venture capital exemption 

may treat as a private fund any non-U.S. fund managed by the adviser that does not offer its 

securities in the United States or to U.S. persons.568 This treatment will enable an adviser to rely 

on the exemption when it manages only funds that satisfy the venture capital fund definition, 

regardless of the funds‘ jurisdiction of formation and investor base. We believe that this 

treatment facilitates capital formation and competition because it would allow an adviser to 

sponsor and advise funds in different jurisdictions in order to meet the different tax or regulatory 

needs of the fund‘s investors without risking the availability of the exemption.

 

565 See, e.g., supra note 181 and accompanying and following text.

566 See, e.g., NVCA Letter; SVB Letter.

567 As discussed above, we have imposed this limitation on qualifying portfolio companies because 

of the focus on leverage in the Dodd-Frank Act as a potential contributor to systemic risk as 

discussed by the Senate Committee Report, and the testimony before Congress that stressed the 

lack of leverage in venture capital investing. See supra notes 174 and 175.

568 See note accompanying rule 203(l)-1.
- 141 -

The final rule includes several other characteristics that provide additional flexibility to 

venture capital advisers and their funds. For example, a qualifying fund cannot provide its 

investors with redemption or other liquidity rights except in extraordinary circumstances. 

Although venture capital funds typically do not permit investors to redeem their interests during 

the life of the fund,569 the approach of the final rule allows a venture capital fund to respond to 

extraordinary events, including redeeming investors from the fund, without resulting in a 

registration obligation for the fund‘s adviser. Under the final rule, a venture capital fund must 

affirmatively represent itself as pursuing a venture capital strategy to its investors, a criterion 

designed to preclude advisers to certain private funds from claiming an exemption from 

registration for which they are not eligible. We believe that this element will allow the 

Commission and the investing public (particularly potential investors) to determine and confirm 

an adviser‘s rationale for remaining unregistered with the Commission.570

Because it takes into account existing business practices of venture capital funds and 

permits some flexibility for venture capital funds (and their managers) to adopt, or adapt to, new 

or evolving business practices, we believe that the final rule will facilitate advisers‘ transition to 

the new exemption. The rule generally limits investments of a qualifying fund, but creates a 

basket that will allow these funds flexibility to make limited investments that may vary from 

typical venture capital fund investing practices. The final rule also provides an adviser flexibility

and discretion to structure transactions in underlying portfolio companies to meet the business 

objectives of the fund without creating significant risks of the kind that Congress suggested 

should require registration of the fund‘s adviser. We expect that this flexibility will benefit 

 

569 See supra notes 255-256 and accompanying text.

570 See Merkl Letter (stating that a description of the investment strategy is a key element of any 

private placement memorandum).
- 142 -

investment advisers that seek to rely on the venture capital exemption because they will be able 

more easily to structure and operate funds that meet the definition now and in the future, but will 

not permit reliance on the exemption by private fund advisers that Congress did not intend to 

exclude from registration.

Our final rule also should benefit advisers of existing venture capital funds that fail to 

meet the definition of venture capital fund. Our grandfathering provision permits an adviser to 

rely on the exemption provided that each fund that does not satisfy the definition (i) has 

represented to investors that it pursues a venture capital strategy, (ii) has initially sold interests 

by December 31, 2010, and (iii) does not sell any additional interests after July 21, 2011.571 We 

expect that most advisers to existing venture capital funds that currently rely on the private 

adviser exemption would be exempt from registration in reliance on the grandfathering 

provision.572 As a result of this provision, we expect that advisers to existing venture capital 

funds that do not meet our definition will benefit because they can continue to manage existing 

funds without having to (i) weigh the relative costs and benefits of registration and modification 

of fund operations to conform existing funds with our definition and (ii) incur the costs 

associated with registration with the Commission or modification of existing funds. Advisers to 

venture capital funds that were launched by December 31, 2010 and meet the July 21, 2011 

deadline for sales of all securities also would benefit from the grandfathering provision because 

they would not have to incur these costs. We believe that the grandfathering provision will 

 

571 Rule 203(l)-1(b).

572 A number of commenters specifically inquired about the scope of the holding out criterion and 

noted that under existing business practice venture capital funds may refer to themselves as 

private equity funds. As we discuss in greater detail above, we do not believe that the name used 

by a fund is the sole dispositive factor, and that satisfying the holding out criterion will depend on 

all of the facts and circumstances. See supra Section II.A.7. This criterion is similar to our 

general approach to antifraud provisions under the federal securities laws and our rules.
- 143 -

promote efficiency because it will allow advisers to existing venture capital funds to continue to 

rely on the exemption without having to restructure funds that may not meet the definition.573 It 

also will allow advisers to funds that were launched by December 31, 2010 and can meet the 

other requirements of the grandfathering provision to rely on the exemption without the potential 

costs of having to renegotiate with potential investors and restructure those funds within the 

limited period before the rule is effective. After the effective date, advisers that seek to form 

new funds will have sufficient time and notice to structure those funds to meet the definition 

should they seek to rely on the exemption in section 203(l) of the Advisers Act.

Finally, we believe that our definition would include an additional benefit for investors 

and regulators. Section 203(l) of the Advisers Act provides an exemption specifically for 

advisers that ―solely‖ advise venture capital funds. Currently none of our rules requires that an 

adviser exempt from registration specify the basis for the exemption. We are adopting, however, 

rules that would require exempt reporting advisers to identify the exemption(s) on which they are 

relying.574 Requiring that venture capital funds represent themselves as such to investors should 

allow the Commission and the investing public (particularly potential investors in venture capital 

funds) to determine, and confirm, an adviser‘s rationale for remaining unregistered with the 

Commission. This element is designed to deter advisers to private funds other than venture 

capital funds from claiming to rely on an exemption from registration for which they are not 

eligible.

We believe that existing venture capital funds would meet most, if not all, of the elements 

of the final definition of venture capital fund. Nevertheless, we recognize that some advisers to 

 

573 Many commenters supported the grandfathering provision, and one specifically cited the benefit 

of avoiding the need to alter fund terms to the potential detriment of fund investors. AV Letter.

574 See Implementing Adopting Release, supra note 32, at n.175 and accompanying text.
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existing venture capital funds that seek to rely on the exemption in section 203(l) of the Advisers 

Act might have to structure new funds differently to satisfy the definitional criteria under the 

final rule. To the extent that advisers choose not to change how they structure or manage new 

funds they launch, those advisers would have to register with the Commission,575 which offers 

many benefits to the investing public and facilitates our mandate to protect investors. Registered 

investment advisers are subject to periodic examinations by our staff and are also subject to our 

rules including rules on recordkeeping, custody of client funds and compliance programs. We 

believe that in general Congress considered registration to be beneficial to investors because of, 

among other things, the added protections offered by registration. Accordingly, Congress 

limited the section 203(l) exemption to advisers solely to venture capital funds.

As noted above, we proposed, and are retaining in the final rule, certain elements in the 

portfolio company definition because of the focus on leverage in the Dodd-Frank Act as a 

potential contributor to systemic risk as discussed by the Senate Committee report,576 and the 

testimony before Congress that stressed the lack of leverage in venture capital investing.577 We 

expect that distinguishing between venture capital funds and other private funds that pursue 

investment strategies involving financial leverage that Congress highlighted for concern would 

benefit financial regulators mandated by the Dodd-Frank Act (such as the Financial Stability 

Oversight Council) with monitoring and assessing potential systemic risks. Because advisers 

that manage funds with these characteristics would be required to register, we expect that 

financial regulators could more easily obtain information and data regarding these financial 

 

575 See infra text following notes 585, 597-600 and accompanying text for a discussion of potential 

costs for advisers that would have to choose between registering or restructuring venture capital 

funds formed in the future.

576 See supra note 174.

577 See supra note 175.
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market participants, which should benefit those regulators to the extent it helps to reduce the 

overall cost of systemic risk monitoring and assessment.578 We believe that investors will 

benefit from enhanced disclosure and oversight of the activities of private fund advisers by 

regulators, which in turn could contribute to a more efficient allocation of capital.

2. Costs

Costs for advisers to existing venture capital funds. As we discussed in the Proposing 

Release and above, we do not expect that the definition of venture capital fund would result in 

significant costs for unregistered advisers to venture capital funds currently in existence and 

operating.579 We estimate that currently there are 791 advisers to venture capital funds.580 We 

expect that all these advisers, which we assume currently are not registered in reliance on the 

private adviser exemption, would continue to be exempt after the repeal of that exemption on 

July 21, 2011 in reliance on the grandfathering provision.581 We anticipate that such advisers to 

 

578 See S. Rep. No. 111-176, supra note 6, at 39 (explaining the requirement that private funds 

disclose information regarding their investment positions and strategies, including information on 

fund size, use of leverage, counterparty credit risk exposure, trading and investment positions and 

any other information that the Commission in consultation with the Financial Stability Oversight 

Council determines is necessary and appropriate to protect investors or assess systemic risk).

579 Proposing Release, supra note 26, at text immediately preceding text accompanying n.273.

580 See NVCA Yearbook 2011, supra note 152, at Fig. 1.04 (providing the number of ―active‖ 

venture capital advisers, as of December 2010, that have raised a venture capital fund within the 

past eight years; 456 of the total number of venture capital advisers manage less than $100 

million in capital).

581 We estimate that these advisers (and any other adviser that seeks to remain unregistered in 

reliance on the exemption under section 203(l) of the Advisers Act or rule 203(m)-1 thereunder) 

would incur, on average, $2,311 per year to complete and update related reports on Form ADV, 

including Schedule D information relating to private funds. See Implementing Adopting Release, 

supra note 32, at section V.B.2. This estimate includes internal costs to the adviser of $2,032 to 

prepare and submit an initial report on Form ADV and $279 to prepare and submit annual 

amendments to the report. These estimates are based on the following calculations: $2,032 = 

($4,064,000 aggregate costs ÷ 2000 advisers); $279 = ($558,800 aggregate costs ÷ 2,000 

advisers). Id. at nn.579-581 and accompanying text. We estimate that approximately two exempt 

reporting advisers would file Form ADV-H annually at a cost of $189 per filing. Id., at n.596 and 

accompanying text. We further estimate that three exempt reporting advisers would file Form 
- 146 -

grandfathered funds will incur minimal costs, if any, to confirm that existing venture capital 

funds managed by the adviser meet the conditions of the grandfathering provision. We estimate 

that these costs would be no more than $800 to hire outside counsel to assist in this 

determination.582

We recognize, however, that advisers to funds that were launched by December 31, 2010

but have not concluded offerings to investors may incur costs to determine whether they qualify 

for the grandfathering provision. For example, these advisers may need to assess the impact on 

the fund of selling interests to initial third-party investors by December 31, 2010 and selling 

interests to all investors no later than July 21, 2011.583 We do not expect that the cost of 

evaluating the grandfathering provision would be significant, however, because we believe that 

most funds in formation represent themselves as funds that pursue a venture capital strategy to 

their potential investors584 and the typical fundraising period for a venture capital fund is 

approximately 12 months.585 Thus, we do not anticipate that venture capital fund advisers would 

 

ADV-NR per year at a cost of $188 per year. Id., at nn.598-602 and accompanying text. We 

anticipate that filing fees for exempt reporting advisers would be the same as those for registered 

investment advisers. See infra note 598. These estimates, some of which differ from the 

estimates included in the Proposing Release, supra note 26, are discussed in more detail in the 

Implementing Adopting Release, supra note 32, at section V.B.2.

582 As discussed in the Proposing Release, we expect that a venture capital adviser would need no 

more than 2 hours of legal advice to learn the differences between its current business practices 

and the conditions for reliance on the proposed grandfathering provision. We estimate that this 

advice would cost $400 per hour per firm based on our understanding of the rates typically 

charged by outside consulting or law firms. See Proposing Release, supra note 26, at n.293. We 

did not receive any comments on these cost estimates.

583 We did not receive any comments on the dates specified in the grandfathering provision. See also

supra note 307.

584 See supra note 572.

585 See Breslow & Schwartz, supra note 241, at 2-22 (―Once the first closing [of a private equity 

fund] has occurred, subsequent closings are typically held over a defined period of time [the 

marketing period] of approximately six to twelve months.‖). See also Dow Jones Report, supra

note 242, at 22.
- 147 -

have to alter typical business practices to structure or raise capital for venture capital funds being 

formed. Nevertheless, we recognize that after the final rule goes into effect, exempt advisers of 

such funds in formation may forgo the opportunity to accept investments from investors that may 

seek to invest after July 21, 2011 in order to comply with the grandfathering provision.

To the extent that an existing adviser could not rely on the grandfathering provision with 

respect to funds in formation, we also expect that the adviser would not be required to modify its 

business practices significantly in order to rely on the exemption. Our final rule includes many 

modifications requested by commenters, such as the non-qualifying basket, and as a result, we 

expect that these modifications would reduce some of the costs associated with modifying 

current business practices to satisfy the proposed definitional criteria that commenters 

addressed.586 As we discuss above, we believe that the final rule better reflects venture capital 

activity conducted by venture capital advisers that are likely to seek to rely on the exemption, 

and provides flexibility that will allow these funds to take advantage of new investment 

opportunities. To the extent that some commenters expressed concerns that they would have to 

divert personnel time from other functions to monitoring inadvertent failures to meet the 

definitional elements, we believe that the greater investment flexibility provided by the rule 

would offset most of these compliance costs.

Our rule does not provide separate definitional criteria for non-U.S. advisers seeking to 

rely on the exemption. These advisers might incur costs to the extent that cash management 

instruments they typically acquire may not be ―short-term holdings‖ for purposes of the 

 

586 See, e.g., Charles River Letter; Gunderson Dettmer Letter; NVCA Letter (arguing that as 

proposed the rule would have required venture capital fund advisers to modify their business

practices in order to be eligible for the exemption). See also ABA Letter; Davis Polk Letter; Oak 

Investment Letter; SVB Letter (discussing the potential costs associated with complying with 

various elements of the proposed rule such as managerial assistance, venture capital fund leverage 

and solely investing in qualifying portfolio companies).
- 148 -

definition.587 We expect that these costs would be mitigated, however, to the extent that these 

advisers can continue to acquire these instruments using the non-qualifying basket.

Costs for new advisers and advisers to new venture capital funds. We expect that 

existing advisers that seek to form new venture capital funds and investment advisory firms that 

seek to enter the venture capital industry will incur one-time ―learning costs‖ to determine how 

to structure new funds they may manage to meet the elements of our definition. We estimate that 

on average, there are 23 new advisers to venture capital funds each year.588 We expect that the 

one-time learning costs would be no more than between $2,800 and $4,800 on average for an 

adviser if it hires an outside consulting or law firm to assist in determining how the elements of 

our definition may affect intended business practices.589 Thus, we estimate the aggregate cost to 

existing advisers of determining how the definition would affect funds they plan to launch would 

be from $64,400 to $110,400.590 As they launch new funds and negotiate with potential 

investors, these advisers would have to determine whether it is more cost effective to register or 

to structure the venture capital funds they manage to meet the definition. Such considerations of 

legal or other requirements, however, comprise a typical business and operating expense of 

conducting new business. New advisers that enter into the business of managing venture capital 

 

587 See, e.g., EFAMA Letter (asserting that a non-U.S. fund could not invest in non-U.S. equivalent 

cash holdings under the proposed rule).

588 This is the average annual increase in the number of venture capital advisers between 1981 and 

2010. See NVCA Yearbook 2010, supra note 150, at Fig. 1.04; NVCA Yearbook 2011, supra

note 152, at Fig. 1.04.

589 We expect that a venture capital adviser would need between 7 and 12 hours of consulting or 

legal advice to learn the differences between its current business practices and the definition, 

depending on the experience of the firm and its familiarity with the elements of the rule. We 

estimate that this advice would cost $400 per hour per firm based on our understanding of the 

rates typically charged by outside consulting or law firms.

590 This estimate is based on the following calculations: 23 x $2,800 = $64,400; 23 x $4,800 = 

$110,400. We did not receive any comments on these cost estimates.
- 149 -

funds also would incur such ordinary costs of doing business in a regulated industry.591

In the Proposing Release, we stated that we believed that existing advisers to venture 

capital funds would meet most, if not all, of the elements of the proposed definition.592 As 

discussed above, most commenters generally acknowledged that the proposed definition would 

generally encompass most venture capital investing activity that typically occurs.593 Several 

noted, however, that they might deviate from typical investing patterns on occasion or wanted 

the flexibility to invest small amounts of capital in investments that would be precluded by the 

proposed definition.594 Under the final rule, venture capital funds that qualify for the definition 

may invest in non-qualifying investments subject to availability of the non-qualifying basket, 

including investments specified by some commenters. As a result of these modifications, the 

final definition is more closely modeled on current business practices of venture capital funds 

and provides advisers with flexibility to take advantage of investment opportunities. As a result, 

we do not anticipate that many venture capital fund advisers would have to change significantly 

the structure of new funds they launch.

We also recognize that some existing venture capital funds may have characteristics that 

differ from the criteria in our definition. To the extent that investment advisers seek to form new 

venture capital funds with these characteristics, those advisers would have to choose whether to 

structure new venture capital funds to conform to the definition, forgo forming new funds, or 

register with the Commission. In any case, each investment adviser would assess the costs 

 

591 For estimates of the costs of registration for those advisers that would choose to register, see infra

notes 597-600.

592 Proposing Release, supra note 26, at Section V.A.1.

593 See supra note 51.

594 See supra note 52.
- 150 -

associated with registering with the Commission relative to the costs of remaining unregistered 

(and hence structuring funds to meet our definition in order to be eligible for the exemption). 

We expect that this assessment would take into account many factors, including the size, scope 

and nature of an adviser‘s business and investor base. Such factors will vary from adviser to 

adviser, but each adviser would determine for itself whether registration, relative to other 

choices, is the most cost-effective or strategic business option.

The final rule may have effects on competition and capital formation. To the extent that 

advisers choose to structure new venture capital funds to conform to the definition, or choose not 

to form new funds in order to avoid registration, these choices could result in fewer investment 

choices for investors, less competition and less capital formation.595 For example, to the extent 

that new venture capital funds do not invest in non-qualifying investments in excess of the 

20 percent basket in order to meet the definition, the final rule could decrease competition and 

capital formation. If venture capital funds invest less in non-qualifying investments or more in 

qualifying portfolio company securities that are qualifying investments, this could increase 

competition among qualifying portfolio companies or private funds that invest in such 

companies. To the extent that funds invest more in less risky but lower yielding non-qualifying 

investments, this could decrease competition among investors that seek to invest in qualifying 

investments. To the extent that advisers choose to register in order to structure new venture 

capital funds without regard to the definitional criteria or in order to expand their businesses 

(e.g., pursue additional investment strategies beyond venture capital investing or expand the 

potential investor base to include investors that are required to invest with registered advisers), 

these choices may result in greater investment choices for investors, greater competition and 

 

595 See, e.g., Lowenstein Letter; NVCA Letter; Venrock Letter.
- 151 -

greater capital formation.596

Investment advisers to new venture capital funds that would not meet the definition 

would have to register and incur the costs associated with registration (assuming the adviser 

could not rely on the private fund adviser exemption). We note that the costs of registration for 

advisers that do not qualify for the venture capital fund adviser exemption flow from the DoddFrank Act, which removed the private adviser exemption on which they currently rely.

We estimate that the internal cost to register with the Commission would be $15,077 on 

average for a private fund adviser,597 excluding the initial filing fees and annual filing fees to the 

Investment Adviser Registration Depository (―IARD‖) system operator.598 These registration 

costs include the costs attributable to completing and periodically amending Form ADV, 

preparing brochure supplements, and delivering codes of ethics to clients.599 In addition to the 

 

596 See, e.g., ―Asia‘s Cash-Poor Small Hedge Funds Vulnerable to U.S. Rules,‖ Bloomberg.com 

(Feb. 23, 2011) (identifying two fund of funds managers that either require or prefer to allocate 

client assets to advisers registered with the Commission).

597 This estimate is based upon the following calculations: $15,077 = ($9,627,871 aggregate costs to 

complete Form ADV ÷ 750 advisers expected to register with the Commission) + ($8,509,000 

aggregate costs to complete private fund reporting requirements ÷ 3,800 advisers expected to 

provide private fund reports). See Implementing Adopting Release, supra note 32, at nn.612-618

and accompanying text for a more detailed discussion of these costs. This also assumes that the 

performance of this function would most likely be equally allocated between a senior compliance 

examiner and a compliance manager. See id., at n.608. Data from SIFMA‘s Management & 

Professional Earnings in the Securities Industry 2010, modified to account for an 1,800-hour 

work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and 

overhead, suggest that costs for these positions are $235 and $273 per hour, respectively.

598 Filing fees paid for submitting initial and annual filings through the IARD currently range from 

$40 to $225 based on the amount of assets an adviser has under management. The current fee 

schedule for registered advisers may be found on our website at 

http://www.sec.gov/divisions/investment/iard/iardfee.shtml. See Implementing Adopting 

Release, supra note 32, at n.566-567 and accompanying text (assuming for purposes of the 

analysis that exempt reporting advisers will pay a fee of $225 per initial or annual report).

599 Part 1 of Form ADV requires advisers to answer basic identifying information about their 

business, their affiliates and their owners, information that is readily available to advisers, and 

thus should not result in significant costs to complete. Registered advisers must also complete 

Part 2 of Form ADV and file it electronically with us. Part 2 requires disclosure of certain 
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internal costs described above, we estimate that for an adviser choosing to use outside legal 

services to complete its brochure, such costs would be $5,000.600

New registrants would also face costs to bring their business operations into compliance 

with the Advisers Act and the rules thereunder. These costs, however, will vary significantly 

among advisers depending on the adviser‘s size, the scope and nature of its business, and the 

sophistication of its compliance infrastructure, but in any case would be an ordinary business and 

operating expense of entering into any business that is regulated.

We estimated in the Proposing Release that the one-time costs to new registrants to 

establish a compliance infrastructure would range from $10,000 to $45,000, while ongoing 

annual costs of compliance and examination would range from $10,000 to $50,000.601 Some 

commenters suggested that these estimates are too low. Commenters identifying themselves as 

―middle market private equity fund‖ advisers estimated that they would incur one-time 

 

conflicts of interest and could be prepared based on information already contained in materials 

provided to investors, which could reduce the costs of compliance even further. 

600 See Implementing Adopting Release, supra note 32, at n.729. 

601 See Proposing Release, supra note 26, at n.303 and accompanying text. Our estimate was based 

on the expectation that most advisers that might choose to register for business reasons have 

already built compliance infrastructures as a matter of good business practice. Nevertheless, we 

expect advisers will incur costs for outside legal counsel to evaluate their compliance procedures 

initially and on an ongoing basis. We estimate that the costs to advisers to establish the required 

compliance infrastructure will be, on average, $20,000 in professional fees and $25,000 in 

internal costs including staff time. These estimates were prepared in consultation with attorneys 

who, as part of their private practice, have counseled private fund advisers establishing their 

registrations with the Commission. We included a range because we believe there are a number 

of unregistered advisers of private funds whose compliance operations are already substantially in 

compliance with the Advisers Act and that would therefore experience only minimal incremental 

ongoing costs as a result of registration. In connection with previous estimates we have made 

regarding compliance costs for registered advisers, we received comments from small advisers 

estimating that their annual compliance costs would be $25,000 and could be as high as $50,000.

See, e.g., Comment Letter of Joseph L. Vidich (Aug. 7, 2004). Cf. Comment Letter of Venkat 

Swarna (Sept. 14, 2004) (estimating costs of $20,000 to $25,000). These comment letters were 

submitted in connection with the Hedge Fund Adviser Registration Release, supra note 14, and 

are available on the Commission‘s Internet website at 

http://www.sec.gov/rules/proposed/s73004.shtml. 
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registration and compliance costs ranging from $50,000 to $600,000, followed by ongoing 

annual compliance costs ranging from $50,000 to $500,000.602 Commenters identifying 

themselves as advisers to venture capital funds, however, provided much lower estimates for 

one-time registration and compliance costs ranging from $75,000 to $200,000, followed by 

ongoing annual compliance costs ranging from $50,000 to $150,000.603

Although some advisers may incur these costs, the costs of compliance for a new 

registrant can vary widely among advisers depending on their size, activities, and the 

sophistication of their existing compliance infrastructure. Advisers, whether registered with us 

or not, may have established compliance infrastructures to fulfill their fiduciary duties towards 

their clients under the Advisers Act. Generally, costs will likely be less for new registrants that 

have already established sound compliance practices and more for new registrants that have not 

yet established sound practices.

For example, some commenters specifically included in their cost estimates 

 

602 See, e.g., Comment Letter of Atlas Holdings (Jan. 21, 2011) (―Atlas Letter‖) (estimating 

$500,000 in 2011 and $350,000 per year thereafter for compliance manuals and oversight, 

employee trading records, legal documentation, and the hiring of additional compliance 

employees); Comment Letter of Sentinel Capital Partners (Jan. 16, 2011) (―Sentinel Letter‖) 

(estimating between $500,000-$600,000 in 2011 and more than $375,000 per year thereafter for 

compliance manuals and oversight, employee trading records, legal documentation, and the hiring 

of additional compliance employees); Comment Letter of Charlesbank Capital Partners (Jan. 21, 

2011) (―Charlesbank Letter‖) (―[A]lthough impossible to quantify at this point given the absence 

of regulations, we anticipate a substantial cost associated with ongoing compliance.‖); Comment 

Letter of Crestview Advisors, LLC (Jan. 19, 2011) (―Crestview Letter‖) (estimating annual costs 

of $300,000-$500,000); Comment Letter of Azalea Capital (Feb. 17, 2011) (―Azalea Letter‖) 

(estimating $50,000 to $100,000 per year); Comment Letter of Gen Cap America, Inc. (Jan. 21, 

2011) (―Gen Cap Letter‖) (estimating $150,000-$250,000 per year). See also Memorandum to 

File No. S7-37-10, dated March 17, 2011, concerning a meeting with certain private fund 

representatives, avail. at http://www.sec.gov/comments/s7-37-10/s73710-124.pdf (―File 

Memorandum‖) (estimating that costs for small firms range from $100,000-$200,000 (exclusive 

of salary costs for a CCO)).

603 See VIA Letter (estimating an initial cost of $75,000 or more and ongoing costs of $50,000 to 

$150,000 per year); Pine Brook Letter (estimating initial costs of $125,000 to $200,000 and 

ongoing compliance costs of $100,000-150,000 per year). 
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compensation costs for hiring a dedicated chief compliance officer (―CCO‖).604 Our compliance 

rule, however, does not require advisers to hire a new individual to serve as a full-time CCO, and 

the question of whether an adviser can look to existing staff to fulfill the CCO requirement 

internally is firm-specific.605

Although we recognize that some newly registering advisers will need to designate 

someone to serve as CCO on a full-time basis, we expect these will be larger advisers—those 

with many employees and a sizeable amount of investor assets under management. Because 

there is no currently-available comprehensive database of unregistered advisers, we cannot 

determine the number of these larger advisers in operation. These larger advisers that are not yet 

registered likely already have personnel who perform similar functions to a CCO, in order to 

address the adviser‘s liability exposure and protect its reputation.

In smaller advisers, the designated CCO will likely also fill another function in the 

adviser, and perform additional duties alongside compliance matters. Advisers designating a 

CCO from existing staff may experience costs that result from shifting responsibilities among 

staff or additional compensation, to the extent the individual is taking on additional compliance 

 

604 See, e.g., Katten Foreign Insurance Letter (―In addition, there are added salary costs for hiring a 

chief compliance officer. In all, costs could be expected to total hundreds of thousands of dollars 

and hundreds of hours of personnel time for each new registrant.‖); Comment Letter of Cortec 

Group (Jan. 14, 2011) (―Cortec Letter‖) (―Furthermore, the Act requires we add a compliance 

officer (who has to be a senior-level executive), at a minimum annual compensation of $200,000, 

yet we do not engage in any activity the Act wishes to monitor.‖). Other commenters may have 

included such costs in their estimates although they did not provide details on individual 

components. See, e.g., Crestview Letter (―As part of these new regulations, we are required to 

develop a compliance program; hire a compliance officer; custody our private company stock 

certificates, which are worthless to any party not part of the original purchase agreement; and 

register with the SEC.‖) 

605 See Advisers Act rule 206(4)-(7) (requiring, among other things, an adviser registered or required 

to be registered under the Advisers Act to designate an individual (who is a supervised person) 

responsible for administering the policies and procedures). In determining whether existing staff 

can fulfill the CCO requirement, advisers may consider factors such as the size of the firm, the 

complexity of its compliance environment, and the qualifications of current staff.
- 155 -

responsibilities or giving up other non-compliance responsibilities. Costs will vary from adviser 

to adviser, depending on the extent to which an adviser‘s staff is already performing some or all 

of the requisite compliance functions, the extent to which the CCO‘s non-compliance 

responsibilities need to be lessened to permit allocation of more time to compliance 

responsibilities, and the value to the adviser of the CCO‘s non-compliance responsibilities.606

Some commenters asserted that the costs of ongoing compliance would be substantial.607 

We anticipate that there may be a number of currently unregistered advisers whose operations 

are already substantially in compliance with the Advisers Act and that would therefore 

experience only minimal incremental ongoing costs as a result of registration. There likely are 

other currently unregistered advisers, however, who will face additional ongoing costs to conduct 

their operations in compliance with the Advisers Act, and these costs may be significant for 

some of these advisers. 

We do not have access to information that would enable us to determine these additional 

ongoing costs, which are predominantly internal to the advisers themselves. Incremental 

ongoing compliance costs will vary from adviser to adviser depending on factors such as the 

complexity of each adviser‘s activities, the business decisions it makes in structuring its response 

to its compliance obligations, and the extent to which it is already conducting its operations in 

compliance with the Advisers Act. Indeed, the broad range of estimated costs we received 

reflects the individualized nature of these costs and the extent to which they may vary even 

 

606 Although some commenters noted that requiring existing employees to assume compliancerelated responsibilities would involve costs, they did not provide sufficient information on which 

we could estimate these costs.

607 See supra note 602.
- 156 -

among the relatively small number of commenters who provided cost estimates.608

Some commenters expressed concern that compliance costs would be prohibitive in 

comparison to their revenues or in relation to their size or activities.609 We note, however, that 

an adviser is required to adopt policies and procedures that take into consideration the nature of 

that adviser‘s operations.610 We have explained that, accordingly, we would expect smaller 

advisers without conflicting business interests to require much simpler policies and procedures 

than larger advisers that, for example, have multiple potential conflicts as a result of their other 

lines of business or their affiliations with other financial service firms.611 The preparation of 

these simpler policies and procedures and their administration should be much less 

burdensome.612

 

608 Compare Azalea Letter (estimated ongoing compliance costs of $50,000 to $100,000 per year) 

with Crestview Letter (estimated ongoing compliance costs of $300,000 to $500,000 per year). 

See also Charlesbank Letter (stating that costs associated with ongoing compliance are impossible 

to quantify at this point).

609 See, e.g., Crestview Letter (―The cost of complying with these new regulations is estimated to be 

$300,000-$500,000 per year, which is a significant sum for a firm that invests in two to three 

private companies each year in relation to the benefit it provides.‖); Azalea Letter (―The cost of 

complying with these new regulations is estimated to be $50,000 to $100,000 per year, which is a 

significant sum for a firm that invests in two to three private companies each year.‖); Gen Cap 

Letter (―The cost of complying with these new regulations is estimated to be $150,000-$250,000 

per year, which is a significant sum for a firm that invests in two to three private companies each 

year in relation to the benefit it provides.‖). 

610 See Compliance Programs of Investment Companies and Investment Advisers, Investment 

Advisers Act Release No. 2204 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)], discussion at 

section II.A.1.

611 Id. See also id. at n.13 (noting that even small advisers may have arrangements, such as soft 

dollar agreements, that create conflicts; advisers of all sizes, in designing and updating their 

compliance programs, must identify these arrangements and provide for the effective control of 

the resulting conflicts).

612 Id., discussion at section II.A.1.
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We also note that approximately 570 smaller advisers currently are registered with us.613 

These advisers have absorbed the compliance costs associated with registration, notwithstanding 

the fact that their assets under management are likely to be smaller than those of an adviser 

managing one venture capital fund of average size (e.g., with $107.8 million in venture capital 

under management614) that may be required to register because it cannot rely on the venture 

capital exemption or the private fund adviser exemption. Moreover, as we explained in the 

Proposing Release, in connection with previous estimates we have made regarding compliance 

costs for registered advisers, we received comments from small advisers estimating that their 

annual compliance costs would be $25,000 and could be as high as $50,000.615 Finally, as we 

noted in the Proposing Release, to the extent there would be an increase in registered advisers, 

there are benefits to registration for both investors and the Commission.616

We do not believe that the definition of venture capital fund is likely to affect whether 

advisers to venture capital funds would choose to launch new funds or whether persons would 

choose to enter into the business of advising venture capital funds because, as noted above, we 

believe the definition, as revised, reflects the way most venture capital funds currently operate. 

Thus, for example, we eliminated the managerial assistance criterion in the proposed definition, 

expanded the short-term instruments in which venture capital funds can invest and provided for a 

non-qualifying basket. These elements in the proposal could have resulted in costs to advisers 

that manage venture capital funds with business or cash management practices inconsistent with 

 

613 See Implementing Adopting Release, supra note 32, at n.823 and accompanying text (noting that, 

based on data from the Investment Adviser Registration Depository as of April 7, 2011, 572 

advisers registered with the Commission were small advisers). 

614 See NVCA Yearbook 2011, supra note 152, at 9, Fig. 1.0.

615 See Proposing Release, supra note 26, at n.303. See also supra note 601.

616 See supra text following note 575.
- 158 -

those proposed criteria and that sought to rely on the exemption.617 As a result, we expect that 

the definition is not likely to significantly affect the way in which investment advisers to these 

funds do business and thus compete. For the same reason, we do not believe that our rule is 

likely to have a significant effect on overall capital formation.

Other Costs. Some commenters argued in favor of a narrow definition of venture capital 

fund in order to preclude advisers to other types of funds from relying on the definition.618 One 

commenter expressed the concern that the definition should be narrow so that advisers generally 

would be subject to a consistent regulatory regime,619 and another supported incorporating 

substantive Advisers Act rules, such as custody, as a condition for reliance on the various 

exemptions in order to protect investors.620 To the extent that our final rule includes broader 

criteria and results in fewer registrants under the Advisers Act, we acknowledge that this could 

have an adverse impact on investors.

621

 

Moreover, to the extent that our final rule includes broader criteria and results in fewer 

registrants, this also could reduce the amount of information available to regulators with respect 

to venture capital advisers relying on the exemption. Under the final rule, immediately after it 

acquires any non-qualifying investment (excluding short-term holdings), no more than 20 

percent of a qualifying fund‘s capital commitments may be held in non-qualifying investments

(excluding short-term holdings). As a result, initially, and possibly for a period of time during 

 

617 See supra notes 548, 586 and accompanying text.

618 See supra note 43.

619 CalPERS Letter. See also NASAA Letter (supported adding substantive requirements to the 

grandfathering provision).

620 CPIC Letter.

621 See supra text accompanying and following note 575 (discussing benefits that result from 

registration).
- 159 -

the fund‘s term (subject to compliance with the other elements of the rule), it may be possible for 

non-qualifying investments to comprise most of a qualifying fund‘s investment portfolio. The 

proposal would have required a qualifying fund to be comprised entirely of qualifying 

investments, which would have enabled regulators and investors to confirm with relative ease at 

any point in time whether a fund satisfied the definition. Modifying the definition to include a 

non-qualifying basket determined as a percentage of a qualifying fund‘s capital commitments

may increase the monitoring costs that regulators and investors may incur in order to verify that a 

fund satisfies the definition, depending on the length of the fund‘s investment period and the 

frequency with which the fund invests in non-qualifying investments.

A number of commenters expressed concerns with certain elements of the proposed rule, 

which we are not modifying. Several commenters suggested that the rule specify that the 

leverage limit of 15 percent be calculated without regard to uncalled capital commitments 

because they were concerned about the potential for excessive leverage.622 We acknowledge that 

a leverage limitation which includes uncalled capital commitments could result in a fund 

incurring, in the early stages of the fund‘s life, a significant degree of leverage by the fund 

relative to the fund‘s overall assets. We believe, however, that the 120-day limit would mitigate 

the effects of any such leverage that is incurred by a venture capital fund seeking to satisfy the 

definition.

Several commenters also argued that the definition of qualifying portfolio company 

should include certain subsidiaries that may be owned by a publicly traded company, such as 

research and development subsidiaries, that may seek venture capital funding.623 As a result of 

 

622 AFR Letter; AFL-CIO Letter.

623 BCLBE Letter; Dechert General Letter; Gunderson Dettmer Letter.
- 160 -

our final rule, these types of subsidiaries may have reduced access to capital investments by 

qualifying funds, although this cost would be mitigated by a qualifying fund‘s investments made 

through the non-qualifying basket.

Other commenters argued that the definition of venture capital fund should include funds 

of venture capital funds.624 We have not modified the rule to reflect this request, because we do 

not believe that defining the term in this manner is consistent with the intent of Congress.625 To 

the extent that an adviser to a fund of venture capital funds ceases business or ceases to offer new 

funds in order to avoid registration with the Commission, this could reduce the pool of potential 

investors investing in venture capital funds,626 and potentially reduce capital formation for 

potential qualifying portfolio companies.

B. Exemption for Investment Advisers Solely to Private Funds with Less than 

$150 Million in Assets Under Management

As discussed in Section II.B, rule 203(m)-1 exempts from registration under the Advisers 

Act any investment adviser solely to private funds that has less than $150 million in assets under 

management in the United States. The rule implements the private fund adviser exemption, as 

directed by Congress, in section 203(m) of the Advisers Act and includes provisions for 

determining the amount of an adviser‘s private fund assets for purposes of the exemption and 

when those assets are deemed managed in the United States.627

1. Benefits

Method of Calculating Private Fund Assets. As discussed in Section II.B.2 above and in 

 

624 See, e.g., Cook Children‘s Letter; Merkl Letter; SVB Letter.

625 See supra notes 204-206.

626 See generally Merkl Letter; SVB Letter.

627 See supra Sections II.B.2-3.
- 161 -

the Implementing Adopting Release, we are revising the instructions to Form ADV to provide a 

uniform method for calculating assets under management that can be used for regulatory 

purposes, including determining eligibility for Commission, rather than state, registration; 

reporting assets under management for regulatory purposes on Form ADV; and determining 

eligibility for the private fund adviser exemption under section 203(m) of the Advisers Act and 

rule 203(m)-1 thereunder and the foreign private adviser exemption under section 203(b)(3) of 

the Advisers Act.

628

 We believe that this uniform approach will benefit regulators (both state 

and federal) as well as advisers, because only a single determination of assets under management 

is required for purposes of registration and exemption from federal registration. 

The instructions to Form ADV previously permitted, but did not require, advisers to 

exclude certain types of managed assets.629 As a result, it was not possible to conclude that two 

advisers reporting the same amount of assets under management were necessarily comparable 

because either adviser could have elected to exclude all or some portion of certain specified 

assets that it managed. We expect that specifying in rule 203(m)-1 that assets under management 

must be calculated according to the instructions to Form ADV will increase administrative 

efficiencies for advisers because they will have to calculate assets under management only once 

for multiple purposes.630 In addition, we believe this will minimize costs relating to software 

modifications, recordkeeping, and training required to determine assets under management for 

regulatory purposes. We also believe that the consistent calculation and reporting of assets under 

 

628 See supra notes 332-336 and accompanying text.

629 See Form ADV: Instructions to Part 1A, instr. 5.b(1), as in effect before the amendments adopted 

in the Implementing Adopting Release, supra note 32.

630 See supra Section II.B.2. As discussed below, we are permitting advisers to calculate their 

private fund assets annually in connection with their annual updating amendments to their Forms 

ADV, rather than quarterly as proposed. Requiring annual, rather than quarterly, calculations will 

be less costly for advisers.
- 162 -

management will benefit investors and regulators because it will provide enhanced transparency 

and comparability of data, and allow investors and regulators to analyze on a more cost effective 

basis whether any particular adviser may be required to register with the Commission or is 

eligible for an exemption.

Many commenters generally expressed support for the implementation of a uniform 

method of calculating assets under management in order to maintain consistency for registration 

and risk assessment purposes.631 Indeed, even some commenters who suggested that we revise 

aspects of the method of calculating regulatory assets under management nonetheless recognized 

the benefits provided by a uniform method of valuing assets for regulatory purposes.632 

We believe that the valuation of private fund assets under rule 203(m)-1 will benefit 

advisers that seek to rely on the private fund adviser exemption. Under rule 203(m)-1, each 

adviser annually must determine the amount of its private fund assets, based on the market value 

of those assets, or the fair value of those assets where market value is unavailable.

633

 We are 

 

631 See supra note 339.

632 See, e.g., AIMA Letter (suggested modifications to the method of calculating regulatory assets 

under management but also stated ―[w]e agree that a clear and unified approach for calculation of 

AUM is necessary and we believe that using as a standard the assets for which an adviser has 

 ̳responsibility‘ is appropriate‖); O‘Melveny Letter (argued that the calculation of regulatory 

assets under management as proposed ―does not provide a suitable basis to determine whether a 

fund adviser should be subject to the SEC‘s regulation‖ but also ―agree[s] with the SEC that 

 ̳uniformity in the method for calculating assets under management would result in more 

consistent asset calculations and reporting across the industry and, therefore, in more coherent 

application of the Advisers Act‘s regulatory requirements and of the SEC staff‘s risk assessment 

program‘‖).

633 See rule 203(m)-1(c) (requiring an adviser to calculate private fund assets annually, in accordance 

with General Instruction 15 to Form ADV, which together with rule 204-4 requires advisers 

relying on the exemption to determine their private fund assets annually, in connection with the 

adviser‘s annual updating amendments to its Form ADV). See also rules 203(m)-1(a)(2); 

203(m)-1(b)(2); 203(m)-1(d)(1) (defining ―assets under management‖ to mean ―regulatory assets 

under management‖ in item 5.F of Form ADV, Part 1A); 203(m)-1(d)(4) (defining ―private fund 

assets‖ to mean the ―assets under management‖ attributable to a ―qualifying private fund‖). As 
- 163 -

requiring advisers to fair value private fund assets so that, for purposes of the exemption, 

advisers value private fund assets on a meaningful and consistent basis. As we stated in the 

Proposing Release, we understand that many, but not all, advisers to private funds value assets 

based on their fair value in accordance with GAAP or other international accounting standards 

that require the use of fair value.634 We acknowledged in the Proposing Release that some 

advisers to private funds may not use fair value methodologies, which may be more difficult to 

apply when the fund holds illiquid or other types of assets that are not traded on organized 

markets.635

Frequency of Calculations and the Transition Period. Rule 203(m)-1(c) specifies that an 

adviser relying on the exemption must calculate its private fund assets annually, in accordance 

with General Instruction 15 to Form ADV, rather than quarterly, as proposed. Advisers 

registered with us and with the states, and now advisers relying on rule 203(m)-1, must calculate 

their assets under management for regulatory purposes annually in connection with their annual 

updating amendments to Form ADV. We expect that requiring these types of advisers to 

calculate their assets under management for regulatory purposes on the same schedule, and using 

the same method, will increase efficiencies for these advisers. 

The annual calculation also will allow advisers that rely on the exemption to maintain the 

 

discussed above, advisers are not required to fair value real estate assets in certain limited 

circumstances. See supra note 366 and accompanying text.

634 See Proposing Release, supra note 26, discussion at section V.B and n.196. See also ABA Letter 

(recommending that the Commission consider using a standard of ―fair value‖ for valuing assets 

and further recommending that if assets were calculated on a net basis, private funds should be 

required to prepare audited annual financial statements in accordance with GAAP (or another 

accounting standard acceptable to the Commission), and to maintain such financial statements 

under section 203(m)(2)); O‘Melveny Letter (agreeing with the statement in the Proposing 

Release that many private funds value assets based on fair value, and noting that private equity 

funds in particular are among the private funds that generally do not fair value).

635 See Proposing Release, supra note 26, discussion at section V.B. See also infra Section V.B.2. 
- 164 -

exemption despite short-term market value fluctuations that might result in the loss of the 

exemption if, for example, the rule required daily valuations or, to a less significant extent, 

quarterly valuations as proposed.636 Annual calculations should benefit these advisers by 

allowing them to avoid the cost of more frequent valuations, including costs (such as third-party 

quotes) associated with valuing illiquid assets, which may be particularly difficult to value 

because of the lack of frequency with which such assets are traded.637 Requiring annual, rather 

than quarterly, calculations thus responds to concerns expressed by commenters who argued that 

quarterly calculations would (i) impose unnecessary costs and burdens on advisers, some of 

whom might not otherwise perform quarterly valuations; and (ii) inappropriately permit shorterterm fluctuations in assets under management to require advisers to register.638

An adviser relying on the exemption that reports private fund assets of $150 million or 

more in its annual updating amendment to its Form ADV will not be eligible for the exemption

and must register under the Advisers Act unless it qualifies for another exemption. If the adviser 

 

636 See, e.g., ABA Letter (―[A] semi-annual or annual measuring period would perhaps be more 

appropriate, and [] a longer measuring period would provide an adviser that is exempt from 

registration under the Private Fund Adviser Exemption assistance in avoiding issues arising from 

temporary increases in asset values.‖); AIMA Letter (―Asset valuation is a substantial 

administrative task and is currently undertaken annually for other purposes (for example, Form 

ADV), so that a requirement for annual valuation would appear to strike a fair balance between 

ensuring that firms whose AUM is at or above the applicable threshold are  ̳captured‘ and 

avoiding both complications with short-term market value fluctuations and over-burdening 

investment advisers.‖).

637 See, e.g., Dechert Foreign Adviser Letter (―[T]he Foreign Asset Manager submits that a yearly 

calculation (rather than a quarterly calculation) would be more appropriate, as some private funds 

may not provide for quarterly calculations of their NAV.‖); Katten Foreign Advisers Letter 

(argued for annual calculations, noting that ―[m]any advisers only determine their aggregate 

assets under management on an annual basis‖); NASBIC/SBIA Letter (―Unless sought by the 

adviser, evaluations on whether to register should be made no more often than an annual basis.‖); 

Seward Letter (―We believe that annual measurement of assets for purposes of determining an 

adviser‘s ability to rely on the private fund adviser exemption would be consistent with the 

approach established under NSMIA.‖). 

638 See AIMA Letter; Dechert Foreign Adviser Letter; Dechert General Letter; EFAMA Letter; 

Katten Foreign Advisers Letter; Merkl Letter; Seward Letter.
- 165 -

has complied with all Commission reporting requirements applicable to an exempt reporting 

adviser as such, however, it may apply for registration under the Advisers Act up to 90 days after 

filing the annual updating amendment, and may continue to act as a private fund adviser, 

consistent with the requirements of rule 203(m)-1, during this transition period.

639

The transition period should benefit certain advisers. As discussed above, an adviser that 

has ―complied with all [Commission] reporting requirements applicable to an exempt reporting 

adviser as such‖ may apply for registration with the Commission up to 90 days after filing an 

annual updating amendment reflecting that the adviser has private fund assets of $150 million or 

more, and may continue to act as a private fund adviser, consistent with the requirements of rule 

203(m)-1, during this transition period.

640

 In addition, by requiring annual calculations of private 

fund assets, we are allowing advisers to whom the transition period is available 180 days after 

their fiscal year-ends to register under the Advisers Act.

641

 We expect that providing these

advisers additional time to register will reduce the burdens associated with registration by permitting 

them to register in a more deliberate and cost-effective manner, as suggested by some 

commenters.642

 

639 See supra Section II.B.2.b; rule 203(m)-1(c) (requiring advisers to calculate their private fund 

assets annually, in accordance with General Instruction 15 to Form ADV); General Instruction 15 

to Form ADV; rule 204-4.

640 See supra note 378 (explaining that the transition period is available to an adviser that has 

complied with ―all [Commission] reporting requirements applicable to an exempt reporting 

adviser as such,‖ rather than ―all applicable Commission reporting requirements,‖ as proposed).

641 An adviser must file its annual Form ADV updating amendment within 90 days after the end of 

its fiscal year and, if the transition period is available, may apply for registration up to 90 days 

after filing the amendment. We proposed, in contrast, to give advisers three months to register 

with us after becoming ineligible to rely on the exemption due to an increase in the value of their 

private fund assets as reflected in the proposed quarterly calculations.

642 See, e.g., Sadis & Goldberg Implementing Release Letter (―Three (3) months provides an 

insufficient amount of time for an investment adviser to (i) complete its ADV Parts 1, 2A and 2B, 

including the newly required narrative brochure and brochure supplement; (ii) submit its 

completed application to the Commission through IARD; and (iii) receive its approval from the 
- 166 -

Assets under Management in the United States. Under rule 203(m)-1(a), all of the private 

fund assets of an adviser with a principal office and place of business in the United States are 

considered to be ―assets under management in the United States,‖ even if the adviser has offices 

outside of the United States.643 A non-U.S. adviser must count only private fund assets it 

manages at a place of business in the United States toward the $150 million limit under the 

exemption.

As discussed below, we believe that this interpretation of ―assets under management in 

the United States‖ offers greater flexibility to advisers and reduces many costs associated with 

compliance.644 These costs could include difficult attribution determinations that would be 

required if assets are managed by teams located in multiple jurisdictions or if portfolio managers 

located in one jurisdiction rely heavily on research or other advisory services performed by 

employees located in another jurisdiction. Most commenters who addressed the issue supported 

the proposal to treat ―assets under management in the United States‖ as those assets managed at a 

U.S. place of business.645

 

Commission, which may take up to forty-five (45) days.‖); Shearman Letter (―Our experience is 

that registering an investment adviser firm in a thoughtful and deliberate manner is often closer to 

a six-month task (that can sometimes take even longer depending on the need to engage new or 

additional service providers to the firm or its funds), so that an at least 180-day transition period 

would be more appropriate.‖). 

643 As discussed above, the rule looks to an adviser‘s principal office and place of business as the 

location where it directs, controls and coordinates its advisory activities. Rule 203(m)-1(d)(3).

644 See, e.g., Merkl Letter (stated that this interpretation would be easier to apply than the alternative 

interpretation about which we sought comment which looks to the source of the assets). 

645 See, e.g., Debevoise Letter (―In particular, it is our view that the discussion of the proposed 

definition of the term  ̳assets under management in the United States‘ is a fair reflection of the 

policy underlying Section 203(m) of the Advisers Act (as amended by the Dodd-Frank Act) and 

is consistent with prior Commission and Staff statements concerning the territorial scope of the 

Advisers Act.‖); MAp Airports Letter; Non-U.S. Adviser Letter (―By adopting a very pragmatic 

and sensible jurisdictional approach to regulation, the Commission is appropriately recognizing 

general principles of international comity and the fact that activities of non-U.S. advisers outside 

the United States are less likely to implicate U.S. regulatory interests.‖). Cf. Sen. Levin Letter 
- 167 -

To the extent that this interpretation may increase the number of advisers subject to 

registration under the Advisers Act, we anticipate that our rule also will benefit investors by 

providing more information about those advisers (e.g., information that would become available 

through Form ADV, Part I). We further believe that this will enhance investor protection by 

increasing the number of advisers registering pursuant to the Advisers Act and by improving our 

ability to exercise our investor protection and enforcement mandates over those newly registered 

advisers. As discussed above, registration offers benefits to the investing public, including 

periodic examination of the adviser and compliance with rules requiring recordkeeping, custody 

of client funds and compliance programs.646

Territorial Approach. Under rule 203(m)-1(b), a non-U.S. adviser with no U.S. place of 

business may avail itself of the exemption even if it advises non-U.S. clients that are not private 

funds, provided that it does not advise any U.S. clients other than private funds.647 We believe 

that this aspect of the rule, which looks primarily to the principal office and place of business of 

an adviser to determine eligibility for the exemption, will increase the number of non-U.S. 

advisers that may be eligible for the exemption. As with other Commission rules that adopt a 

territorial approach, the private fund adviser exemption is available to a non-U.S. adviser 

(regardless of its non-U.S. advisory or other business activities) in recognition that non-U.S. 

activities of non-U.S. advisers are less likely to implicate U.S. regulatory interests and in 

consideration of general principles of international comity. This aspect of the rule is designed to 

 

(stated that advisers managing assets in the United States of funds incorporated outside of the 

United States ―are exactly the type of investment advisers to which the Dodd-Frank Act‘s 

registration requirements are intended to apply‖). See also supra note 386.

646 See supra text preceding, accompanying, and following note 575. 

647 By contrast, a U.S. adviser may ―solely advise private funds‖ as specified in the statute. Compare

rule 203(m)-1(a)(1) with rule 203(m)-1(b)(1).
- 168 -

encourage the participation of non-U.S. advisers in the U.S. market by applying the U.S. 

securities laws in a manner that does not impose U.S. regulatory and operational requirements on 

a non-U.S. adviser‘s non-U.S. advisory business.648

We believe that our interpretation of the availability of the private fund adviser 

exemption for non-U.S. advisers, as reflected in the rule, will benefit those advisers by 

facilitating their continued participation in the U.S. market with limited disruption to their nonU.S. advisory or other business practices.649

 This approach also should benefit U.S. investors 

and facilitate competition in the market for advisory services to the extent that it maintains or 

increases U.S. investors‘ access to potential advisers. Furthermore, because non-U.S. advisers 

that elect to avail themselves of the exemption would be subject to certain reporting 

requirements,650 we believe that our approach will increase the availability of information 

publicly available to U.S. investors who invest in the private funds advised by such exempt but 

reporting non-U.S. advisers.

Most of the commenters who considered this aspect of the rule supported it, citing, 

among other benefits, that this interpretation would effectively protect U.S. markets and 

investors and is consistent with the Commission‘s overall territorial approach to Advisers Act 

regulation.651 For example, one commenter stated that the ―jurisdictional approach to only 

considering U.S. activities for non-U.S. advisors is prudent as it focuses on what causes 

 

648 See supra note 393 and accompanying text.

649 See supra Section II.B.3.

650 See Implementing Adopting Release, supra note 32, discussion at section II.B.

651 ABA Letter; Debevoise Letter; Dechert Foreign Adviser Letter; Gunderson Dettmer Letter; 

Katten Foreign Advisers Letter; MAp Airports Letter; Merkl Letter; Wellington Letter.
- 169 -

systematic [sic] risks to the U.S.‖652 Another noted that non-U.S. persons dealing with non-U.S. 

advisers would not expect to benefit from the protections provided by the Advisers Act.653 

Another stated that this approach, together with our interpretation of ―assets under management 

in the United States,‖ will ―avoid the issues associated with conflicting and overlapping 

regulation.‖654

Rule 203(m)-1(b) uses the term ―United States person,‖ which generally incorporates the 

definition of a ―U.S. person‖ in Regulation S.655 We believe that generally incorporating the 

definition of a ―U.S. person‖ in Regulation S will benefit advisers, because Regulation S 

provides a well-developed body of law that, in our view, appropriately addresses many of the 

questions that will arise under rule 203(m)-1. Moreover, advisers to private funds and their 

counsel currently must be familiar with the definition of ―U.S. person‖ under Regulation S in 

order to comply with other provisions of the federal securities laws. Commenters generally 

supported defining ―United States person‖ by reference to Regulation S, confirming that the 

 

652 Wellington Letter. 

653 Debevoise Letter. See also ABA Letter (―When, in the private fund context, United States 

investors invest with a non-United States-based investment manager, they understand they are not 

being afforded the investor protection safeguards of the United States Investment Advisers 

Act.‖); Avoca Letter (―It is reasonable to assume that U.S. investors who purchase shares of a 

private fund (as defined in section 202(a)(29)) will not expect an investment adviser that has no 

United States presence to be registered with the U.S. SEC as an investment adviser.‖). 

654 ABA Letter.

655 Rule 203(m)-1(d)(8) (defining a ―United States person‖ as any person that is a ―U.S. person‖ as 

defined in Regulation S, except that any discretionary account or similar account that is held for 

the benefit of a United States person by a dealer or other professional fiduciary is a United States 

person if the dealer or professional fiduciary is a related person of the investment adviser relying 

on rule 203(m)-1 and is not organized, incorporated, or (if an individual) resident in the United 

States). As discussed above, two commenters that generally supported our incorporation of the 

definition in Regulation S also urged us to modify our proposed definition in certain respects. 

See supra notes 409-413 and accompanying text. We decline to accept these suggestions for the 

reasons discussed in Section II.B.4, and we continue to believe that advisers will benefit from the 

efficiencies created by our general incorporation of the definition of ―U.S. person‖ in Regulation 

S. 
- 170 -

definition is well developed and understood by advisers.656 

We also are adding a note to rule 203(m)-1 that clarifies that a client will not be 

considered a United States person if the client was not a United States person at the time of 

becoming a client of the adviser.657 This will benefit non-U.S. advisers, which might, absent this 

note, incur costs in trying to determine whether they would be permitted to rely on rule 203(m)-1 

if one of their existing non-U.S. clients that is not a private fund becomes a United States person, 

for example if a natural person client residing abroad relocates to the United States.658 The nonU.S. adviser could at that time be considered to have a United States person client other than a 

private fund. 

Definition of a Qualifying Private Fund. We proposed to define a ―qualifying private 

fund‖ as ―any private fund that is not registered under section 8 of the Investment Company Act 

of 1940 (15 U.S.C 80a-8) and has not elected to be treated as a business development company 

pursuant to section 54 of that Act (15 U.S.C. 80a-53).‖659 We are modifying rule 203(m)-1 to 

also permit an adviser to treat as a ―private fund,‖ and thus as a ―qualifying private fund,‖ an 

issuer that qualifies for an exclusion from the definition of ―investment company,‖ as defined in 

section 3 of the Investment Company Act, in addition to those provided by section 3(c)(1) or 

 

656 AIMA Letter; CompliGlobe Letter; Debevoise Letter; Dechert General Letter; Gunderson 

Dettmer Letter; Katten Foreign Advisers Letter; O‘Melveny Letter. 

657 See supra Section II.B.4.

658 See EFAMA Letter (argued that an analogous note in the foreign private adviser exemption, 

revised consistent with its comments, ―also should apply to the  ̳private fund adviser exemption‘ 

and the  ̳venture capital fund exemption‘‖); IFIC Letter (―We ask for clarification from the SEC 

as to whether it will apply the [analogous note to the foreign private adviser exemption] in other 

contexts for purposes of compliance with the U.S. federal securities laws, including compliance 

with Rule 12g3-2(b) of the 1934 Act.‖). 

659 See proposed rule 203(m)-1(e)(5).
- 171 -

3(c)(7) of that Act.660 Absent this modification, an adviser to a section 3(c)(1) or 3(c)(7) fund 

would lose the exemption if the fund also qualified for another exclusion.661 For example, an 

adviser to a section 3(c)(1) or 3(c)(7) fund would lose the exemption if the fund also qualified for 

another exclusion, even though the adviser may be unaware of the fund so qualifying and the 

fund does not purport to rely on the other exclusion.

Expanding the range of potential ―qualifying private funds,‖ therefore, should benefit 

advisers to funds that also qualify for other exclusions by permitting these advisers to rely on the 

exemption.662 It also will prevent advisers from violating the Advisers Act‘s registration 

requirements solely because their funds qualify for another exclusion. In addition, advisers will 

not be required to incur the time and expense required to assess whether the funds they advise 

also qualify for an additional exclusion.

2. Costs

Assets under Management in the United States. As noted above, under rule 203(m)-1, we 

look to an adviser‘s principal office and place of business as the location where the adviser 

directs, controls or has responsibility for the management of private fund assets, and therefore as 

the place where all the adviser‘s assets are managed.663 Thus, a U.S. adviser must include all of 

its private fund assets under management in determining whether it exceeds the $150 million 

 

660 Rule 203(m)-1(d)(5). An adviser relying on this provision must treat the fund as a private fund 

under the Advisers Act and the rules thereunder for all purposes (e.g., reporting on Form ADV). 

Id.

661 A fund that qualifies for an additional exclusion would not be a private fund, because a ―private 

fund‖ is a fund that would be an investment company as defined in section 3 of the Investment 

Company Act but for section 3(c)(1) or 3(c)(7) of that Act. See supra Section II.B.1.

662 See, e.g., Dechert General Letter (argued that advisers should be permitted to treat as a private 

fund for purposes of rule 203(m)-1 a fund that qualifies for another exclusion from the definition 

of ―investment company‖ in the Investment Company Act in addition to section 3(c)(1) or 

3(c)(7), such as section 3(c)(5)(C), which excludes certain real estate funds).

663 See supra note 385 and accompanying text.
- 172 -

limit under the exemption. We also look to where day-to-day management of private fund assets 

may occur for purposes of a non-U.S. adviser, whose principal office and place of business is 

outside of the United States.664 A non-U.S. adviser therefore would count only the private fund 

assets it manages at a place of business in the United States in determining the availability of the 

exemption. This approach is similar to the way we have identified the location of the adviser for 

regulatory purposes under our current rules,

665 and we believe it is the way in which most 

advisers would have interpreted the exemption without our rule.666 

We believe that our approach will promote efficiency because advisers are familiar with 

it, and we do not anticipate that U.S. advisers to private funds would likely change their business 

models, the location of their private funds or the location where they manage assets as a result of 

the rule. As noted in the Proposing Release, we expect that non-U.S. advisers may, however, 

incur minimal costs to determine whether they have assets under management in the United 

States. We estimate that these costs would be no greater than $6,730 per adviser to hire U.S. 

counsel and perform an internal review to assist in this determination, in particular to assess 

whether a non-U.S. affiliate manages a discretionary account for the benefit of a United States 

 

664 See supra note 384 and accompanying text. 

665 See supra note 385 and accompanying text. 

666 We do not believe that the statutory text refers to where the assets themselves may be located or 

traded or the location of the account where the assets are held. In today‘s market, using the 

location of assets would raise numerous questions of where a security with no physical existence 

is ―located.‖ Although physical stock certificates were once sent to investors as proof of 

ownership, stock certificates are now centrally held by securities depositories, which perform 

electronic ―book-entry‖ changes in their records to document ownership of securities. This 

arrangement reduces transmittal costs and increases efficiencies for securities settlements. See 

generally Bank for International Settlements, The Depository Trust Company: Response to the 

Disclosure Framework for Securities Settlement Systems (2002), 

http://www.bis.org/publ/cpss20r3.pdf. An account also has no physical location even if the prime 

broker, custodian or other service that holds assets on behalf of the customer does. Each of these 

approaches would be confusing and extremely difficult to apply on a consistent basis.
- 173 -

person under the rule.667 

As noted above, because the rule is designed to encourage the participation of non-U.S. 

advisers in the U.S. market, we believe that it will have minimal regulatory and operational 

burdens on non-U.S. advisers and their U.S. clients. Non-U.S. advisers may rely on the rule if 

they manage U.S. private funds with more than $150 million in assets at a non-U.S. location as 

long as the private fund assets managed at a U.S. place of business are less than $150 million. 

This could affect competition with U.S. advisers, which must register when they have $150 

million in private fund assets under management regardless of where the assets are managed. 

In contrast to the many commenters who supported our approach, one commenter argued 

that treating U.S. and non-U.S. advisers differently would disadvantage U.S.-based advisers by 

permitting non-U.S. advisers to accept substantial amounts of money from U.S. investors without 

having to comply with certain U.S. regulatory requirements, and would cause advisers to move 

offshore or close U.S. offices to avoid regulation.668 

As we explained in the Proposing Release, we believe that our interpretation recognizes 

 

667 We estimated in the Proposing Release that a non-U.S. adviser would need no more than 10 hours 

of external legal advice (at $400 per hour) and 10 hours of internal review by a senior compliance 

officer (at $294 per hour) to evaluate whether the adviser would qualify for the exemption 

provided by rule 203(m)-1, for a total estimated cost of $6,940. We did not receive any 

comments on these estimates. We are, however, decreasing this estimate slightly, to $6,730, to 

account for more recent salary data reflecting a $273 per hour wage for senior compliance 

officers. See supra note 597. One commenter suggested that we presume for non-U.S. advisers, 

like U.S. advisers, that all of their private fund assets are managed at their principal office and 

place of business. Katten Foreign Advisers Letter. We decline to adopt this suggestion for the 

reasons discussed above. See supra notes 388-389 and accompanying text. In addition, the 

commenter did not convince us that the costs we estimate a non-U.S. adviser would incur in 

determining if it has assets under management in the United States justify foregoing our approach 

and its attendant benefits. To the extent the commenter suggests that we adopt an alternative 

interpretation to conserve our resources, we note that any interpretation that requires additional 

advisers to register will contribute to our workload, and registration provides benefits of its own, 

as discussed above. 

668 Portfolio Manager Letter. See also Tuttle Implementing Release Letter (argued that businesses 

may move offshore if they become too highly regulated in the United States).
- 174 -

that non-U.S. activities of non-U.S. advisers are less likely to implicate U.S. regulatory interests 

and is in keeping with general principles of international comity.669 The rule also is designed to 

encourage the participation of non-U.S. advisers in the U.S. market by applying the U.S. 

securities laws in a manner that does not impose U.S. regulatory and operational requirements on 

a non-U.S. adviser‘s non-U.S. advisory business.670 Non-U.S. advisers relying on rule 203(m)-1 

will remain subject to the Advisers Act‘s antifraud provisions and will become subject to the 

requirements applicable to exempt reporting advisers. Moreover, the commenter appears to 

suggest that an adviser that moves offshore to avoid registering under the Advisers Act would 

not be subject to any regulation as an investment adviser, but we understand that most non-U.S. 

advisers to private funds locate in major financial centers in jurisdictions that regulate investment 

advisers. We therefore believe that any competitive consequences to U.S. advisers will be 

diminished.671 

As we acknowledged in the Proposing Release, to avail themselves of rule 203(m)-1, 

some advisers might choose to move their principal offices and places of business outside of the 

United States and manage private funds at those locations.672 This could result in costs to U.S. 

investors in private funds that are managed by these advisers because they would not have the 

investor protection and other benefits that result from an adviser‘s registration under the 

Advisers Act. We do not expect that many advisers would be likely to relocate for purposes of 

avoiding registration, however, because, as we explained in the Proposing Release, we 

 

669 See supra note 392 and accompanying text.

670 See supra note 393 and accompanying text.

671 See also supra Section II.B.3. We also decline to accept a separate commenter‘s suggestion to 

permit U.S. advisers to exclude assets managed at non-U.S. offices. See supra notes 395-396 and 

accompanying and following text. 

672 See Proposing Release, supra note 26, discussion at section V.B.2.
- 175 -

understand that the primary reasons for advisers to locate in a particular jurisdiction involve tax 

and other business considerations.673 

We also note that if an adviser did relocate, it would incur the costs of regulation under 

the laws of most of the foreign jurisdictions in which it may be likely to relocate, as well as the 

costs of complying with the reporting requirements applicable to exempt reporting advisers, 

unless it also qualified for the foreign private adviser exemption. We do not believe, in any case, 

that the adviser would relocate if relocation would result in a material decrease in the amount of 

assets managed because that loss would likely not justify the benefits of avoiding registration, 

and thus we do not believe our rule is likely to have an adverse effect on capital formation.

One commenter also proposed that we adopt an alternative approach that would look to 

the source of the assets.674 Under this alternative approach, a non-U.S. adviser would count the 

assets of private funds attributable to U.S. investors towards the $150 million threshold, 

regardless of the location where it manages private funds, and a U.S. adviser would exclude 

assets that are not attributable to U.S. investors. As a result, more U.S. advisers might be able to 

rely on rule 203(m)-1 under this alternative interpretation. To the extent that non-U.S. advisers 

 

673 We note that the two commenters that suggested U.S. advisers might relocate to rely on the rule 

provided no data as to the likelihood that this would occur or the number or types of advisers who 

might relocate, and neither refuted our contention that the primary reasons for advisers to locate 

in a particular jurisdiction involve tax and other business considerations. See Portfolio Manager 

Letter; Tuttle Implementing Release Letter. 

674 Portfolio Manager Letter (―If you raise significant money here you should be on the same level 

playing field as the fund managers located here so that we can compete fairly.‖). See also Merkl 

Letter (suggested that it ―may be useful‖ to look both to assets managed from a U.S. place of 

business and assets contributed by U.S. private fund investors to address both investor protection 

and systemic risk concerns). Another commenter suggested that we determine the ―assets under 

management in the United States‖ for U.S. advisers by reference to the amount of assets invested, 

or ―in play,‖ in the United States. Dougherty Letter. We decline to adopt this approach because 

it would be difficult for advisers to ascertain and monitor which assets are invested in the United 

States, and this approach thus would be confusing and extremely difficult to apply on a consistent 

basis. See supra note 394 and accompanying and following text. 
- 176 -

have U.S. investors in private funds that they manage at a non-U.S. location, fewer non-U.S. 

advisers would be eligible for the exemption. Thus, this alternative could increase costs for 

those non-U.S. advisers that would have to register but reduce costs for those U.S. advisers that 

would not have to register. 

This alternative approach also could adversely affect U.S. investors to the extent that it 

discouraged U.S. advisers from managing U.S. investor assets. A U.S. adviser might avoid 

managing assets from U.S. investors because, under this alternative interpretation, the assets 

would be included in determining whether the adviser was eligible to rely on rule 203(m)-1. 

This could reduce competition for the management of assets from U.S. investors. The likelihood 

of U.S. advisers seeking to avoid registration in this way might be mitigated, however, to the 

extent that the loss of managed assets of U.S. investors would exceed the savings from avoiding 

registration.

Method of Calculating Private Fund Assets. Rule 203(m)-1 incorporates the valuation 

methodology in the instructions to Form ADV, which requires advisers to use the market value 

of private fund assets, or the fair value of private fund assets where market value is unavailable, 

when determining regulatory assets under management and to include in the calculation certain 

types of assets advisers previously were permitted to exclude. The revised instructions also 

clarify that this calculation must be done on a gross basis. 

We acknowledged in the Proposing Release that some private fund advisers may not use 

fair value methodologies.675 As we explained there, the costs incurred by those advisers to use 

 

675 See supra note 634 and accompanying and following text. In addition, we estimate in the 

Implementing Adopting Release, based on registered advisers‘ responses to Items 5.D, 7.B, and 

9.C of Form ADV, that approximately 3% of registered advisers have at least one private fund 

client that is not audited, and that these advisers therefore may incur costs to fair value their 

private fund assets. See Implementing Adopting Release, supra note 32, at nn.634-641 and 
- 177 -

fair valuation methodologies would vary based on factors such as the nature of the asset, the 

number of positions that do not have a market value, and whether the adviser has the ability to 

value such assets internally or would rely on a third party for valuation services.676 Nevertheless, 

we continue to believe that the requirement to use fair value would not result in significant costs 

for these advisers, particularly in light of our decision to require annual, rather than quarterly, 

valuations. We also understand that private fund advisers, including those that may not use fair 

value methodologies for reporting purposes, perform administrative services, including valuing 

assets, internally as a matter of business practice.677 

A number of commenters objected to the requirement to determine private fund assets 

based on fair value, generally arguing that the requirement would cause those advisers that did 

not use fair value methods to incur additional costs, especially if the private funds‘ assets that 

they manage are illiquid and therefore difficult to fair value.678 As discussed in Section II.B.2, 

we are sensitive to the costs this new requirement will impose, and we requested comment in the 

Proposing Release on our estimates concerning the costs related to fair value. Commission staff 

 

accompanying text. We also estimate in that release that each of these registered advisers that 

potentially would incur costs as a result of the fair value requirement would incur costs of 

$37,625 on an annual basis. Id., at n.641 and accompanying text. This is the middle of the range 

of the estimated fair value costs, which range from $250 to $75,000 annually. Id. See also infra 

notes 680-681 and accompanying text. 

676 See Proposing Release, supra note 26, at n.323 and accompanying text. 

677 For example, a hedge fund adviser may value fund assets for purposes of allowing new 

investments in the fund or redemptions by existing investors, which may be permitted on a 

regular basis after an initial lock-up period. An adviser to private equity funds may obtain 

valuations of portfolio companies in which the fund invests in connection with financing obtained 

by those companies. Advisers to private funds also may value portfolio companies each time the 

fund makes (or considers making) a follow-on investment in the company. Private fund advisers 

could use these valuations as a basis for complying with the fair valuation requirement applicable 

to private fund assets. 

678 See, e.g., Gunderson Dettmer Letter; Merkl Letter; O‘Melveny Letter; Seward Letter; Wellington 

Letter. 
- 178 -

estimates that such an adviser would incur $1,320 in internal costs to conform its internal 

valuations to a fair value standard.

679

 In the event a fund does not have an internal capability for 

valuing specific illiquid assets, we expect that it could obtain pricing or valuation services from 

an outside administrator or other service provider. Staff estimated that the cost of such a service 

would range from $1,000 to $120,000 annually, which could be borne by several funds that 

invest in similar assets or have similar investment strategies.680 We did not receive any 

comments on these estimates. These estimates, however, assumed that an adviser would be 

required to calculate the fair value of its private funds assets quarterly, as required by rule 

203(m)-1 as proposed. We are reducing the estimated range to $250 to $75,000 annually to 

reflect that rule 203(m)-1 requires advisers to calculate their private fund assets annually, rather 

 

679 We estimated in the Proposing Release that such an adviser would incur $1,224 in internal costs 

to conform its internal valuations to a fair value standard. See Proposing Release, supra note 26, 

at n.325. We received no comments on this estimate. We are, however, increasing this estimate 

slightly, to $1,320, to account for more recent salary data. This revised estimate is based upon 

the following calculation: 8 hours x $165/hour = $1,320. The hourly wage is based on data for a 

fund senior accountant from SIFMA‘s Management & Professional Earnings in the Securities 

Industry 2010, modified by Commission staff to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead.

680 These estimates are based on conversations with valuation service providers. We understand that 

the cost of valuation for illiquid fixed income securities generally ranges from $1.00 to $5.00 per 

security, depending on the difficulty of valuation, and is performed for clients on a weekly or 

monthly basis. We understand that appraisals of privately placed equity securities may cost from 

$3,000 to $5,000 with updates to such values at much lower prices. For purposes of this cost 

benefit analysis, we are estimating the range of costs for (i) a private fund that holds 50 fixed 

income securities at a cost of $5.00 to price and (ii) a private fund that holds privately placed 

securities of 15 issuers that each cost $5,000 to value initially and $1,000 thereafter. We believe 

that costs for funds that hold both fixed-income and privately placed equity securities would fall 

within the maximum of our estimated range. We note that funds that have significant positions in 

illiquid securities are likely to have the in-house capacity to value those securities or already 

subscribe to a third-party service to value them. We note that many private funds are likely to 

have many fewer fixed income illiquid securities in their portfolios, some or all of which may 

cost less than $5.00 per security to value. Finally, we note that obtaining valuation services for a 

small number of fixed income positions on an annual basis may result in a higher cost for each 

security or require a subscription to the valuation service for those that do not already purchase 

such services. The staff‘s estimate is based on the following calculations: (50 x $5.00 x 4 = 

$1,000); (15 x $5,000) + (15 x $1,000 x 3) = $120,000).
- 179 -

than quarterly as proposed.681

In addition, as discussed above, we have taken several steps to mitigate these costs.682 

While many advisers will calculate fair value in accordance with GAAP or another international 

accounting standard,

683 other advisers acting consistently and in good faith may utilize another 

fair valuation standard.

684

 While these other standards may not provide the quality of 

information in financial reporting (for example, of private fund returns), we expect these 

calculations will provide sufficient consistency for the purposes that regulatory assets under 

management serve in our rules, including rule 203(m)-1.

685

 

Use of the alternative approaches recommended by commenters (e.g., cost basis or any 

method required by the private fund‘s governing documents other than fair value) would not 

meet our objective of having more meaningful and comparable valuation of private fund assets, 

and could result in a significant understatement of appreciated assets. Moreover, these 

alternative approaches could permit advisers to circumvent the Advisers Act‘s registration 

requirements. Permitting the use of any valuation standard set forth in the governing documents 

of the private fund other than fair value could effectively yield to the adviser the choice of the 

most favorable standard for determining its registration obligation as well as the application of 

other regulatory requirements. For these reasons and those discussed in the Implementing

Adopting Release, commenters did not persuade us that the extent of the additional burdens the 

fair value requirement would impose on some advisers to private funds would be inappropriate in 

 

681 The staff‘s revised estimate is based on the following calculations: (50 x $5.00 = $250; 15 x 

$5,000 = $75,000). See also supra note 680.

682 See supra notes 363-366 and accompanying text. 

683 See supra note 364 and accompanying text.

684 See supra note 365 and accompanying text. 

685 See supra note 366 and accompanying text.
- 180 -

light of the value of a more meaningful and consistent calculation by all advisers to private 

funds.

We also do not expect that advisers‘ principals (or other employees) generally will cease 

to invest alongside the advisers‘ clients as a result of the inclusion of proprietary assets, as some 

commenters suggested.686 If private fund investors value their advisers‘ co-investments as 

suggested by these commenters, we expect that the investors will demand them and their 

advisers will structure their businesses accordingly.687

One commenter also argued that including proprietary assets would deter non-U.S. 

advisers that manage large sums of proprietary assets from establishing U.S. operations and 

employing U.S. residents.688 Such an adviser, however, would not be ineligible for the private 

fund adviser exemption merely because it established U.S. operations. As discussed in Section 

II.B, a non-U.S. adviser may rely on the private fund adviser exemption while also having one or 

more U.S. places of business, provided it complies with the exemption‘s conditions. 

Some commenters objected to calculating regulatory assets under management on the 

basis of gross, rather than net, assets. They argued, among other things, that gross asset 

measurements would be confusing,689 complex,690 and inconsistent with industry practice.691 

However, nothing in the current instructions suggests that liabilities should be deducted from the 

calculation of an adviser‘s assets under management. Indeed, since 1997, the instructions have 

 

686 See, e.g., ABA Letter; Katten Foreign Advisers Letter; Seward Letter.

687 See supra note 347 and accompanying text.

688 Katten Foreign Advisers Letter.

689 Dechert General Letter. See also Implementing Adopting Release, supra note 32, at n.80 and 

accompanying text.

690 MFA Letter.

691 See, e.g., Merkl Letter; Shearman Letter. See also supra note 351.
- 181 -

stated that an adviser should not deduct securities purchased on margin when calculating its 

assets under management.

692

 Whether a client has borrowed to purchase a portion of the assets 

managed does not seem to us a relevant consideration in determining the amount an adviser has 

to manage, the scope of the adviser‘s business, or the availability of the exemptions.693

Moreover, we are concerned that the use of net assets could permit advisers to highly 

leveraged funds to avoid registration under the Advisers Act even though the activities of such 

advisers may be significant and the funds they advise may be appropriate for systemic risk 

reporting.

694

 One commenter argued, in contrast, that it would be ―extremely unlikely that a net 

asset limit of $150,000,000 in private funds could be leveraged into total investments that would 

pose any systemic risk.‖695 But a comprehensive view of systemic risk requires information 

about certain funds that may not present systemic risk concerns when viewed in isolation, but 

nonetheless are relevant to an assessment of systemic risk across the economy. Moreover, 

because private funds are not subject to the leverage restrictions in section 18 of the Investment 

Company Act, a private fund with less than $150 million in net assets could hold assets far in 

excess of that amount as a result of its extensive use of leverage. In addition, under a net assets 

test such a fund would be treated similarly for regulatory purposes as a fundamentally different 

fund, such as one that did not make extensive use of leverage and had $140 million in net assets.

The use of gross assets also need not cause any investor confusion, as some commenters 

 

692 See Form ADV: Instructions for Part 1A, instr. 5.b.(2), as in effect before it was amended by the 

Implementing Adopting Release (―Do not deduct securities purchased on margin.‖). Instruction 

5.b.(2), as amended in the Implementing Adopting Release, provides ―Do not deduct any 

outstanding indebtedness or other accrued but unpaid liabilities.‖ See Implementing Adopting 

Release, supra note 32, discussion at section II.A.3.

693 See id.

694 See id., at n.82 and preceding and accompanying text.

695 ABA Letter. 
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suggested.696 Although an adviser will be required to use gross (rather than net) assets for 

purposes of determining whether it is eligible for the private fund adviser or the foreign private 

adviser exemptions (among other purposes), we would not preclude an adviser from holding 

itself out to its clients as managing a net amount of assets as may be its custom.697

Definition of a Qualifying Private Fund. As discussed above, we modified the definition 

of a ―qualifying private fund‖ to include an issuer that qualifies for an exclusion from the 

definition of ―investment company,‖ as defined in section 3 of the Investment Company Act, in 

addition to those provided by section 3(c)(1) or 3(c)(7) of that Act. To the extent advisers are 

able to rely on the exemption as a result of this modification, investors and the Commission will 

lose the benefits registration would provide. This modification does, however, benefit advisers, 

as discussed above, and investors (and the Commission) will still have access to the information 

these advisers will be required to file as exempt reporting advisers.

Solely Advises Private Funds. Some commenters asserted, in effect, that advisers should 

be permitted to combine other exemptions with rule 203(m)-1 so that, for example, an adviser 

could advise venture capital funds with assets under management in excess of $150 million in 

addition to other, non-venture capital private funds with less than $150 million in assets under 

management.698 One commenter argued that, by declining to adopt this view, we are imposing 

unnecessary burdens, particularly on advisers who advise both small private funds and small 

business investment companies.699 But as we discuss in Section II.B.1, the approach the 

 

696 See, e.g., Dechert General Letter. See also Implementing Adopting Release, supra note 32, at 

n.80 and accompanying text.

697 See supra note 357.

698 NASBIC/SBIA Letter; Seward Letter.

699 NASBIC/SBIA Letter. 
- 183 -

commenter suggests runs contrary to the language of section 203(m), which directs us to provide 

an exemption ―to any investment adviser of private funds, if each of such investment adviser acts 

solely as an adviser to private funds and has assets under management in the United States of 

less than $150,000,000.‖ Thus, we believe that the costs to advisers that may have to register 

because they do not advise solely private funds with assets under management in the United 

States of less than $150 million flow directly from the Dodd-Frank Act.

Assessing Whether the Exemption is Available and Costs of Registration and 

Compliance. We estimate each adviser may incur between $800 to $4,800 in legal advice to 

learn whether it may rely on the exemption.700 We did not receive any comments concerning 

these estimates. We also estimate that each adviser that registers would incur registration costs, 

which we estimate would be $15,077,

701 initial compliance costs ranging from $10,000 to 

$45,000, and ongoing annual compliance costs ranging from $10,000 to $50,000.702 Some 

commenters suggested that these estimates are too low, and estimated that they would incur onetime registration and compliance costs ranging from $50,000 to $600,000, followed by ongoing 

annual compliance costs ranging from $50,000 to $500,000.703 Although some advisers may 

incur these costs, we do not believe they are representative, as discussed above.

704

 Moreover, as 

discussed above, commenters identifying themselves as ―middle market private equity fund‖ 

advisers provided the highest estimated costs, but these commenters generally would not qualify 

 

700 We estimate that a private fund adviser would obtain between 2 and 12 hours of external legal

advice (at a cost of $400 per hour) to determine whether it would be eligible for the private fund 

adviser exemption.

701 See supra note 597 and accompanying text.

702 See supra note 601 and accompanying text.

703 See supra notes 602-603 and accompanying text.

704 See supra Section V.A.2.
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for the private fund adviser exemption we are required to provide under section 203(m).

705

 We 

also note that the costs of registration for advisers that do not qualify for the private fund adviser 

exemption flow from the Dodd-Frank Act, which removed the private adviser exemption on 

which they currently rely.

C. Foreign Private Adviser Exemption 

Section 403 of the Dodd-Frank Act replaces the current private adviser exemption from 

registration under the Advisers Act with a new exemption for any ―foreign private adviser,‖ as 

defined in new section 202(a)(30) of the Advisers Act.706 We are adopting, substantially as 

proposed, new rule 202(a)(30)-1, which defines certain terms in section 202(a)(30) for use by 

advisers seeking to avail themselves of the foreign private adviser exemption, including: 

(i) ―investor;‖ (ii) ‖in the United States;‖ (iii) ―place of business;‖ and (iv) ―assets under 

management.‖707 We are also including in rule 202(a)(30)-1 the safe harbor and many of the 

client counting rules that appeared in rule 203(b)(3)-1.708

 

705 We note that the advisers that gave us these estimates for registration costs have assets under 

management in excess of the $150 million threshold and they are not representative of advisers 

that would qualify for the private fund adviser exemption. See supra notes 602-603 and 

accompanying text. We also note that approximately 570 smaller advisers currently are 

registered with us. See supra note 613 and accompanying text. These advisers have absorbed the 

compliance costs associated with registration, notwithstanding the fact that their revenues are 

likely to be smaller than those of a typical adviser that will be required to register as a result of 

Congress‘s repeal of the private adviser exemption (e.g., an adviser to private funds with $150 

million or more of assets under management in the United States, or a ―middle market‖ private 

equity adviser). See, e.g., Atlas Letter (middle market private equity adviser with $365 million of 

assets under management); Cortec Letter (middle market private equity adviser with less than 

$750 million of assets under management). See also supra note 614 and accompanying text.

706 See supra notes 415-418 and accompanying text. The new exemption is codified as amended 

section 203(b)(3). See supra Section II.C.

707 Rule 202(a)(30)-1(c).

708 See supra Section II.C. Rule 203(b)(3)-1, which we are rescinding with the Implementing 

Adopting Release, provides a safe harbor for determining who may be deemed a single client for 

purposes of the private adviser exemption. We are not, however, carrying over rules 203(b)(3)-

1(b)(4), (5), or (7). See supra notes 316, 420 and 425 and accompanying text.
- 185 -

Rule 202(a)(30)-1 clarifies several provisions used in the statutory definition of ―foreign 

private adviser.‖ First, the rule includes a safe harbor for counting clients, which previously 

appeared in rule 203(b)(3)-1, and which we have modified to account for its use in the foreign 

private adviser context. Under the safe harbor, an adviser would count certain natural persons 

as a single client under certain circumstances.709 Rule 202(a)(30)-1 also includes another 

provision of rule 203(b)(3)-1 that permits an adviser to treat as a single ―client‖ an entity that 

receives investment advice based on the entity‘s investment objectives and two or more entities 

that have identical owners.710 As proposed, we are omitting the ―special rule‖ that allowed 

advisers not to count as a client any person for whom the adviser provides investment advisory 

services without compensation.711 Finally, the rule includes two provisions that clarify that 

advisers need not double-count private funds and their investors under certain circumstances.712

Second, section 202(a)(30) provides that a ―foreign private adviser‖ eligible for the new 

registration exemption cannot have more than 14 clients ―or investors in the United States.‖ We 

 

709 Rule 202(a)(30)-1(a)(1). 

710 Rule 202(a)(30)-1(a)(2)(i)-(ii). In addition, rule 202(a)(30)-1(b)(1) through (3) contain the 

following related ―special rules:‖ (1) an adviser must count a shareholder, partner, limited 

partner, member, or beneficiary (each, an ―owner‖) of a corporation, general partnership, limited 

partnership, limited liability company, trust, or other legal organization, as a client if the adviser 

provides investment advisory services to the owner separate and apart from the investment 

advisory services provided to the legal organization; (2) an adviser is not required to count an 

owner as a client solely because the adviser, on behalf of the legal organization, offers, promotes, 

or sells interests in the legal organization to the owner, or reports periodically to the owners as a 

group solely with respect to the performance of or plans for the legal organization‘s assets or 

similar matters; and (3) any general partner, managing member or other person acting as an 

investment adviser to a limited partnership or limited liability company must treat the partnership 

or limited liability company as a client.

711 See rule 203(b)(3)-1(b)(4); supra notes 425-427 and accompanying text.

712 See rule 202(a)(30)-1(b)(4) (an adviser is not required to count a private fund as a client if it 

counts any investor, as defined in the rule, in that private fund as an investor in the United States 

in that private fund); rule 202(a)(30)-1(b)(5) (an adviser is not required to count a person as an 

investor if the adviser counts such person as a client in the United States). See also supra note 

429.
- 186 -

are defining ―investor‖ in a private fund in rule 202(a)(30)-1 as any person who would be 

included in determining the number of beneficial owners of the outstanding securities of a 

private fund under section 3(c)(1) of the Investment Company Act, or whether the outstanding 

securities of a private fund are owned exclusively by qualified purchasers under section 3(c)(7) 

of that Act.713 We are also treating as investors beneficial owners of ―short-term paper‖ issued 

by the private fund, who must be qualified purchasers under section 3(c)(7) but are not counted 

as beneficial owners for purposes of section 3(c)(1).714

Third, rule 202(a)(30)-1 defines ―in the United States‖ generally by incorporating the 

definition of a ―U.S. person‖ and ―United States‖ under Regulation S.715 In particular, we define 

―in the United States‖ in rule 202(a)(30)-1 to mean: (i) with respect to any place of business, any 

such place located in the ―United States,‖ as defined in Regulation S;716 (ii) with respect to any 

client or private fund investor in the United States, any person who is a ―U.S. person‖ as defined 

in Regulation S,717 except that under the rule, any discretionary account or similar account that is 

held for the benefit of a person ―in the United States‖ by a non-U.S. dealer or other professional 

fiduciary is a person ―in the United States‖ if the dealer or professional fiduciary is a related 

person of the investment adviser relying on the exemption; and (iii) with respect to the public, in 

 

713 See rule 202(a)(30)-1(c)(2); supra Section II.C.2. In order to avoid double-counting, the rule 

allows an adviser to treat as a single investor any person who is an investor in two or more private 

funds advised by the adviser. See rule 202(a)(30)-1, at note to paragraph (c)(2).

714 See rule 202(a)(30)-1(c)(2)(ii); supra notes 453-462 and accompanying text. Consistently with 

section 3(c)(1) and section (3)(c)(7) of the Investment Company Act, the final rule, unlike the 

proposed rule, does not treat knowledgeable employees as ―investors.‖ Cf. proposed rule 

202(a)(30)-1(c)(1)(i).

715 Rule 202(a)(30)-1(c)(3). See supra Section II.C.3. 

716 See 17 CFR 230.902(l).

717 See 17 CFR 230.902(k). We are allowing foreign advisers to determine whether a client or 

investor is ―in the United States‖ by reference to the time the person became a client or acquires 

securities issued by the private fund. See rule 202(a)(30)-1, at note to paragraph (c)(3)(i).
- 187 -

the ―United States,‖ as defined in Regulation S.718

Fourth, rule 202(a)(30)-1 defines ―place of business‖ to have the same meaning as in 

Advisers Act rule 222-1(a).719 Finally, for purposes of rule 202(a)(30)-1, we are defining ―assets 

under management‖ by reference to ―regulatory assets under management‖ as determined under 

Item 5 of Form ADV.720

1. Benefits 

We are defining certain terms included in the statutory definition of ―foreign private 

adviser‖ in order to clarify the meaning of these terms and reduce the potential administrative 

and regulatory burdens for advisers that seek to rely on the foreign private adviser exemption. 

As noted above, our rule references definitions set forth in other Commission rules under the 

Advisers Act, the Investment Company Act and the Securities Act, all of which are likely to be 

familiar to non-U.S. advisers active in the U.S. capital markets.

As we discussed in the Proposing Release, we anticipate that by defining these terms we 

will benefit non-U.S. advisers by providing clarity with respect to the terms that advisers would 

otherwise be required to interpret (and which they would likely interpret with reference to the 

rules we reference).721 Our approach provides consistency among these other rules and the new 

exemption. This should limit non-U.S. advisers‘ need to undertake additional analysis with 

 

718 See 17 CFR 230.902(l).

719 See rule 202(a)(30)-1(c)(4); rule 222-1(a) (defining ―place of business‖ of an investment adviser 

as: ―(1) An office at which the investment adviser regularly provides investment advisory 

services, solicits, meets with, or otherwise communicates with clients; and (2) Any other location 

that is held out to the general public as a location at which the investment adviser provides 

investment advisory services, solicits, meets with, or otherwise communicates with clients.‖). 

See supra Section II.C.4. 

720 Rule 202(a)(30)-1(c)(1); Form ADV: Instructions to Part 1A, instr. 5.b(4). See also supra Section 

II.C.5.

721 See Proposing Release, supra note 26, at n.350 and accompanying text.
- 188 -

respect to these terms for purposes of determining the availability of the foreign private adviser 

exemption.722 We believe that the consistency and clarity that results from the rule will promote 

efficiency for non-U.S. advisers and the Commission. Commenters that expressed support for 

the proposed definitions confirmed that the references to other rules will allow advisers to apply 

existing concepts and maintain consistency with current interpretations.723 

For example, for purposes of determining eligibility for the foreign private adviser 

exemption, advisers must count clients substantially in the same manner as they counted clients 

under the private adviser exemption.724 In identifying ―investors,‖ advisers can generally rely on 

the determination made to assess whether the private fund meets the counting or qualification 

requirements under section 3(c)(1) or 3(c)(7) of the Investment Company Act.725 In determining 

whether a client, an investor, or a place of business is ―in the United States,‖ or whether it holds 

itself out as an investment adviser to the public ―in the United States,‖ an adviser generally will 

apply the same analysis it would otherwise apply under Regulation S.726 In identifying whether 

it has a place of business in the United States, an adviser will use the definition of ―place of 

business‖ as defined in Advisers Act rule 222-1, which is used to determine whether a state may 

 

722 This is true for all of the definitions except for ―assets under management.‖ An adviser that relies 

on the foreign private adviser exemption must calculate its assets under management according to 

the instructions to Item 5 of Form ADV only for purposes of determining the availability of the 

exemption. As discussed above, rule 202(a)(30)-1 includes a reference to Item 5 of Form ADV in 

order to provide for consistency in the calculation of assets under management for various 

purposes under the Advisers Act. See supra note 497 and accompanying text. 

723 See, e.g., Dechert General Letter (with respect to the definition of ―investor‖); Dechert Foreign 

Adviser Letter and IFIC Letter (noting that the proposed definition of ―in the United States‖ has 

the benefit of relying on existing guidance that is generally used by investment advisers); 

O‘Melveny Letter (with respect to the definition of ―U.S. person‖).

724 See supra Section II.C.1.

725 See supra note 432 and accompanying text.

726 See supra notes 471-472 and accompanying text.
- 189 -

assert regulatory jurisdiction over the adviser.727

As noted above, the definitions of ―investor‖ and ―United States‖ under our rule rely on 

existing definitions, with slight modifications.728 Our rule also incorporates the safe harbor that 

appeared in rule 203(b)(3)-1 for counting clients, except that it no longer allows an adviser to 

disregard clients for whom the adviser provides services without compensation.729 We are 

making these modifications (collectively, the ―modifications‖) in order to preclude some advisers 

from excluding certain assets or clients from their calculation so as to avoid registration with the 

Commission and the regulatory requirements associated with registration.730 Without a 

definition of these terms, advisers would likely rely on the same definitions we reference in rule 

202(a)(30)-1, but without the modifications. We expect, therefore, that the rule likely will have

the practical effect of narrowing the scope of the exemption, and thus likely will result in more 

advisers registering than if it reflected no modifications from the current rules. 

The final rule does not include one of the modifications we proposed. The final rule does 

not treat knowledgeable employees as investors, consistent with sections 3(c)(1) and 3(c)(7).731 

As some commenters noted, treating knowledgeable employees in the same manner for purposes 

of the definition of investor and sections 3(c)(1) and 3(c)(7) will simplify advisers‘ compliance 

 

727 See supra Section II.C.4. Under section 222 of the Advisers Act, a state may not require an 

adviser to register if the adviser does not have a ―place of business‖ within, and has fewer than 6 

client residents of, the state.

728 See supra Sections II.C.2 and II.C.3.

729 See supra Section II.C.1.

730 See supra notes 453-462 and accompanying and following text and notes 474-477 and 

accompanying text. See also infra notes 744-747 for an estimate of the costs associated with 

registration.

731 See supra notes 448-452 and accompanying text. 
- 190 -

with these regulatory requirements.732 In addition, as a result of this treatment of knowledgeable 

employees, more non-U.S. advisers will be able to rely on the exemption. 

We believe that any increase in registration as compared to the number of non-U.S. 

advisers that might have registered if we had not adopted rule 202(a)(30)-1 will benefit investors. 

Investors whose assets are, directly or indirectly, managed by the non-U.S. advisers that will be 

required to register will benefit from the increased protection afforded by federal registration of 

the adviser and application to the adviser of all of the requirements of the Advisers Act. As 

noted above, registration offers benefits to the investing public, including periodic examination 

of the adviser and compliance with rules requiring recordkeeping, custody of client funds and 

compliance programs.733

2. Costs

As discussed in the Proposing Release, we do not believe our definitions will result in 

significant costs for non-U.S. advisers.734 Non-U.S. advisers that seek to avail themselves of the 

foreign private adviser exemption will incur costs to determine whether they are eligible for the 

exemption. We expect that these advisers will consult with outside U.S. counsel and perform an 

internal review of the extent to which an advisory affiliate manages discretionary accounts 

owned by a U.S. person that would be counted toward the limitation on clients in the United 

States and investors in the United States. We estimate these costs will be $6,730 per adviser.

735

Without the rule, we believe that most advisers would have interpreted the new statutory 

 

732 See Seward Letter; Shearman Letter.

733 See supra text accompanying and following note 575.

734 See Proposing Release, supra note 26, at section V.C.2.

735 See supra note 667 and accompanying text. As noted above, we are decreasing this estimate to 

$6,730 to account for more recent salary data. Id. We did not receive any comments on the costs 

we estimated advisers would incur to perform this internal review.
- 191 -

provision by reference to the same rules that rule 202(a)(30)-1 references. Without our rule, 

some advisers would have likely incurred additional costs because they would have sought 

guidance in interpreting the terms used in the statutory exemption. By defining the statutory 

terms in a rule, we believe that we are providing certainty for non-U.S. advisers and limiting the 

time, compliance costs and legal expenses non-U.S. advisers would have incurred in seeking an 

interpretation, all of which could have inhibited capital formation and reduced efficiency. 

Advisers will also be less likely to seek additional assistance from us because they can rely on 

relevant guidance that we have previously provided with respect to the definitions that rule 

202(a)(30)-1 references. We also believe that non-U.S. advisers‘ ability to rely on the definitions 

that the rule references and the guidance provided with respect to the referenced rules will reduce 

Commission resources that would have otherwise been applied to administering the foreign

private adviser exemption, which resources can be allocated to other matters.

Our instruction allowing non-U.S. advisers to determine whether a client or investor is 

―in the United States‖ by reference to the time the person became a client or an investor acquires 

securities issued by the private fund should also reduce advisers‘ costs.

736

 Advisers will make 

the determination only once and will not be required to monitor changes in the status of each 

client and private fund investor. Moreover, if a client or an investor moved to the United States, 

the adviser would not have to choose among registering with us, terminating the relationship 

with the client, or forcing the investor out of the the private fund. Some commenters agreed that 

the instruction will benefit advisers.737

 

736 See rule 202(a)(30)-1, at note to paragraph (c)(3)(i); supra note 476 and accompanying text.

737 See Dechert General Letter (―The note provides helpful relief at a time when advisory clients 

often move across international borders while keeping an existing relationship with a financial 

institution.‖); IFIC Letter (the proposed approach ―is consistent with the current interpretations on 
- 192 -

Some commenters disagreed with the Proposing Release‘s explanation of how the 

exemption‘s requirement that an adviser look through to private fund investors would apply with 

respect to certain structures, such as master-feeder funds and total return swaps.738 In both 

respects, we note that the obligation to look through certain transactions stems from 

section 208(d) of the Advisers Act (section 48(a) of the Investment Company Act with respect to 

sections 3(c)(1) and 3(c)(7)) as it applies to an adviser‘s obligations to look through to private 

fund investors for purposes of the foreign private adviser exemption. Thus, any costs associated 

with the statutory provisions that prohibit any person from doing indirectly or through or by 

another person anything that would be unlawful to do directly flow from those provisions, rather 

than any definitions we are adopting.

Some commenters expressed concern that the look-through requirement contained in the 

statutory definition of a ―foreign private adviser‖ could impose significant burdens on advisers to 

non-U.S. funds, including non-U.S. retail funds publicly offered outside of the United States.739 

Two of these commenters stated, for example, that in their view a non-U.S. fund could be 

considered a private fund as a result of independent actions of U.S. investors, such as if a nonU.S. shareholder of a non-U.S. fund moves to the United States and purchases additional 

 

which Canadian advisers have relied for many years, and will ensure continuity and certainty in 

their business operations.‖).

738 See Dechert General Letter; EFAMA Letter. See also supra notes 442-444 and accompanying 

text. As we discussed above, for purposes of the look-through provision, the adviser to a master 

fund in a master-feeder arrangement must treat as investors the holders of the securities of any 

feeder fund formed or operated for the purpose of investing in the master fund rather than the 

feeder funds, which act as conduits. In addition, an adviser must count as an investor any owner 

of a total return swap on the private fund because that arrangement effectively provides the risks 

and rewards of investing in the private fund to the swap owner.

739 See AFG letter; Dechert Foreign Adviser Letter; EFAMA Letter; Shearman Letter.
- 193 -

shares.

740

 If these funds were ―private funds,‖ their advisers would, if seeking to rely on the 

foreign private adviser exemption, be required to determine the number of private fund investors 

in the United States and the assets under management attributable to them.

As we explain above, if an adviser reasonably believes that an investor is not ―in the 

United States,‖ the adviser may treat the investor as not being ―in the United States.‖ Moreover, 

we understand that non-U.S. private funds currently count or qualify their U.S. investors in order 

to avoid regulation under the Investment Company Act.741 A non-U.S. adviser would need to 

count the same U.S. investors (except for holders of short-term paper with respect to a fund 

relying on section 3(c)(1)) in order to rely on the foreign private adviser exemption. In this 

respect, therefore, the look-through requirement of the foreign private adviser exemption will 

generally not impose any new burden on advisers to non-U.S. funds.

As discussed in the Proposing Release, the modifications will result in some costs for 

non-U.S. advisers who might change their business practices in order to rely on the exemption.742 

Some non-U.S. advisers may have to choose to register under the Advisers Act or to limit the 

scope of their contacts with the United States in order to rely on the statutory exemption for 

 

740 Dechert Foreign Adviser Letter; EFAMA Letter. See also supra note 464 and accompanying 

text.

741 This practice is consistent with positions our staff has taken in which the staff has stated it would 

not recommend enforcement action in certain circumstances. See, e.g., Goodwin Procter NoAction Letter, supra note 294; Touche Remnant No-Action Letter, supra note 294. See also 

sections 7(d), 3(c)(1), and 3(c)(7) of the Investment Company Act. See also, e.g., Canadian TaxDeferred Retirement Savings Accounts Release, supra note 294, at n.23 (―The Commission and 

its staff have interpreted section 7(d) to generally prohibit a foreign fund from making a U.S. 

private offering if that offering would cause the securities of the fund to be beneficially owned by 

more than 100 U.S. residents.‖).

742 See Proposing Release, supra note 26, at n.362 and accompanying and following text.
- 194 -

foreign private advisers (or the private fund adviser exemption).743 As noted above, we have 

estimated the costs of registration to be $15,077.

744

 In addition, we estimate that registered 

advisers would incur initial costs to establish a compliance infrastructure, which we estimate 

would range from $10,000 to $45,000 and ongoing annual costs of compliance and examination, 

which we estimate would range from $10,000 to $50,000.745 Some commenters suggested that 

these estimates are too low, and estimated that they would incur one-time registration and 

compliance costs ranging from $50,000 to $600,000, followed by ongoing annual compliance 

costs ranging from $50,000 to $500,000.746 Although some advisers may incur these costs, we 

do not believe they are representative, as discussed above.747 Moreover, as discussed above, 

commenters identifying themselves as ―middle market private equity fund‖ advisers provided the 

highest estimated costs, but these commenters generally would not qualify for the foreign private 

adviser exemption (e.g., because these advisers generally appear to have places of business in the 

United States).

 

743 See, e.g., O‘Melveny Letter (argued that because the foreign private adviser is subject to a low 

statutory asset threshold, it is likely ―that the cost of enhanced regulatory compliance [resulting 

from advisers registering or filing reports required of advisers relying on rule 203(m)-1] may, as a 

commercial matter, have to be borne solely by U.S. investors, which would affect their net 

returns‖; the commenter also stated that, alternatively, ―many non-U.S. advisers with less 

significant amounts of U.S. assets invested in their funds may choose to restrict the participation 

by U.S. investors rather than attempt to comply with the Proposed Rules and, thereby, decrease 

the availability of potentially attractive investment opportunities to U.S. investors‖). We note, 

however, that the benefits and costs associated with the elimination of the private adviser 

exemption are attributable to the Dodd-Frank Act, including the costs of registration incurred by 

advisers that previously relied on that exemption but that will have to register because they do not 

qualify for another exemption. In addition, the benefits and costs associated with the reporting 

requirements applicable to advisers relying on the private fund adviser exemption are associated 

with the separate rules that impose those requirements. See Implementing Adopting Release, 

supra note 32, at section II.B.

744 See supra note 597 and accompanying text.

745 See supra note 601 and accompanying text.

746 See supra notes 602-603 and accompanying text. 

747 See supra Section V.A.2.
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In any case, non-U.S. advisers will assess the costs of registering with the Commission 

relative to relying on the foreign private adviser or the private fund adviser exemption. This 

assessment will take into account many factors, which will vary from one adviser to another, to 

determine whether registration, relative to other options, is the most cost-effective business 

option for the adviser to pursue. If a non-U.S. adviser limited its activities within the United 

States in order to rely on the exemption, the modifications might have the effect of reducing 

competition in the market for advisory services or decreasing the availability of certain 

investment opportunities for U.S. investors. If the non-U.S. adviser chose to register, 

competition among registered advisers would increase. One commenter asserted that treating 

holders of short-term paper as investors could result in a U.S. commercial lender to a fund being 

treated as an investor, leading non-U.S. advisers to avoid U.S. lenders.748 To the extent that the 

modification included in the definition of ―investor‖ causes a non-U.S. adviser seeking to rely on 

the foreign private adviser exemption to limit U.S. investors in a private fund‘s short-term notes, 

the modification could have an adverse effect on capital formation and reduce U.S. lenders as 

sources of credit for non-U.S. funds. However, unless the extension of credit by a fund‘s brokerdealer or custodian bank results in the issuance of a security by the fund to its creditor, the 

creditor would not be considered an investor for purposes of the foreign private adviser 

exemption.749

As a result of the rule‘s reference to the method of calculating assets under management 

under Form ADV, non-U.S. advisers will use the valuation method provided in the instructions 

to Form ADV to verify compliance with the $25 million asset threshold included in the foreign 

 

748 See Shearman Letter.

749 See Reves v. Ernst & Young, 494 U.S. 56 (1990). See also supra note 458 and accompanying 

text.
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private adviser exemption.750 Among other things, these instructions require advisers to use the 

market value of private fund assets, or the fair value of private fund assets where market value is 

unavailable, when determining regulatory assets under management and to include in the 

calculation certain types of assets advisers previously were permitted to exclude.751 Most 

commenters addressed the components of the new method of calculation in reference to the 

calculation of ―regulatory assets under management‖ under Form ADV, or with respect to the 

calculation of private fund assets for purposes of the private fund adviser exemption.752

As discussed in the Proposing Release, some non-U.S. advisers to private funds may 

value assets based on their fair value in accordance with GAAP or other international accounting 

standards that require the use of fair value, while other advisers to private funds currently may 

not use fair value methodologies.753 We noted above that the costs associated with fair valuation 

will vary based on factors such as the nature of the asset, the number of positions that do not 

have a market value, and whether the adviser has the ability to value such assets internally or 

relies on a third party for valuation services.754 Nevertheless, we do not believe that the 

requirement to use fair value methodologies will result in significant costs for these advisers to 

 

750 See supra Section II.C.5.

751 See supra Section II.B.2.a.

752 See Implementing Adopting Release, supra note 32, discussion at section II.A.3; supra Section 

II.B.2.a. Among those commenters who addressed the components specifically with respect to 

the foreign private adviser exemption, one noted that because of the requirement to include 

proprietary assets in the calculation, ―managers, in order to qualify for the [exemption], will have 

an incentive to reduce their personal commitments to the private funds, and manage their own 

assets individually.‖ See ABA Letter. This result, argues the commenter, will not be in the best 

interest of investors, who benefit from managers having ―skin the game.‖ As discussed in 

Section II.B.2, if private fund investors value their advisers‘ co-investments as suggested by the 

commenter, we expect that the investors will demand them and their advisers will structure their 

businesses accordingly. 

753 See Proposing Release, supra note 26, at n.365 and accompanying text.

754 See supra note 676 and accompanying text.
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these funds.755 Commission staff estimates that such advisers will each incur $1,320 in internal 

costs to conform its internal valuations to a fair value standard.756 In the event a fund does not 

have an internal capability for valuing illiquid assets, we expect that it will be able to obtain 

pricing or valuation services from an outside administrator or other service provider. Staff 

estimated that the annual cost of such a service will range from $1,000 to $120,000 annually, 

which could be borne by several funds that invest in similar assets or have similar investment 

strategies.757 We did not receive any comments on these estimates.

VI. REGULATORY FLEXIBILITY CERTIFICATION

The Commission certified in the Proposing Release, pursuant to section 605(b) of the 

Regulatory Flexibility Act,758 that proposed rules 203(l)-1 and 203(m)-1 under the Advisers Act 

would not, if adopted, have a significant economic impact on a substantial number of small 

entities.759 As we explained in the Proposing Release, under Commission rules, for the purposes 

of the Advisers Act and the Regulatory Flexibility Act, an investment adviser generally is a small 

entity if it: (i) has assets under management having a total value of less than $25 million; (ii) did 

not have total assets of $5 million or more on the last day of its most recent fiscal year; and (iii) 

does not control, is not controlled by, and is not under common control with another investment 

adviser that has assets under management of $25 million or more, or any person (other than a 

natural person) that had $5 million or more on the last day of its most recent fiscal year (―small 

 

755 See supra text following note 676.

756 See supra note 679.

757 See supra note 680.

758 5 U.S.C. 605(b)

759 See Proposing Release, supra note 26, at section VI.
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adviser‖).760

Investment advisers solely to venture capital funds and advisers solely to private funds in 

each case with assets under management of less than $25 million would remain generally 

ineligible for registration with the Commission under section 203A of the Advisers Act.761 We 

expect that any small adviser solely to existing venture capital funds that would not be ineligible 

to register with the Commission would be able to avail itself of the exemption from registration

under the grandfathering provision. If an adviser solely to a new venture capital fund could not 

avail itself of the exemption because, for example, the fund it advises did not meet the definition 

of ―venture capital fund,‖ we anticipate that the adviser could avail itself of the exemption in 

section 203(m) of the Advisers Act as implemented by rule 203(m)-1. Similarly, we expect that 

any small adviser solely to private funds would be able to rely on the exemption in 

section 203(m) of the Advisers Act as implemented by rule 203(m)-1.

Thus, we believe that small advisers solely to venture capital funds and small advisers to 

other private funds will generally be ineligible to register with the Commission. Those small 

advisers that may not be ineligible to register with the Commission, we believe, would be able to 

rely on the venture capital fund adviser exemption under section 203(l) of the Advisers Act or 

the private fund adviser exemption under section 203(m) of that Act as implemented by our 

rules. For these reasons, we certified in the Proposing Release that rules 203(l)-1 and 203(m)-1 

under the Advisers Act would not, if adopted, have a significant economic impact on a 

substantial number of small entities. Although we requested written comments regarding this 

 

760 Rule 0-7(a) (17 CFR 275.0-7(a)).

761 Section 203A of the Advisers Act (prohibiting an investment adviser that is regulated or required 

to be regulated as an investment adviser in the State in which it maintains its principal office and 

place of business from registering with the Commission unless the adviser has $25 million or 

more in assets under management or is an adviser to a registered investment company).
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certification, no commenters responded to this request.

VII. STATUTORY AUTHORITY

The Commission is adopting rule 202(a)(30)-1 under the authority set forth in sections 

403 and 406 of the Dodd-Frank Act, to be codified at sections 203(b) and 211(a) of the Advisers 

Act, respectively (15 U.S.C. 80b-3(b), 80b-11(a)). The Commission is adopting rule 203(l)-1 

under the authority set forth in sections 406 and 407 of the Dodd-Frank Act, to be codified at 

sections 211(a) and 203(l) of the Advisers Act, respectively (15 U.S.C. 80b-11(a), 80b-3(l)). 

The Commission is adopting rule 203(m)-1 under the authority set forth in sections 406 and 408 

of the Dodd-Frank Act, to be codified at sections 211(a) and 203(m) of the Advisers Act, 

respectively (15 U.S.C. 80b-11(a), 80b-3(m)).

List of Subjects in 17 CFR Part 275

Reporting and recordkeeping requirements; Securities

TEXT OF RULES

For reasons set out in the preamble, the Commission amends Title 17, Chapter II 

of the Code of Federal Regulations as follows:

PART 275 – RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 

1940

1. The general authority citation for Part 275 is revised to read as follows:

Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-2(a)(17), 80b-3, 80b-4,

80b-4a, 80b-6(4), 80b-6(a), and 80b-11, unless otherwise noted.

* * * * *

2. Section 275.202(a)(30)-1 is added to read as follows:

§ 275.202(a)(30)-1 Foreign private advisers.

(a) Client. You may deem the following to be a single client for purposes of 
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section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)):

(1) A natural person, and:

(i) Any minor child of the natural person;

(ii) Any relative, spouse, spousal equivalent, or relative of the spouse or of the 

spousal equivalent of the natural person who has the same principal residence;

(iii) All accounts of which the natural person and/or the persons referred to in this 

paragraph (a)(1) are the only primary beneficiaries; and

(iv) All trusts of which the natural person and/or the persons referred to in this 

paragraph (a)(1) are the only primary beneficiaries;

(2)(i) A corporation, general partnership, limited partnership, limited liability company, 

trust (other than a trust referred to in paragraph (a)(1)(iv) of this section), or other legal 

organization (any of which are referred to hereinafter as a ―legal organization‖) to which you 

provide investment advice based on its investment objectives rather than the individual 

investment objectives of its shareholders, partners, limited partners, members, or beneficiaries 

(any of which are referred to hereinafter as an ―owner‖); and

(ii) Two or more legal organizations referred to in paragraph (a)(2)(i) of this section 

that have identical owners.

(b) Special rules regarding clients. For purposes of this section:

(1) You must count an owner as a client if you provide investment advisory services 

to the owner separate and apart from the investment advisory services you provide to the legal 

organization, provided, however, that the determination that an owner is a client will not affect 

the applicability of this section with regard to any other owner;

(2) You are not required to count an owner as a client solely because you, on behalf 
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of the legal organization, offer, promote, or sell interests in the legal organization to the owner, 

or report periodically to the owners as a group solely with respect to the performance of or plans 

for the legal organization‘s assets or similar matters;

(3) A limited partnership or limited liability company is a client of any general 

partner, managing member or other person acting as investment adviser to the partnership or 

limited liability company; 

(4) You are not required to count a private fund as a client if you count any investor, 

as that term is defined in paragraph (c)(2) of this section, in that private fund as an investor in the 

United States in that private fund; and 

(5) You are not required to count a person as an investor, as that term is defined in 

paragraph (c)(2) of this section, in a private fund you advise if you count such person as a client 

in the United States.

Note to paragraphs (a) and (b): These paragraphs are a safe harbor and are not intended 

to specify the exclusive method for determining who may be deemed a single client for purposes 

of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)).

(c) Definitions. For purposes of section 202(a)(30) of the Act (15 U.S.C.

80b-2(a)(30)):

(1) Assets under management means the regulatory assets under management as 

determined under Item 5.F of Form ADV (§ 279.1 of this chapter). 

(2) Investor means:

(i) Any person who would be included in determining the number of beneficial 

owners of the outstanding securities of a private fund under section 3(c)(1) of the Investment 

Company Act of 1940 (15 U.S.C. 80a-3(c)(1)), or whether the outstanding securities of a private 
- 202 -

fund are owned exclusively by qualified purchasers under section 3(c)(7) of that Act (15 U.S.C. 

80a-3(c)(7)); and 

(ii) Any beneficial owner of any outstanding short-term paper, as defined in 

section 2(a)(38) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(38)), issued by the 

private fund.

Note to paragraph (c)(2): You may treat as a single investor any person who is an 

investor in two or more private funds you advise.

(3) In the United States means with respect to: 

(i) Any client or investor, any person who is a U.S. person as defined in § 230.902(k) 

of this chapter, except that any discretionary account or similar account that is held for the 

benefit of a person in the United States by a dealer or other professional fiduciary is in the United 

States if the dealer or professional fiduciary is a related person, as defined in § 275.206(4)-

2(d)(7), of the investment adviser relying on this section and is not organized, incorporated, or (if 

an individual) resident in the United States.

Note to paragraph (c)(3)(i): A person who is in the United States may be treated as not 

being in the United States if such person was not in the United States at the time of becoming a 

client or, in the case of an investor in a private fund, each time the investor acquires securities 

issued by the fund. 

(ii) Any place of business, in the United States, as that term is defined in § 230.902(l) 

of this chapter; and

(iii) The public, in the United States, as that term is defined in § 230.902(l) of this 

chapter.

(4) Place of business has the same meaning as in § 275.222-1(a).
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(5) Spousal equivalent has the same meaning as in § 275.202(a)(11)(G)-1(d)(9).

(d) Holding out. If you are relying on this section, you shall not be deemed to be 

holding yourself out generally to the public in the United States as an investment adviser, within 

the meaning of section 202(a)(30) of the Act (15 U.S.C. 80b-2(a)(30)), solely because you 

participate in a non-public offering in the United States of securities issued by a private fund 

under the Securities Act of 1933 (15 U.S.C. 77a).

3. Section 275.203(l) -1 is added to read as follows:

§ 275.203(l)-1 Venture capital fund defined.

(a) Venture capital fund defined. For purposes of section 203(l) of the Act (15 

U.S.C. 80b-3(l)), a venture capital fund is any private fund that:

(1) Represents to investors and potential investors that it pursues a venture capital 

strategy;

(2) Immediately after the acquisition of any asset, other than qualifying investments 

or short-term holdings, holds no more than 20 percent of the amount of the fund‘s aggregate 

capital contributions and uncalled committed capital in assets (other than short-term holdings) 

that are not qualifying investments, valued at cost or fair value, consistently applied by the fund;

(3) Does not borrow, issue debt obligations, provide guarantees or otherwise incur 

leverage, in excess of 15 percent of the private fund‘s aggregate capital contributions and 

uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a 

non-renewable term of no longer than 120 calendar days, except that any guarantee by the 

private fund of a qualifying portfolio company‘s obligations up to the amount of the value of the 

private fund‘s investment in the qualifying portfolio company is not subject to the 120 calendar 

day limit;
- 204 -

(4) Only issues securities the terms of which do not provide a holder with any right, 

except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such 

securities but may entitle holders to receive distributions made to all holders pro rata; and

(5) Is not registered under section 8 of the Investment Company Act of 1940 

(15 U.S.C. 80a-8), and has not elected to be treated as a business development company pursuant 

to section 54 of that Act (15 U.S.C. 80a-53). 

(b) Certain pre-existing venture capital funds. For purposes of section 203(l) of the 

Act (15 U.S.C. 80b-3(l)) and in addition to any venture capital fund as set forth in paragraph (a) 

of this section, a venture capital fund also includes any private fund that: 

(1) Has represented to investors and potential investors at the time of the offering of 

the private fund‘s securities that it pursues a venture capital strategy;

(2) Prior to December 31, 2010, has sold securities to one or more investors that are 

not related persons, as defined in § 275.206(4)-2(d)(7), of any investment adviser of the private 

fund; and

(3) Does not sell any securities to (including accepting any committed capital from) 

any person after July 21, 2011.

(c) Definitions. For purposes of this section:

(1) Committed capital means any commitment pursuant to which a person is 

obligated to:

(i) Acquire an interest in the private fund; or 

(ii) Make capital contributions to the private fund.

(2) Equity security has the same meaning as in section 3(a)(11) of the Securities 

Exchange Act of 1934 (15 U.S.C. 78c(a)(11)) and § 240.3a11-1 of this chapter.
- 205 -

(3) Qualifying investment means:

(i) An equity security issued by a qualifying portfolio company that has been 

acquired directly by the private fund from the qualifying portfolio company; 

(ii) Any equity security issued by a qualifying portfolio company in exchange for an 

equity security issued by the qualifying portfolio company described in paragraph (c)(3)(i) of 

this section; or

(iii) Any equity security issued by a company of which a qualifying portfolio company 

is a majority-owned subsidiary, as defined in section 2(a)(24) of the Investment Company Act of 

1940 (15 U.S.C. 80a-2(a)(24)), or a predecessor, and is acquired by the private fund in exchange 

for an equity security described in paragraph (c)(3)(i) or (c)(3)(ii) of this section.

(4) Qualifying portfolio company means any company that:

(i) At the time of any investment by the private fund, is not reporting or foreign

traded and does not control, is not controlled by or under common control with another 

company, directly or indirectly, that is reporting or foreign traded;

(ii) Does not borrow or issue debt obligations in connection with the private fund‘s 

investment in such company and distribute to the private fund the proceeds of such borrowing or 

issuance in exchange for the private fund‘s investment; and

(iii) Is not an investment company, a private fund, an issuer that would be an 

investment company but for the exemption provided by § 270.3a-7 of this chapter, or a 

commodity pool.

(5) Reporting or foreign traded means, with respect to a company, being subject to 

the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 

U.S.C. 78m or 78o(d)), or having a security listed or traded on any exchange or organized market 
- 206 -

operating in a foreign jurisdiction.

(6) Short-term holdings means cash and cash equivalents, as defined in § 270.2a51-

1(b)(7)(i) of this chapter, U.S. Treasuries with a remaining maturity of 60 days or less, and 

shares of an open-end management investment company registered under section 8 of the 

Investment Company Act of 1940 (15 U.S.C. 80a-8) that is regulated as a money market fund 

under § 270.2a-7 of this chapter.

Note: For purposes of this section, an investment adviser may treat as a private fund any 

issuer formed under the laws of a jurisdiction other than the United States that has not offered or 

sold its securities in the United States or to U.S. persons in a manner inconsistent with being a 

private fund, provided that the adviser treats the issuer as a private fund under the Act (15 U.S.C. 

80b) and the rules thereunder for all purposes.

4. Section 275.203(m)-1 is added to read as follows:

§ 275.203(m)-1 Private fund adviser exemption.

(a) United States investment advisers. For purposes of section 203(m) of the Act (15 

U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business in the 

United States is exempt from the requirement to register under section 203 of the Act if the 

investment adviser:

(1) Acts solely as an investment adviser to one or more qualifying private funds; and

(2) Manages private fund assets of less than $150 million. 

(b) Non-United States investment advisers. For purposes of section 203(m) of the 

Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business 

outside of the United States is exempt from the requirement to register under section 203 of the

Act if:

(1) The investment adviser has no client that is a United States person except for one 
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or more qualifying private funds; and 

(2) All assets managed by the investment adviser at a place of business in the United 

States are solely attributable to private fund assets, the total value of which is less than $150 

million.

(c) Frequency of Calculations. For purposes of this section, calculate private fund 

assets annually, in accordance with General Instruction 15 to Form ADV (§ 279.1 of this 

chapter).

(d) Definitions. For purposes of this section:

(1) Assets under management means the regulatory assets under management as 

determined under Item 5.F of Form ADV (§ 279.1 of this chapter).

(2) Place of business has the same meaning as in § 275.222-1(a).

(3) Principal office and place of business of an investment adviser means the 

executive office of the investment adviser from which the officers, partners, or managers of the 

investment adviser direct, control, and coordinate the activities of the investment adviser. 

(4) Private fund assets means the investment adviser‘s assets under management 

attributable to a qualifying private fund. 

(5) Qualifying private fund means any private fund that is not registered under section 

8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8) and has not elected to be treated as 

a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-53). For 

purposes of this section, an investment adviser may treat as a private fund an issuer that qualifies 

for an exclusion from the definition of an ―investment company,‖ as defined in section 3 of the 

Investment Company Act of 1940 (15 U.S.C. 80a-3), in addition to those provided by section 

3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or 15 U.S.C. 80a-3(c)(7)), provided that the 
- 208 -

investment adviser treats the issuer as a private fund under the Act (15 U.S.C. 80b) and the rules 

thereunder for all purposes. 

(6) Related person has the same meaning as in § 275.206(4)-2(d)(7).

(7) United States has the same meaning as in § 230.902(l) of this chapter.

(8) United States person means any person that is a U.S. person as defined in 

§ 230.902(k) of this chapter, except that any discretionary account or similar account that is held 

for the benefit of a United States person by a dealer or other professional fiduciary is a United 

States person if the dealer or professional fiduciary is a related person of the investment adviser 

relying on this section and is not organized, incorporated, or (if an individual) resident in the 

United States.

Note to paragraph (d)(8): A client will not be considered a United States person if the 

client was not a United States person at the time of becoming a client.

By the Commission.

Elizabeth M. Murphy

Secretary

Dated: June 22, 2011