A bill introduced in the Arizona Senate would permit private investment advisers to set up shop in the state to invest in Arizona companies. This marks the first time that a private fund adviser exemption would be adopted by legislation rather than by rule but that is because Arizona’s legislative process is quicker than its rulemaking process.
Private fund adviser exemption. An investment adviser that is a private fund adviser is not required to be licensed or to make a notice filing in Arizona if:
- The private fund adviser is not subject to federal Regulation A Rule 262 “bad boy” disqualification provisions;
- The private fund adviser to a qualifying private fund that is not a venture capital company files with the Arizona Corporation Commission each report (and report amendment) that the investment adviser is required to file with the SEC under federal Rule 204-4. The private fund adviser must electronically file the reports with the Commission through the IARD. A report is considered “filed” when the report and applicable fee are accepted by the IARD on the state’s behalf; and
- The private fund adviser to a qualifying private fund that is not a venture capital company has paid $125 to the Commission for each calendar year that it relies on the private fund adviser exemption.
- only advise those retail buyer funds whose outstanding securities, other than short-term paper, are beneficially owned entirely by either: (a) any person who, at the time the securities are sold, the private fund adviser reasonably believes is an “accredited investor” as defined by Regulation D Rule 501(a), or who is a manager, director, officer or employee of the private fund adviser; or (b) any person that obtains the security through a transfer not involving the sale of that security;
- at or before the time of purchase of any security of a retail buyer fund, the private fund adviser discloses in writing to the purchaser: (a) all services to be provided by the investment adviser to the purchaser of securities of the retail buyer fund and to the retail buyer fund itself; and (b) all duties that the investment adviser owes to the purchaser of securities of the retail buyer fund and to the retail buyer fund itself; and
- the private fund adviser must annually obtain audited financial statements of each retail buyer fund that is advised by the private fund adviser and deliver a copy of those financial statements to each purchaser of the securities of the retail buyer fund.
A person employed by or associated with an eligible private fund adviser who does not otherwise act as an investment adviser representative is not required to be licensed or to file a notice in Arizona.
The private fund adviser exemption does not exempt an investment adviser with custody of client funds or securities from having to comply with Arizona’s IA custody rules.
An investment adviser who becomes ineligible for the private fund adviser exemption has 90 days after the date of ineligibility to comply with all licensing or notice filing laws or rules.
Defined terms. A “retail buyer fund” is a qualifying private fund that is neither a venture capital company nor a qualifying private fund that qualifies for the Section 3(c)(7) exclusion from the “investment company” definition in the 1940 Act. Other defined terms include “advisory affiliate,” “affiliated person,” “control,” “derivative investment,” “entity,” “limited retail buyer fund,” “management rights,” “operating company,” “person,” “private fund adviser,” “qualifying private fund,” “venture capital company,” and “venture capital investment.”