Rule 260.204.9 - "What is to be Done?"

Posted on August 11, 2010 by Keith Paul Bishop

As I mentioned in this earlier post, California has its own definition of "venture capital company" in Rule 260.204.9.  This rule is an exemption from the investment adviser registration requirement in Corporations Code Section 25230 if a person meets the following conditions:

  • Does not hold itself out generally to the public as an investment adviser;
  • Has fewer than 15 clients;
  • Is exempt from registration under the Investment Advisers Act of 1940 by virtue of Section 203(b)(3) of that act; and
  • Either
    • Has assets under management, as defined of not less than $25 million; or
    • Provides investment advice only to venture capital companies, as defined.

The elimination of the "fewer than 15 client" exemption in the Dodd-Frank Act will require some changes to Rule 260.204.9.   Quite obviously, the rule's reference to Section 203(b)(3) of the Investment Advisers Act is no longer relevant.  (The Dodd-Frank Act deletes the current exemption in Section 203(b)(3) for advisers with fewer than 15 clients and substitutes a new exemption for foreign private advisers.)

However, the big question is what is to be done with the rule itself?  The rule was intended to exempt advisers in two different circumstances.  Thus, the rule exempts advisers to large hedge funds that would be federally registered (and thus could not be registered under state law) but for the Section 203(b)(3) exemption.  This is the reason for the $25 million threshhold in the rule which correlates to Section 203A of the Advisers Act.  The rule also exmpts advisers to venture capital companies regardless of the amount of assets under management.

My own view is that the rule should be revised to dovetail with the new federal exemptions created by the Dodd-Frank Act.  To the extent that a manager solely to a venture capital fund (as defined by the Securities and Exchange Commission) is not required to be registered with the SEC, the same should hold true at the state level.  Going forward, I'm sure that the Dodd-Frank Act will continue to "spark" many changes at the state level.