In a previous post, I began to delve into the question of what is a "real estate fund". See SEC Staff Reports On “Real Estate Funds”, But What Exactly Are They? As noted in that post, a "real estate fund" as defined in Form PF cannot be a company excluded from the definition of an "investment company" pursuant to Section 3(c)(5)(C), but not Sections 3(c)(1) or 3(c)(7) of the Investment Company Act. The reason is that Form PF defines a "real estate fund" to be a subset of a "private fund" and "private fund" is defined an issuer that "would be an investment company as defined in section 3 of the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that Act." The good news therefore is that an adviser to a Section 3(c)(5)(C) only fund isn't required to file a Form PF.
Matters get more than a little weird, however, when one considers the SEC's rule, Rule 203(m)-1, exempting private fund advisers. That rule exempts from registration under the Investment Advisers Act of 1940 an investment adviser with its principal office and place of business in the United States if the adviser (i) acts solely as an investment adviser to one or more qualifying private funds; and (ii) manages private fund assets of less than $150 million. Based on the definition of a "private fund", an adviser to fund excluded pursuant to Section 3(c)(5)(C) would seemingly not be able to rely on the exemption, even if the fund is also exempt under Sections 3(c)(1) or 3(c)(7). Rule 203(m)-1 prevents this anomalous result by permitting 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), provided that adviser treats the issuer as a private fund under the IAA and rules thereunder for all purposes. The SEC gave the following rationale for this bit of grace:
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.
SEC Release No. IA-3222 (June 22, 2011).
However, an adviser who solely advises a fund excluded under Section 3(c)(5)(C) only may not need the private fund adviser exemption or any other exemption from registration under the IAA. In fact, an adviser that advises only a Section 3(c)(5)(C) fund may not even be eligible for registration under the IAA. The reason is a bit convoluted. In general, an investment adviser must have regulatory assets under management of at least $25 million in order to be eligible to register with the SEC. In determining regulatory assets under management, the adviser is required to include the value of a “securities portfolio” for which it provides continuous and regular supervisory or management services. According to the glossary to Form ADV, an account is a securities portfolio if at least 50% of the total value of the account consists of securities. The SEC staff, however, has taken the position that an issuer may not rely on the exclusion provided by Section 3(c)(5)(C) unless at least 55% of its assets consist of "mortgages and other liens on and interests in real estate". A fund can't have at the same time 50% of its total value in securities and 55% of its assets in real estate interests. Thus, a Section 3(c)(5)(C) fund cannot be a "securities portfolio". If the adviser only advises the Section 3(c)(5)(C) fund, it may as a consequence have no regulatory assets under management and hence be ineligible for registration with the SEC. The adviser may, however, be eligible under a different exception.
Note to readers: Any reader who has made it this far in this post must surely recognize that this is a complicated subject. I've omitted many important details. This post (like all other posts) should not be regarded as legal advice.