On Jan. 9, 2012 the Indiana Secretary of State issued an Administrative Order (12-0012AO) (the "Administrative Order") adopting a temporary exemption under the Indiana Uniform Securities Act (the "Indiana USA") from registration of certain Indiana-based private equity and venture capital fund advisers. The Administrative Order is intended to be a temporary stopgap pending further amendments to the Indiana Administrative Code to conform Indiana's investment adviser regulations with recent changes to the federal Investment Adviser Act of 1940 (the "Advisers Act") and Investment Company Act of 1940 (the "1940 Act") imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173) ("Dodd-Frank").

Rules recently issued pursuant to Dodd-Frank will soon result in many private equity fund managers and their investment adviser representatives being required to register as investment advisers under the Advisers Act. Such registration requirements become effective March 30, 2012.  However, the Indiana Securities Commissioner adopted the Administrative Order to prevent technicalities in the Indiana USA from requiring certain private equity fund managers from having to register in Indiana when they would otherwise be exempt from federal registration under Dodd-Frank.

The new exemption adopted under the Administrative Order will cover most private equity and venture capital fund managers with a place of business in Indiana. To qualify for this exemption, a fund manager must:

1. Maintain a place of business in Indiana;
2. Have had 5 or fewer clients in the past 12 months (the Indiana Securities Division defines a "client" as a fund, not investors in the fund);
3. Not hold itself out generally to the public as an investment adviser; and
4. Advise a "qualifying private fund," which generally means a private equity or venture capital fund that is not registered under the 1940 Act as a result of the exemptions provided by Sections 3(c)(1) or 3(c)(7) (which covers most private equity and venture capital funds).

The following additional requirements apply to fund managers who advise at least one 3(c)(1) fund which does not meet the technical definition of a "venture capital fund" under the Administrative Order:

1. Each investor in each 3(c)(1) fund must be an "accredited investor" (as defined under Regulation D under the federal Securities Act of 1933);
2. The fund manager must disclose in writing at the time of purchase to all investors in the 3(c)(1) fund (i) all services, if any, to be provided to such investors, (ii) all duties owed to such investors, and (iii) other material information affecting the rights of the investors; and
3. The fund manager must obtain and distribute annual audited financial statements to all investors.

This new exemption is a very positive development for private equity fund managers and small hedge fund managers in Indiana.  Prior to the adoption of the new Administrative Order, private equity and hedge fund managers with a place of business in Indiana which did not advise funds with a venture capital strategy were required to register as investment advisers even though they would have been exempt under federal law. In this regard, under Dodd-Frank fund managers with less than $150 million in assets under management and managers of venture capital funds are generally exempt from federal Advisers Act registration, regardless of the location of their place of business. Indiana's new Administrative Order resolves, at least temporarily, the inconsistency between the Indiana and federal registration requirements. As a result, many private equity fund managers may now be able to withdraw their Indiana registrations and not be subject to the sometimes onerous regulatory requirements applicable to investment advisers.