Investment advisers to Small Business Investment Companies (SBICs) received an early holiday gift when President Obama signed the SBIC Advisers Relief Act of 2015 (the “Relief Act”) into law last December.^[1]  The Relief Act amended three sections of the Investment Advisers Act of 1940^[2] (the “Advisers Act”) to resolve inconsistencies and oversights that have been casting regulatory shadows over the SBIC, venture capital and smaller private fund investment adviser community since the 2010 adoption of the Dodd-Frank reforms^[3]. We expect the main beneficiaries of the Relief Act will be:

• SBIC advisers who were required to register with the SEC because they also advise either venture capital funds or private funds;

• advisers to venture capital funds and smaller private equity funds that are interested in launching SBIC funds but have avoided or delayed doing so due to the added expense and operational burdens of becoming an SEC registered investment adviser; and

• SBIC-only advisers who are registered under state law because they are located in states that have not adopted exemptions to investment adviser registration analogous to the Advisers Act.

Relief for advisers to both SBICs and Venture Capital Funds

Prior to enactment of the Relief Act, Section 203(l) of the Advisers Act provided that an investment adviser that advises only venture capital funds would be an exempt reporting adviser under the Advisers Act, and Section 203(b)(7) of the Advisers Act provided that an investment adviser that advises only SBICs would be exempt from all reporting and registration requirements of the Advisers Act.  However, an investment adviser that advised both venture capital funds and SBICs could not take advantage of either exemption and would be required to register with the SEC.

The Relief Act has patched this hole by amending Section 203(l) of the Advisers Act to expressly include SBICs as “venture capital funds” for purposes of the venture capital fund adviser exemption. As a result advisers to that advise only SBICs and venture capital funds can rely on the venture capital fund exemption, and therefore need only register with the SEC as exempt reporting advisors.

Relief for advisers to SBICs and Private Funds.

As adopted, Section 203(m) of the Advisers Act provided that investment advisers to private funds with aggregate assets under management of less than $150,000,000 would be exempt reporting advisers.  Prior to the enactment of the Relief Act, the SEC interpreted Section 203(m) to include in the calculation of assets under management the assets of any SBIC that also qualified as a private fund (without any deductions for SBA leverage). If the assets of an SBIC caused the investment adviser’s aggregate assets under management to exceed $150,000,000, the investment adviser could not rely on the private fund adviser exemption.

The Relief Act rectifies this situation by excluding the assets of SBIC funds from the assets under management calculation.  Thus, under the revised regulations, a private fund adviser can advise SBICs of any size and still qualify for the private fund adviser exemption so long as the adviser’s aggregate private fund assets under management are less than $150,000,000.

Preemption of State Registration Requirements for SBIC Advisers

Prior to the enactment of the Relief Act, SBIC fund advisers that were eligible for the SBIC fund adviser exemption under Section 203(b)(7) would still be subject to state investment adviser registration requirements unless a state exemption was also available.^[4] While many states have adopted exemptions from investment adviser registration analogous to the SBIC fund adviser, venture capital fund and private fund adviser exemptions of the Advisers Act, not every state has done so, and several states have adopted exemptions similar to the private fund adviser and venture capital fund adviser exemptions (with analogous “exempt reporting adviser” registration and reporting requirements), but not the SBIC fund adviser exemption. As a result, SBIC fund-only located in states that have not adopted a state-level SBIC fund adviser exemption have been subject to some level of registration despite being completely exempt from federal regulation.

The Relief Act amends Section 203A(b)(1) of the Advisers Act to preempt states from requiring advisers relying on the SBIC fund adviser exemption to register, license or qualify as an investment adviser in the state.  While advisers that qualify for the SBIC fund adviser exemption remain subject to SEC and state regulatory authority for anti-fraud purposes, they are no longer required to register or report at either the state or federal level, and may withdraw their SEC registrations or file their final exempt reporting adviser report with the SEC, as applicable.

Next Steps

• Federal and state registered or exempt reporting advisers that advise only SBICs should consider withdrawing their registrations or filing their final exempt reporting adviser reports.

• SBIC-only advisers relying on the SBIC fund adviser exemption may want to consider launching venture capital or smaller private equity funds given the reduced burdens of registering as exempt reporting advisers.

• Conversely, advisers relying on either the venture capital fund adviser or the private fund adviser exemption may want to consider exploring the benefits of launching an SBIC.^[5]

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_{[1] The Relief Act was enacted on December 4, 2015, as part of H.R. 22, the Fixing America’s Surface Transportation Act of 2015.} 

_{[2] 15 U.S.C. §§ 80b-1 through 80b-21.}

_{[3] Title IV of the Dodd-Frank legislation was the “Private Fund Investment Advisers Registration Act of 2010,” which, among other things, added the various exemptions to the Advisers Act that have been addressed by the Relief Act.  Note that none of the exemptions discussed in this article are available to an adviser to an SBIC that has elected to be treated as a Business Development Company.}

_{[4] While Section 203A(b) of the Advisers Act prohibited states from requiring registration of investment advisers who were either registered with the SEC or who were excepted from the definition of an investment adviser under Section 202 (a)(11) of Advisers Act, advisers relying on the SBIC fund adviser exemption were neither registered with the SEC nor excepted from the definition of investment adviser.}

_{[5] Note that the expansion of Advisers Act exemptions under the Relief Act have no effect on the process for qualifying and applying for, and obtaining, an SBIC license from the SBA.}