HEDGE FUNDS
LAWS FOR ADVISERS & FUNDS: STATE LAW

State securities laws do not regulate the operations of pooled investment vehicles such as investment companies or hedge funds. Although states do not regulate hedge funds directly, they may regulate them indirectly through the funds' investment adviser or by regulating the offer and sale of interests in the hedge funds. Because of federal preemption and the availability of exemptions from adviser registration, only some states exercise regulatory authority over some hedge fund advisers, and most do not regulate the offer and sale of interests in hedge funds.

State Regulation of Offers and Sales of Hedge Fund Securities

Adoption of the National Securities Markets Improvements Act of 1996 (“NSMIA”) greatly reduced state regulation of offers and sales of hedge fund securities. Most hedge funds issue securities in offerings that are exempt from registration under the Securities Act, in reliance upon Rule 506 of Regulation D, and are therefore “deemed covered securities” under Section 18 of the Securities Act.

Under Section 18, covered securities are exempt from state regulations that: (1) require the registration or qualification of securities or securities transactions; (2) impose any requirements related to disclosure documents used in an offering; or (3) impose any merit regulation of such offerings. The states, however, retain their antifraud jurisdiction. They may also impose notice filing requirements and notice filing fees (see links below).

State Regulation of Hedge Fund Advisers

Hedge fund advisers registered with the SEC under the Advisers Act are not required to register with the state securities authorities and are exempt from most substantive provisions of state investment adviser laws. Hedge fund advisers not registered with the SEC also may be eligible for exemptions from state registration and regulatory requirements.

A hedge fund adviser that is subject to state investment adviser laws is likely to face regulations similar to the SEC’s, as state regulation of investment advisers is generally similar to the Advisers Act. Broadly speaking, the investment adviser must register with authorities and must provide certain disclosures to clients. The adviser also is subject to rules designed to protect investors and prevent fraud, and may be subject to periodic examination by regulators.

Where to Find Your State Regulator

The SEC Web page, "How To Register With the SEC as an Investment Adviser", has suggestions for state issues. "For information about state securities registration requirements, including notice filing requirements for SEC registered advisers, check with the appropriate state securities authorities and NASAA." These links give you a handy map to locate your state regulator.

Expedited Blue Sky Filing Services

We are in the business of advising business fund managers with deadlines to meet and immediate need for assistance with Blue Sky filings. We can answer your questions quickly and efficiently. Don’t pick up investors in any state before you know the rules. Not all states have a “grace period” for Blue Sky filings. Some states require that you Blue Sky in advance of acquiring a new investor in your fund! Don’t take chances with the SEC, state or federal.

We can have any state or federal Blue Sky form readied for filing within hours.

• Notice Filings for Offerings
• Form D
• U-2
• Form ADV Part I and II
• Annual ADV Updates
• Investment Adviser Registration Services for all States and the SEC
• Investment Adviser Representative Registration
• Solicitor Registration
• Conversions from State Registration to SEC Registration

Ask about our flat fee pricing option for five or more blue sky filings. Click here to learn more.

Division of Authority between the SEC and the States

The below content is excerpted from our Must I Register? (as an investment adviser) web page.

The regulatory landscape applying to investment advisers changed dramatically in 1996 as a result of the National Securities Markets Improvement Act (NSMIA). Consequently, advisers are subject to regulation at only one level: large advisers by the SEC and small advisers and their associated persons by the states.

The underlying principle is that the SEC should focus on those advisers with a more national business, and state regulators should focus on those advisers with a more local business. All the states, as well as the District of Columbia, Puerto Rico, and Guam, regulate securities through laws typically referred to as Blue Sky Laws. The state securities department responsible for securities administers these laws.

The Consequences of not Registering When You Should Are Huge!

If you should register as an investment adviser with a state and you do not, you are setting yourself up for a huge problem. The laws are specific, and each state and set of circumstances brings a different answer to the question.

If you should have, but did not register, and your fund does not do well (resulting in a lawsuit), you could be liable for reimbursement for any funds lost. In addition, you will be in very hot water with your state securities commission—not a good situation.

Registration rules are complex and highly nuanced. It's wise to seek good (legal) counsel before proceeding with your hedge fund business plan.

Ready for help or have a question? Please call our attorneys or e-mail us at legal@greencompany.com.