Exempt Investment Companies

Shortly after my post on the SEC’s recent settlement with Apollo Global Management went up, the SEC released a settlement with another private equity fund manager: W.L. Ross & Co. LLC (“WLR”). Like the Apollo case, the SEC sanctioned WLR for failing to fully disclose how it was collecting its fees. But WLR paid a lower penalty than Apollo, perhaps due to its greater perceived cooperation with the SEC.

My first post discussed the requirements for the Section 4(c) exemption from broker-dealer registration added by the JOBS Act. This second part will apply Section 4(c) of the Securities Act of 1933 to a number of situations where questions can be raised whether the activities require registration as a broker-dealer.

We have previously discussed the long-running saga regarding whether transaction-based compensation related to non-public sales of securities require registration as a broker-dealer under the Securities and Exchange Act of 1934 (“Exchange Act”). Our discussions have included (i) the tricks and treats of the SEC’s Crowdfunding release last Halloween, (ii) California’s exemption for “finders,” and (iii) a Christmas present for resellers of privately placed securities in last year’s Fixing America’s Surface Transportation (FAST) Act. As a precursor to any of this, Congress added Section 4(b)(1) [now treated as if it had been properly renumbered as Section 4(c) by the FAST Act] to the Securities Act of 1933 (“1933 Act”) describing circumstances in which a person involved in a Rule 506 offering under Regulation D would not have to register as a broker-dealer under Section 15(a)(1) of the Exchange Act.

On October 30th, the SEC adopted their Crowdfunding rules and the adopting release became available on October 31st, commonly referred to as Halloween.  There are two interesting regulatory decisions in that 686 page release, both of which could be described with one or the other of the customary child’s cautionary warning when you answer your front door on Halloween evening.

Family Offices frequently acquire interests in private funds as part of the family office asset allocation process. Private funds have to be certain of the validity of their ability to rely on an exclusion from the definition of “investment company.” The Family Office Rule under the Investment Advisers Act has a detailed definition of “family member” for purposes of that exemption.  In general, a person is a “family member” if he is a lineal descendant of a common ancestor, or a spouse or child of a lineal descendant. There is also a definition of “family client” that includes every possible trust, charitable organization, or ownership situation to which the family office could give investment advice. But the Investment Company Act also defines “family,” differently, in the two most commonly used exclusions from the definition of “investment company.”