TENNESSEE adopts private fund adviser exemption - 21 December 2023

The Tennessee Securities Division adopted a private fund adviser exemption as follows:

Private fund advisers, i.e., advisers providing advice to one or more qualifying private funds, are exempt from registration under the Tennessee Securities Act if neither the advisers nor their advisory affiliates are subject to Tennessee “bad boy” disqualification provisions under federal Regulation D, Rule 506(d) (unless waived by the Director for good cause shown) and the advisers electronically file through the IARD the SEC-filed reports and amendments required for exempt reporting advisers by Rule 204-4 of the Investment Advisers Act of 1940 and pay a $150 initial reporting fee (or $150 annual renewal fee). A report is considered filed when the report and fee are filed and accepted by the IARD on the State's behalf.

Additional requirements for private fund advisers to certain 3(c)(1) funds. Private fund advisers advising at least one fund under Section 3(c)(1) of the Investment Company Act of 1940 that is not a venture capital fund must, in addition to satisfying the above-mentioned basic requirements: (1) advise only those 3(c)(1) funds, other than venture capital funds, whose outstanding securities (other than short term paper) are beneficially owned entirely by persons who, after deducting the primary residence value from their net worth, meet the SEC Rule 205-3 “qualified client” definition at the time the securities are purchased from the issuer; and (2) disclose in writing, at the time of purchase, to each beneficial owner of a 3(c)(1) fund that is not a venture capital fund: (a) the services the advisers will provide to them (if any), (b) the duties the advisers will owe them (if any), and (c) all other material information affecting the beneficial owners' rights or responsibilities. Private fund advisers need to annually obtain audited financial statements for each 3(c)(1) fund that is not a venture capital fund and deliver a copy of those financial statements to each beneficial owner of the fund.

Grandfathering exemption for investment advisers. Notwithstanding the above requirements, private fund advisers to one or more 3(c)(1) funds that are not venture capital funds but that have one or more non-”qualified client”-defined beneficial owners may still qualify for the exemption if: (1) the subject fund(s) existed before December 25, 2023 and the advisers cease to accept beneficial owners that are not qualified clients as of that date; (2) the private fund advisers to the subject funds make the above-mentioned written disclosures to all beneficial owners of the subject funds; and (3) the private fund advisers annually deliver the above-mentioned audited financial statements to all beneficial owners of the subject funds.

Investment adviser representatives employed by or associated with exemption-eligible investment advisers are, themselves, exempt from investment adviser representative registration if they do not otherwise act as investment adviser representatives. Investment advisers that become ineligible for the private fund adviser exemption can, within 90 days following their ineligibility, register or notice file as investment advisers (as applicable) in Tennessee. Federal covered investment advisers, i.e., private fund advisers registered with the SEC, are ineligible for the exemption and must, therefore, comply with Tennessee notice filing requirements.

Definitions. Terms defined include “3(c)(1) fund,” “private fund adviser,” “qualifying private fund,” “value of primary residence” and “venture capital fund.”


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