SEC Proposes Changes to Investment Adviser Act for Small Business Investment Company Advisers

On May 3, 2017, the SEC released its proposed amendments to the Investment Advisers Act (the Advisers Act) to reflect changes made under the Fixing America’s Surface Transportation Act (the FAST Act). The FAST Act, which was passed in 2015, amended sections 203(l) and 203(m) of the Advisers Act to exempt small business investment company (SBIC) advisers from registration.

SBICs are investment funds that specialize in making equity and debt investments in small businesses and are licensed and regulated by the SBA. SBICs have access to lower costs of capital due in large part to a funding subsidy granted by the SBA. The SBA provides up to $2 of government-guaranteed debt to ever $1 the SBIC funds for up to $150 million. The SBIC program is intended to bridge the gap between the small business community’s need for capital and traditional more expensive sources of capital.

Prior to the passage of the FAST Act, Section 203(l) of the Advisers Act exempted venture capital fund advisers from registering as an investment adviser if they only advise venture capital funds, as defined under Rule 203(l)-1. Additionally, investment advisers could have been exempt from registration under Section 203(b) if they only advised SBICs. The FAST Act added SBICs to the definition of venture capital funds thereby essentially combining Sections 203(l) and 203(b) so that an investment adviser can be exempt even if they advise venture capital funds that are not SBICs. The SEC’s proposed amendments to Rule 203(l)-1 would officially recognize SBICs as venture capital funds for the purposes of the exemption.

Section 203(m) of the Advisers Act previously provided an exemption for investment advisers who solely advise private funds and have less than $150 million in assets under management in the US. As required by the FAST Act, the SEC’s proposed rule would exclude SBIC assets from the $150 million threshold.

The SEC is asking for public comments on the two proposed rule changes. Specifically, the SEC wants to know which exemptions advisers to SBICs previously relied upon and if there should be any changes to the proposed rules. Comments are due 30 days after publication in the Federal Register and can be made online here.

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