Filing as an Exempt Reporting Adviser with the SEC is only half the picture. Every state has its own investment adviser laws, and your federal exemption does not automatically protect you at the state level. Depending on where you operate and where your investors live, you may face additional registration requirements, notice filings, or outright prohibitions on certain fee structures.
When State Laws Apply
State investment adviser laws generally apply based on two factors: where the adviser has a place of business, and where the adviser's clients reside. If you have an office in a state or manage money for investors located there, that state's rules likely apply to you.
Federal ERA status under Section 203(l) or 203(m) of the Advisers Act exempts you from SEC registration. It does not preempt state law. Many states have adopted their own exemptions that parallel the federal framework, but the details vary widely.
Some states exempt ERAs automatically. Others require you to file notice documents, pay fees, or register outright. A few impose additional conditions on fund managers that go beyond anything the SEC requires.
The NASAA Model Rule
The North American Securities Administrators Association (NASAA) developed a model rule to create consistency across states. The model rule provides an exemption from state registration for advisers who qualify as ERAs at the federal level, subject to certain conditions.
Core Requirements
Under the NASAA model rule, an ERA is generally exempt from state registration if it meets these conditions:
- The adviser is registered with the SEC as an ERA (or properly exempt from SEC registration)
- The adviser files the appropriate notice filings with the state
- The adviser pays any required state filing fees
- The adviser is not subject to any disqualifying events (statutory disqualifications, disciplinary history)
Additional Requirements for 3(c)(1) Fund Advisers
Some states impose extra requirements on advisers to funds that rely on the Section 3(c)(1) exemption under the Investment Company Act. These conditions typically include:
- Fund interests are not marketed to the general public
- All investors in the fund are "qualified clients" as defined under the Advisers Act
- The adviser discloses its ERA status to investors
- The adviser provides fund investors with audited financial statements annually
State-by-State Variations
States fall into roughly four categories based on how they treat ERA advisers. Knowing which category your states fall into determines your compliance burden.
Permissive States
These states broadly exempt ERAs with minimal or no additional conditions. If you qualify as an ERA at the federal level, you are generally exempt from state registration with little more than a notice filing. Examples include states that adopted the NASAA model rule without significant modification and do not impose the additional 3(c)(1) conditions.
Model Rule States
These states adopted the NASAA model rule substantially as written, including the additional conditions for 3(c)(1) fund advisers. You can rely on the exemption, but you need to confirm that your fund structure and investor base meet the qualified client and disclosure requirements.
Modified Rule States
These states started with the NASAA model rule but added their own twists. The modifications range from minor (different fee schedules, additional notice requirements) to significant (restricting which types of funds qualify, imposing reporting obligations). You need to review the specific state statute to understand what applies.
Restrictive States
A small number of states either have not adopted an ERA exemption or impose conditions so strict that most emerging fund managers cannot satisfy them. In these states, you may need to register as an investment adviser even if you are an ERA at the federal level.
States That Exclude 3(c)(1) Funds
A few states deserve special attention because they explicitly exclude advisers to 3(c)(1) funds from their ERA exemptions.
Delaware
Delaware's exemption applies only to advisers relying on the venture capital fund adviser exemption under Section 203(l). If you rely on the private fund adviser exemption under Section 203(m) and manage a 3(c)(1) fund, Delaware does not provide a state-level exemption. Given that many funds are formed as Delaware LPs or LLCs, this creates an important compliance gap that managers often overlook.
Washington
Washington State similarly limits its ERA exemption and may require registration for advisers to 3(c)(1) funds. The state takes a narrow view of available exemptions for private fund managers.
California: Retail Buyer Fund Rules
California imposes additional requirements on fund managers who accept investors that California classifies as "retail buyers." Under California law, a retail buyer is generally an investor who does not meet the qualified purchaser standard under the Investment Company Act.
If your fund includes California retail buyers, you may be required to register as an investment adviser in California regardless of your federal ERA status. California also imposes specific disclosure requirements and may require you to provide investors with additional information about your fund's operations, fees, and risks.
This is particularly relevant for emerging managers raising their first fund, as early investors often include friends and family who may not meet the qualified purchaser threshold.
Performance Fee Restrictions
Several states restrict or regulate performance-based compensation (carried interest, incentive allocations, performance fees) for investment advisers. These restrictions can apply even when the federal rules permit performance fees.
At the federal level, performance fees are generally permitted if all investors in the fund are "qualified clients." Some states adopt this standard. Others impose their own, sometimes stricter, requirements. A few states prohibit performance fees for state-registered advisers entirely, which creates a problem if you are required to register rather than file as an ERA.
If your fund charges carried interest or any form of performance-based compensation, you need to verify that each state where you have obligations permits it under the applicable rules.
Registration Consequences
If you determine that you need to register in one or more states, the practical consequences include:
- Form ADV filing: You will need to file Form ADV with the state through the IARD system, similar to the federal ERA filing but with additional state-specific requirements
- Examination authority: The state securities regulator gains the authority to examine your books, records, and operations
- Ongoing obligations: State-registered advisers typically face annual renewal requirements, fee payments, and may need to comply with state-specific advertising and custody rules
- Bonding requirements: Some states require investment advisers to post a surety bond
- Net capital requirements: Certain states impose minimum net capital requirements on registered advisers
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This content is for informational purposes only and does not constitute legal, tax, or compliance advice. State securities laws change frequently, and the information presented here may not reflect the most current requirements in your jurisdiction. You should consult with a qualified securities attorney to determine your specific state registration obligations. Capital Company is not a law firm and does not provide legal advice.