Federal ERA status does not exempt you from state investment adviser requirements. This is one of the most common compliance gaps for private fund managers, and it catches people off guard because federal and state regimes do not always align.
Why State Registration Is Separate
The Investment Advisers Act divides regulatory authority between the SEC and the states based on AUM. Advisers with $100 million or more generally register with the SEC. Advisers below that threshold generally register with their home state.
ERA status is a federal concept. It means you have filed a notice with the SEC but are not fully registered. States have their own rules about whether and how they regulate ERAs, and those rules vary significantly.
The NASAA Model Rule
The North American Securities Administrators Association (NASAA) adopted a model rule that exempts ERAs from state registration, provided you file Form ADV with the SEC and comply with any state notice filing requirements.
Many states have adopted this model rule or something similar. In these states, your federal ERA filing is sufficient as long as you check the appropriate state boxes on Form ADV (Item 2.C) and pay any required fees.
States That Do Not Follow the Model Rule
Not all states have adopted the NASAA model rule, and some that have adopted it added their own conditions. A few notable examples:
States that may require registration regardless of ERA status. Some states require investment advisers to register at the state level if they have a place of business in the state, regardless of their federal filing status.
States that exclude certain fund types. Delaware and Washington, among others, have exemptions that exclude advisers to 3(c)(1) funds but may not extend the same treatment to advisers of other fund types.
States with client count triggers. Some states require registration if you have more than a specified number of clients (often 5 or 6) located in the state.
What "Place of Business" Means
The concept of "place of business" is broader than you might expect. It includes your main office, but it can also include the home office of a remote employee in another state. If you have investment professionals working remotely from states with registration requirements, you may have a state filing obligation you did not anticipate.
How to Manage State Requirements
Map your state footprint early. Identify:
- Where your firm has a physical office
- Where your employees (especially investment professionals) are located
- Where your investors are located (some states care about this)
- Which states require notice filings, registration, or nothing
Then check each relevant state's rules against your ERA status. For states that follow the NASAA model rule, confirming your Form ADV includes the correct state selections is usually sufficient. For states with their own requirements, you may need to file separately.
Consequences of Getting It Wrong
Operating as an unregistered investment adviser at the state level can result in fines, cease-and-desist orders, or restrictions on your ability to raise capital from investors in that state. It is a fixable problem, but it is easier to get right from the start than to remediate later.
How Capital Company Helps
Capital Company maps your state filing obligations, prepares any required state notice filings, and coordinates your federal ERA status with state registration or exemption requirements. When your team expands to new states, Capital Company reviews the impact on your state-level compliance.
This article is for informational purposes only and does not constitute legal advice. Consult qualified legal counsel for advice specific to your situation.