• Кристина Субботина

PRIVATE FUND: Investment Adviser

Updated: Jun 28

As I discussed in the previous post about features and structures of a private fund, one of the main elements of a PE fund structure is an investment adviser, which is typically affiliated with the general partner or manager and is appointed to provide investment advisory services to the fund. An investment adviser evaluates potential investment opportunities and incurs the expenses associated with day-to-day operations and administration of the fund in exchange for a management fee. Smaller funds sometimes have one legal entity (usually, LLC) to serve as a general or manager and an investment adviser.


An example of such rare and isolated advice could be if a doctor found out about an opportunity to invest in a very promising healthcare startup and told about this opportunity to his colleagues. He hired a lawyer to set up a fund and invest in that startup and appointed himself as a general partner of the fund. The doctor provided investment advice to others to invest in the startup and received compensation (e.g., reimbursement of legal expenses). If the doctor stops his investment activities here, he may not be an investment adviser. However, if he, being inspired by his first success, finds another investment opportunity and suggests others to invest in it, he will be considered an investment adviser and most likely will have to become an ERA.


Section 202(a)(11) of the Investment Advisers Act of 1940 defined an investment adviser as “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as a part of regular business, issues or promulgates analyses or reports concerning securities.”


Any person (individual or entity) that (i) for compensation (ii) engages in the business of (iii) providing securities-related advice to others must register, unless qualifies for an exemption, with the Securities Exchange Commission ("SEC").


Here are the examples of the first 2 elements:


(i) The term “compensation” means any economic benefit, including even the reimbursement of out-of-pocket expenses, paid by any source (not only the recipient of the advisory services).


(ii) The terms “in the business of” and “as a part of regular business” mean business activity occurring with some regularity. The SEC will consider the full spectrum and scope of a person’s activities and would view such person as being in the business of giving investment advice if such person: (1) holds itself out to the public as one that provides investment advice; (2) receives compensation for providing advice about securities; or (3) provides specific investment advice other than in rare, isolated and non-periodic instances.


An example of such rare and isolated advice could be if a doctor found out about an opportunity to invest in a very promising healthcare startup and told about this opportunity to his colleagues. He hired a lawyer to set up a fund and invest in that startup and appointed himself as a general partner of the fund. The doctor provided an investment advice to others to invest in the startup and received compensation (e.g., reimbursement of legal expenses). If the doctor stops his investment activities here, he may not be an investment adviser. However, if he, being inspired by his first success, finds another investment opportunity and suggests others to invest in it, he will be considered an investment adviser and most likely will have to become an ERA.


Thus, a person that provides an investment advice is not an investment adviser if such person is not compensated and such advice is rare (once in a lifetime).


This article is not legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author Kristina Subbotina. Ms. Subbotina is a New York-based corporate and securities attorney representing startups and investment funds throughout their lifecycle, including business formation, financing rounds, M&A, and day-to-day business operations.

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