An exempt reporting adviser, or ERA, is an investment adviser that is exempt from full SEC registration but still required to file certain disclosures with the SEC. Most emerging US venture capital and private equity fund managers fall into this category. If you are raising a first or second fund and no one has walked you through what ERA status means for your compliance calendar, read this before you do anything else.
The takeaway from this? Make sure to know where all of your limited partners are in advance of finalizing your compliance setup as well as the physical location where your team works out of, and where you are doing active fund raises. I routinely find this to be an early oversight with emerging managers launching their first funds, which later become obstacles when fund LPs conduct diligence two or three years later.
Operating as an ERA
Filing Form ADV is just the first part, of course. To actually operate in compliance with the ERA status each day presents a new set of challenges. At minimum, many ERAs have:
- Venture capital fund adviser exemption: You advise only funds that meet the SEC's definition of a qualifying venture capital fund. The fund must pursue equity investments in operating companies, not provide leverage, not be registered under the Investment Company Act, and not offer redemption rights.
- Private fund adviser exemption: You advise only private funds and have less than $150 million in regulatory assets under management attributable to private funds in the United States.
Books and records policies to cover the records specifically required under Rule 204-2.
A way of disclosing potential conflicts of interest. The SEC examination staff have recently begun to look more closely at whether ERAs are identifying and managing conflicts of interest.
One thing that has proven to be true throughout the 22 years my firm has been in the market is that the compliance failures that cause the most headaches for emerging managers are not the exotic ones. They are the basics that just get swept under the rug. The GP I worked with during its Fund II fundraise just found out during LP due diligence that the GP had not updated its Form ADV with the SEC to reflect that it had hired a second portfolio manager eighteen months earlier. The delay in the update put back a $12 million LP commitment for two months, while the legal firm had to prepare and file an amendment.
When ERA status won’t be enough
In the scenario that the amount of assets under management regulated by the Advisers Act crosses $150 million, the manager would have to file a registration for the SEC status within 90 days after filing an update to your annual ADV that shows the $150 million assets under management threshold has been crossed. Or if your fund strategy changes in a way that would disqualify your fund(s) from the exemption, you will no longer be able to rely on ERA status, regardless of your size.
Being required to register as an adviser with the SEC entails much more substantial compliance burdens: filing a full Form ADV in Parts 1 and 2A and 2B, undergoing SEC exam, compliance program requirements under Rule 206(4)-7, etc., and potentially subject to the private fund reporting rules that the SEC adopted a few months back.
Frequently Asked Questions on Exempt Reporting Advisers
Q: Is an exempt reporting adviser required to have a chief compliance officer?
A: The Advisers Act does not require an ERA to appoint a chief compliance officer. However, someone at your firm should still be responsible for compliance. Many emerging managers use outside compliance consultants or outside fund counsel during the first few years of a fund.
Q: Can an exempt reporting adviser have both VC and private equity funds?
- A: Yes. But you will need to consider your specific basis for the exemption. If you qualify for an exemption based on a qualifying VC fund, then each fund in your firm must still meet the qualifying definition. Adding a fund that doesn’t meet that definition would necessitate reevaluating whether you are still eligible for the private fund adviser exemption (based on your total assets under management regulated under the Advisers Act).
- Q: What happens if the SEC examiners conduct an exam on an exempt reporting adviser?
- A: ERAs can also be examined by the SEC. Exams generally require the SEC to ask for information like the Form ADV filings, fund documents, compliance policies, books and records, and fundraising materials. An ERA that has not done proper compliance recordkeeping will tend to produce lots of deficiency findings.
Q: Is filing a Form D the same as filing as an ERA?
A: No. Filing a Form D is a notice of exemption filing for a private placement offering under Regulation D. Filing Form ADV is a notice of registration or exemption for the adviser itself. It is most common for private fund managers to have to file both. These are two separate filings, under two separate regulations.
Q: How long does it take to file as an exempt reporting adviser?
A: The actual filing mechanics of filing Form ADV through the IARD system are not complicated. Getting all the information together so you can make a complete filing generally requires two to four weeks of work with outside fund counsel. This involves information about all related persons, beneficial owners, affiliated advisory firms, and fund structures. This is not something you should start the process on after your first close.
Filing Form ADV is step one. Operating as a compliant ERA day-to-day is a different challenge. At a minimum, most ERA managers should have:
- A written compliance manual tailored to your specific exemption and fund strategy.
- An annual compliance review conducted by someone with Advisers Act knowledge, documented.
- A books and records policy covering the specific records required under Rule 204-2.
- A conflicts of interest disclosure process. The SEC's examination staff have become increasingly focused on whether ERA managers are identifying and managing conflicts.
One thing we have observed consistently over 22 years: the compliance gaps that create the biggest problems are rarely exotic. They are the basics that got deferred. A first-time GP we worked with during their Fund II raise discovered during LP due diligence that their Form ADV had not been updated after they brought on a second portfolio manager eighteen months earlier. The omission delayed a $12 million commitment by two months while counsel filed an amendment.
When ERA Status Is No Longer Sufficient
If your regulatory AUM crosses $150 million, you must register with the SEC within 90 days of filing your next annual ADV update showing the threshold breach. If your fund strategy changes in a way that disqualifies it from the exemption, you can no longer rely on ERA status regardless of AUM.
Full SEC registration carries significantly more compliance obligations: complete Form ADV including Parts 2A and 2B, SEC examination exposure, compliance program requirements under Rule 206(4)-7, and potential applicability of recently adopted private fund reporting rules.
Frequently Asked Questions
Does an exempt reporting adviser need a compliance officer?
The Advisers Act does not require ERAs to designate a chief compliance officer. However, someone at your firm needs to own compliance. Many emerging managers use outside compliance consultants or fund counsel during early fund years.
Can an ERA have both venture capital and buyout funds?
Yes, but your exemption basis matters. If you rely on the VC fund exemption, every fund must meet the qualifying definition. Adding a non-qualifying fund means reassessing whether the private fund adviser exemption applies based on total RAUM.
What happens if the SEC examines an ERA?
ERAs are subject to SEC examination authority. Examinations typically involve document requests covering ADV filings, fund documents, compliance policies, books and records, and marketing materials. ERAs that have not maintained proper records tend to generate significant deficiency findings.
Is a Form D filing the same as an ERA filing?
No. Form D is a notice of exempt offering filed under Regulation D. Form ADV is an adviser registration or exemption filing. Most private fund managers file both. They are separate requirements under separate regulatory frameworks.
How long does it take to file as an ERA?
The IARD filing mechanics are not complicated. Preparing the filing accurately takes two to four weeks working with fund counsel. You need information on all related persons, beneficial owners, advisory affiliates, and fund structures. Do not start this process after your first close.