The US Private Real Estate Fund Compliance Guide

Venture capital fund managers can fall under a the new category of exempt reporting advisers. When a potential investor requests a Form ADV, a venture capital fund manager will be able to deliver a copy of its Form ADV, although with the limited information required of an exempt reporting adviser.

A May 9, 2011 survey13 by the author looked at the top 30 private equity real estate managers published by PERE magazine14 to determine which were registered with the SEC. Of the managers listed, 18 of the 30 were already registered with the SEC as investment advisers. With the passing of the Dodd-Frank registration deadline, 28 of the 30 were registered as investment advisers as of April 2, 2012.15

different method for calculation of assets under management:
For purposes of this definition, treat all of the assets of a private fund as a securities portfolio, regardless of the nature of such assets. For accounts of private funds, moreover, include in the securities portfolio any uncalled commitment pursuant to which a person is obligated to acquire an interest in, or make a capital contribution to, the private fund.
If the fund qualifies under the 3(c)(5) exclusion, it would have a value of $0 for purposes of assets under management on Form ADV.

The other thing to keep in mind is that using the Section 3(c)(5) exclusion may get the manager out from under the definition of a private fund, but not necessarily from under the definition of investment adviser. It just means that the fund manager is not an adviser to a private fund.

Is the fund an investment company?
The definition of private fund switches the analysis to the Investment Company Act. Under that law, the definition of an ‘investment company’ has three parts:9
1.is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities;
2.is engaged or proposes to engage in the business of issuing face-amount certificates of the installment type, or has been engaged in such business and has any such certificate outstanding; or
3.is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 percentum of the value of such issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated basis.

Exempt reporting
If a private real estate fund manager has less than $150 million in assets under management, the adviser can look to Section 203(m) of the Advisers Act for the new mid-sized adviser exemption. This new category of ‘exempt reporting’ advisers also includes venture capital fund managers. However, the fund manager is still subject to a subset of Advisers Act requirements and must file the Form ADV with the SEC.

Exclusions
The definition of ‘investment adviser’ in Section 202(a)(11) of the Advisers Act specifically excludes several types of organizations from its definition. However, a typical private real estate fund manager is unlikely to fit into one of these categories. The list includes: banks, lawyers, teachers, broker/dealers, newspaper publishers, advisers solely dealing with US treasuries, family offices and nationally recognized statistical rating organizations.

Cash management
Some choices for parking cash on a short-term basis could be considered giving advice about securities. If the choice is other than a bank account, it could be considered a security. For example, causing the fund to purchase US Treasuries or a short-term bond fund would be considered giving advice about securities.

Deal structure
Deal structure may influence the analysis. It is common in some jurisdictions to structure the transaction as a sale of interests in the owner of the real estate instead of a sale of the asset itself. That transaction structure could be viewed as a sale of securities, instead of a sale of real estate.

Loans fall outside the definition of a security, while notes held for investment are considered securities. To