- Federal vs. State regulation of investment advisers
- Advisers to private funds
- Venture capital advisers
- Duties of investment advisers
- Registration of investment advisers
Today we start with the most basic question: What is an investment adviser?
Here’s the definition from the Investment Adviser Act of 1940:
“[A]ny person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. . . .”
The term “securities” is very broad, covering obvious things like stock, bonds, and interests in limited liability companies, but less obviously things like (1) mortgages, and (2) blockchain tokens that are treated as securities under Howey.
EXAMPLE #1: Molly Smith operates a Crowdfunding site that allows investors to participate in specific mortgage loans made to real estate fix-and-flippers. Because investors choose their own mortgage loans, Molly probably isn’t an investment adviser.
EXAMPLE #2: Samantha O’Hara creates a fund that buys and sells mortgage loans made to real estate fix-and-flippers. If Samantha is deciding which loans the fund will buy and sell, she’s probably an investment adviser.
EXAMPLE #3: John Kelly, software engineer, reads the Wall Street Journal and often gives investment tips to his friends. Because he’s not in business and not being compensated, John isn’t an investment adviser.
EXAMPLE #4: Craig Toricelli creates a fund that buys and sells apartment buildings. Because a fee simple interest in real estate isn’t a “security,” Craig isn’t an investment adviser.
EXAMPLE #5: Gregg Wright creates a fund that buys and sells bitcoin (buy on the dip!). Because bitcoin isn’t a “security,” Gregg isn’t an investment adviser.
A few common exceptions:
- Lawyers, accountants, engineers, and teachers aren’t investment advisers if their performance of advisory services is solely incidental to their professions.
- Brokers and dealers aren’t investment advisers if their performance of advisory services is solely incidental to the conduct of their business as brokers and dealers, and they do not receive any special compensation for advisory services.
- Publishers of bona fide newspapers, newsletters, and business or financial publications of general and regular circulation aren’t investment advisers if their publications meet three requirements:
- The publication must offer only impersonal advice, e., advice not tailored to the individual needs of a specific client, group of clients, or portfolio.
- The publication must contain disinterested commentary and analysis rather than promotional material disseminated by someone touting particular securities.
- The publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry.
EXAMPLE: Each time Cindy Liu, Esquire finishes work on an ICO, she post on her Facebook page: “Take a look!” Even If her clients think they’re paying for the publicity as well the legal work, Cindy’s not an investment adviser, because she’s not being paid by her Facebook friends.
In that list, you don’t see “advisers to private funds” or “advisers to family offices.” That’s because while these and other common species of investment advisers are exempt from registering with the SEC, they are still investment advisers, which means (1) they are still subject to certain legal obligations, and (2) they still might have to register with a state. More on all that later.
Questions? Let me know.