“Do I need to register as an investment adviser?” Part 1

(Editor’s Note: This is Part 1 of a two-part article, with Part 2 at this link.)

Texas and United States federal law requires that any person who for compensation gives advice with respect to securities is obligated to register as an investment adviser, either with the state securities regulator of the state where the adviser has its principal office or with the United States Securities and Exchange Commission (the “SEC”).

I frequently represent clients who syndicate offerings of private securities to finance real estate investments.  I also represent clients who syndicate offerings of private securities to finance their acquisition of private stock in operating companies (as venture capital or private equity investors) and clients who syndicate offerings of private securities to finance their acquisition of publicly-traded securities (as a hedge fund, for example).  If these clients receive compensation for their analysis of the value of the underlying securities in which they are investing their investors’ investment funds, these clients are acting as investment advisers.  Historically, however, attorneys have advised clients who syndicate private offerings of securities to fund real estate investments that because the underlying asset is real estate and not shares of stock or membership interests in an underlying business entity (a corporation, LLC, or limited partnership), the “advice” that the client is providing really regards real estate and not securities even though the client is selling securities in their syndicated offering and there is a value placed on those securities.

Registration as an investment adviser is an onerous process.  You must apply either with the SEC or the securities regulator of the state where you are doing business.  Our securities regulator in Texas is the Texas State Securities Board (the “TSSB”).  Under the Investment Advisers Act of 1940, as amended (“Advisers Act”), until you have $150 million under management, you will be required to register with the state securities regulator instead of the SEC.  Under the state registration rules, at least one of the principals of the firm must satisfy examination requirements (the principal must pass the Series 65, or have a combination of either the Series 1, 2, or 7, and the Series 66).  The registration process commences with completing and filing a Form ADV for the investment adviser.  The Form ADV requires you to disclose material information about your advisory business and how you address potential conflicts of interest.  Part 2 of the Form ADV requires extensive narrative disclosure about your business.  After you are registered, you are subject to ongoing record keeping and operational requirements and you are subject to a surprise audit by the TSSB.

So this is the bad news that I am going to leave you with as a cliffhanger for the good news that I will provide in the next installment of this series.  If you want to know the answer sooner, call me and I would be happy to discuss further!