Effective May 11, 2016, Nebraska adopted a new exemption from the State’s investment adviser registration requirements which, subject to certain conditions, excludes private fund advisers from registration as an “investment adviser” with the State. The new exemption reduces regulatory burdens and is expected to provide Nebraska-based companies a better opportunity to access growth capital and facilitate capital formation in the State.
Jeff Slobotski, an entrepreneur and founder of Router Ventures (a venture investment fund), together with Dan McMahon, a Shareholder in Koley Jessen’s Corporate Practice, led the effort with the State to get this new exemption adopted and have provided some background on this regulatory change and its potential impact.
Q: What regulations were in place prior to the adoption of the private fund adviser exemption?
A: Prior to the adoption of the new private fund exemption, all Nebraska-based investment advisers (including those that advised only private funds) that were too small for registration with the Securities and Exchange Commission (generally under $100-150 million in assets under management) were required to register as investment advisers with the Nebraska Department of Banking and Finance (NDBF).
Q: What changes with the private fund adviser exemption?
A: Subject to certain conditions, Nebraska’s new private fund adviser exemption excludes from NDBF registration those investment advisers that provide investment advice solely to one or more qualifying private funds.
Q: What is a “qualifying private fund”?
A: Private funds include, generally, venture capital funds that invest in startup and early-stage companies, private equity funds that invest in more developed private companies, certain real estate funds, and hedge funds that invest in public companies. A “qualifying private fund” is a private fund that is not registered with the SEC under the Investment Company Act of 1940 because they are eligible for an exemption. The most common exemptions are for funds that have fewer than 100 investors or funds whose investors are ultra-high-net-worth investors, called “qualified purchasers”.
The number of investors that can invest in private funds is relatively limited, and the type of investors that are eligible to invest in private funds is typically limited to “accredited investors” (high-net-worth individuals and institutions).
Q: How and why did you become involved in trying to make this change?
A: Jeff, through co-founding and running Silicon Prairie News and Big Omaha, among other activities, has been a great ambassador for startups and entrepreneurs in in the State. As he was pursuing his new venture it became clear that the time and costs of compliance with the existing regulations would jeopardize his plans. Jeff was trying to bring capital from high-net-worth investors, largely from other states, into Nebraska, and red tape was stopping him. We wanted to help remove those barriers for him and other folks like him that can help bring capital to the State. To the current administration’s credit, the NDBF supported this from the start and worked diligently to make it happen. This was a good example of what is happening in other successful entrepreneurial ecosystems – the business community, lawyers or other service providers, and the state regulators working together to create smart, pro-growth solutions to real world issues.
Q: Why is this an important change for Nebraska?
A: We believe that this exemption modernizes Nebraska’s securities regulations, reduces regulatory burdens, and facilitates capital formation in Nebraska. In our experience, these regulations have caused potential Nebraska-based investment firms and individuals to elect not to form private funds, which deprived Nebraska-based companies of the opportunity to access this growth capital and frustrated capital formation in the State. This is definitely a pro-business, pro-growth regulation.
Q: Who will benefit from this change?
A: A few primary groups will benefit from this change. First, Nebraska-based firms, or individuals like Jeff, that are wanting to sponsor a private fund will find it easier to do that and to attract capital to the State. Second, we anticipate that it will be particularly helpful to Nebraska-based startup and early-stage companies, as it will allow these companies greater access to needed growth capital. It is easier for a Silicon Valley startup to raise growth capital because there is a venture capital firm on every corner there; so the more investor capital we can bring to the State, the greater chance we have of keeping our high growth startups here as well as attracting new ones. Third, in our view, this change benefits everyday Nebraska investors by allowing the NDBF to focus its resources on overseeing and protecting our retirement and other traditional investment accounts, instead of the accounts of high-net-worth private fund investors.
About Jeff Slobotski: Slobotski is the Founder of Router Ventures, a venture fund that bypasses place to connect talented people and impactful projects with global, game-changing resources and capital. Previously, Slobotski launched Silicon Prairie News. SPN is a digital media and events company dedicated to highlighting, connecting and supporting the entrepreneurial community. Slobotski organized events to connect with the SPN audience, such as Big Omaha, the annual conference focused on start-up culture and entrepreneurship. Founded in 2009, Big Omaha has brought together thousands of entrepreneurs from more than 25 states and a handful of countries from around the globe in Omaha each year.
About Dan McMahon: Dan is a corporate shareholder at Koley Jessen, with a practice focused on start-up company matters, venture capital financings, private equity transactions, formation and operation of private investment funds and mergers and acquisitions.. He represents entrepreneurs and growth companies from formation and initial funding through an exit event, as well as investors in venture capital financings and other private company investments. Dan also advises public companies, private businesses, and private equity firms on all aspects of merger and acquisition transactions.
