Charge any fee for securities advice and the Investment Advisers Act of 1940 is your statute. It does not care whether the advice arrives through a Bloomberg terminal or a group chat. A paid Substack with weekly stock picks can make you an investment adviser. So can a private Discord running model portfolios. A pooled fund charging 2 and 20 always does.
The useful part for emerging managers: the Act contains an exemption built for exactly this situation. Most new hedge fund managers never register with the SEC at launch. They file as exempt reporting advisers (ERAs) under the private fund adviser exemption and stay that way until the fund grows past $150 million. This guide covers the definition that pulls you in, the exemption that keeps registration away, and the shorter list of rules that still bind you while you are exempt.
Part of our regulatory series. The Securities Act governs how you raise money and the Investment Company Act governs how the fund is structured. This article covers the third law: the one that regulates you, the manager.
Three elements make you an investment adviser
Section 202(a)(11) defines an investment adviser by conduct, not by title. All three elements below must be present. For a fund manager, all three always are.
Advice about securities
Advice, reports, or analysis concerning securities: stocks, bonds, options, fund interests. A recommendation to one client counts, and so does publishing picks, models, or signals to an audience.
For compensation
Any economic benefit qualifies: management fees, performance fees, carried interest, subscription revenue, salary, revenue share. It does not need to be labeled an advisory fee.
As part of a business
You advise with regularity, hold yourself out to the public through a site, a deck, or socials, or the advice sits at the core of a business you run, like managing a fund.
Meet all three and you are an investment adviser unless an exclusion or exemption applies. A hedge fund manager charging 2 and 20 meets all three by definition.
Who the statute carves out
Section 202(a)(11) excludes a short list of professions whose securities advice rides along with another job: publishers of bona fide newspapers of general and regular circulation, lawyers and accountants whose advice is solely incidental to their practice, brokers and dealers whose advice is solely incidental to brokerage and who take no special compensation for it, and banks. A fund manager fits none of these. The escape hatch that fits a fund manager is an exemption, not an exclusion.
The exemption most fund managers actually use
Section 203(m) of the Act, implemented by Rule 203(m)-1, exempts an adviser from SEC registration when two conditions hold: every client is a private fund, and private fund assets under management in the United States stay below $150 million. Advisers relying on it are exempt reporting advisers.
Both conditions are strict. One separately managed account, even a small favor for a relative, is a client that is not a private fund and voids the exemption. The $150 million cap is tested annually when you amend Form ADV.
Exempt does not mean invisible. An ERA files a shortened Form ADV Part 1A within 60 days of first relying on the exemption, updates it within 90 days after each fiscal year end, and amends it promptly when material facts change. The filing is public on the SEC’s Investment Adviser Public Disclosure site, which is where allocators will look you up.
A private fund here means a fund excluded from the Investment Company Act by Section 3(c)(1) or 3(c)(7). For an emerging manager that almost always means 3(c)(1): no more than 100 beneficial owners and no public offering. Hedgia supports 3(c)(1) funds only and does not service 3(c)(7) vehicles.
ERA and RIA obligations, side by side
Exempt reporting adviser
- Relies on Rule 203(m)-1, the private fund adviser exemption
- Under $150 million in U.S. private fund assets
- Advises private funds only, typically 3(c)(1)
- Shortened Form ADV within 60 days, updated annually
- Bound by Rule 206(4)-8 antifraud and Rule 206(4)-5 pay to play
Registered investment adviser
- Generally registers at $100 million or more in regulatory assets
- Full compliance program: chief compliance officer, code of ethics, written policies
- Marketing Rule, Rule 206(4)-1, governs ads and performance claims
- Custody Rule, Rule 206(4)-2, requires a qualified custodian
- Files Form PF at $150 million or more in private fund assets
Exempt still means regulated
Skipping registration drops the compliance program, not the law. Two rules follow you everywhere, and one filing never stops.
Binds you now
Rule 206(4)-8, antifraud. No untrue statements or misleading omissions to investors or prospective investors in your fund. Every deck, email, and pitch call is covered.
Rule 206(4)-5, the pay to play rule. A political contribution by you or a covered associate can bar compensation from a government entity investor for two years. It applies to ERAs in full.
Form ADV reporting. Initial filing within 60 days, an annual updating amendment, prompt amendments when material facts change.
State overlays. Notice filings, fees, audit conditions, and individual licensing, covered below.
Waits until registration
Marketing Rule, Rule 206(4)-1. Testimonial, endorsement, and performance presentation requirements for registered advisers.
Custody Rule, Rule 206(4)-2. Qualified custodian and verification requirements attach at registration.
Form PF. Confidential reporting for registered advisers with at least $150 million in private fund assets.
Treat the right column as a preview, not a pass. Write your deck to Marketing Rule standards anyway: substantiate every number, present performance net of fees, never cherry pick winning trades. A misleading track record already violates Rule 206(4)-8 today, and clean materials make eventual registration cheap.
The dollar thresholds, in order
SEC registration becomes available. Below this line, adviser registration is a state matter under Section 203A unless an exemption covers you.
SEC registration becomes mandatory for advisers without an exemption. The gap between $100 and $110 million is a buffer under Rule 203A-1 so firms do not flip back and forth.
The private fund adviser exemption ends. Past this line even an adviser with only private fund clients registers with the SEC.
Coming back down: an adviser registered with the SEC does not have to withdraw until regulatory assets fall below $90 million.
The state layer most managers miss
A federal exemption answers the federal question only. Every state where you have an office, clients, or investors runs its own adviser regime, and three patterns cover most of them.
- De minimis exemptions. Many states skip adviser registration when you have no place of business in the state and 5 or fewer clients there over the past 12 months.
- State private fund adviser exemptions. Many states mirror the federal ERA concept. Common conditions: a notice filing, a fee, bad actor disqualification checks, and, for 3(c)(1) funds that are not venture capital funds, delivering audited annual financial statements to investors.
- Individual licensing. States license people as investment adviser representatives, not just firms. Expect a Series 65 requirement or an accepted alternative, plus 12 continuing education credits per year in states that adopted the NASAA model rule.
Where the Securities Act takes over
The Advisers Act regulates you. The sale of fund interests is governed by the Securities Act, and for most 3(c)(1) hedge funds that means Rule 506(b) of Regulation D: no general solicitation, accredited investors plus up to 35 sophisticated investors who are not accredited (who trigger heavier disclosure obligations), and a Form D filed within 15 days of the first sale. Blue Sky notice filings follow in each state where your investors live.
Our Securities Act guide compares 506(b) with 506(c), and the legal documents checklist lists the PPM, LPA, and subscription documents the offering itself requires.
Five moves that keep an ERA clean
Confirm eligibility before you charge a fee
Every client a private fund. U.S. private fund assets under $150 million. One stray managed account voids the exemption, so decline the side accounts until you are ready to register.
File Form ADV and map your states
The initial ERA filing is due within 60 days of relying on the exemption. At the same time, list every state where you have an office, clients, or investors and check its notice filing, de minimis, and audit delivery conditions.
Write marketing like a registrant
Substantiate performance, present returns net of fees, keep records behind every claim. Rule 206(4)-8 applies from your first conversation, not your first exam.
Preclear political contributions
Track covered associates and route every contribution through preclearance. One check to the wrong campaign can freeze compensation from a government investor for two years.
Plan the RIA transition early
As you approach the thresholds, stage the registration pieces in advance: custodian, auditor, code of ethics, marketing review, then Form PF once registered.
The decision rule
If every client you advise is a 3(c)(1) private fund and your U.S. private fund assets sit under $150 million, start as an ERA: file the shortened Form ADV within 60 days, clear your state overlays, and run your marketing as if the Marketing Rule already applied. Register only when a client type or the $150 million line forces it.
The paperwork around that choice (the fund LLC, the PPM and LPA, Form D, Blue Sky notice filings, banking, investor onboarding) is the part Hedgia automates, with $0 upfront cost and investor minimums as low as $5,000. The Advisers Act analysis stays this simple only while your client list stays clean, so guard the exemption like the asset it is.