Category: Compliance

Written by Leticia Mariz, Partner at Drummond Advisors, and Johanna Chan, Associate Attorney at Drummond Advisors

Raising capital in the United States can be a challenging process because it involves navigating a complex set of federal and state securities laws that govern how securities can be offered and sold, require disclosures, and provide conditions for compliance with exemptions from registrations. Aside from this, companies must also consider different types of investors and their expectations, managing their risk tolerance and strategic interests.

Fundraising may be undertaken by operating companies, such as startups in a venture capital financing round, or by investment funds or other pooled investment vehicles. In our practice, we have observed a growing interest among Brazilian clients in raising funds in the United States, not only from operational companies seeking investors to support business growth, but also from companies wishing to grasp investment opportunities in the United States by means of pooled investment vehicles or by fund managers looking to structure special purpose vehicles or funds for investment in the United States or abroad. This growing interest is likely driven by Brazilians’ increasing preference for investing in dollarized assets, as well as by the opportunities offered by the U.S. market, including the real estate sector.

The equity shares or debt issued by a company, whether operational or not, are generally considered securities when offered to a group of investors. Any offering of securities in the United States is regulated by both federal and state securities laws. This article is intended to serve as a guide to provide clients with a clearer understanding of the regulatory landscape and what can be expected when investing in the United States.

At the federal level, the most relevant laws are the following: (1) Securities Act of 1933 (the “Securities Act”); (2) Securities Exchange Act of 1934 (the “Securities Exchange Act”); (3) Investment Advisers Act of 1940 (the “Investment Advisers Act”); and (4) Investment Company Act of 1940 (the “Investment Company Act”). This article does not address state-level regulations and clients are advised to investigate the applicable state law prior to engaging in the structure of funds or offering of securities in the United States.

This article is organized as follows: Part I discusses the relevant laws and regulations that govern the offer, sale, and resale of securities. It also covers the tests to determine the existence of covered offerings and the exemptions available to issuers to offer or sell securities without registering with the Securities Exchange Commission (“SEC”). Part II covers the regulation of investment advisers and the requirements concerned persons should comply with. It also discusses the reach of the Financial Industry Regulatory Authority (FINRA) as compared to the SEC. Lastly, Part III discusses the registration requirements and exemptions surrounding investment companies and includes a discussion on foreign investment companies seeking to raise capital in the United States.

I.                   SECURITIESOFFERING

a.                SECURITIES ACT OF 1933AND SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

1. Securities Act of 1933

The Securities Act[1] was enacted to require issuers who offer securities to the public to disclose material information and to ensure that any transactions related to the offer of these securities are not based on fraudulent information or practices.[2] It allows issuers to offer securities to the public only after filing a registration statement containing specified information about the company and the security for sale. The purpose of registration is the disclosure of all the company’s information so that the public can make an informed investment. In general, registration forms call for: a description of the company’s properties and business, a description of the security to be offered for sale, information about the management of the company, and financial statements certified by independent accountants.[3]

• Securities Exchange Act of 1934, as amended

This is an act which provides for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.”[4] The SEC is given authority to regulate the registration of securities, impose reporting requirements by companies with publicly traded securities, oversee brokerage firms, transfer agents, and clearing agencies. A company becomes subject to this Act once any of the following occur[5]: (1) listing on a National Securities Exchange; (2) the company exceeds the shareholder threshold; or (3) even without listing securities on a National Securities Exchange, the company has sold securities under an effective registration statement.

3.      Difference between the Securities Act of 1933 and the Securities Exchange Act of 1934

While both the Securities Act and Securities Exchange Act regulate securities, they focus on different aspects of it. The Securities Act regulates the issuance of new securities, such as during an initial public offering (IPO). On the other hand, the Securities Exchange Act governs trading securities after they have been issued, typically involving transactions that would no longer concern the original issuer.

• SECURITIES DEFINED

The primary law that regulates the registration of securities is the Securities Act of 1933. As discussed above, securities may only be offered and sold to the public only after filing a registration statement. But how is security defined and what constitutes an offer?

Section 2(a)(1) of the Securities Act lists what is considered as “security”. Securities come in various forms. The most common examples of securities are notes, stocks, bonds, debentures, certificates of interests, or similar financial instruments.[6] Additionally, Section 2(a)(3) defines the term “offer” as that which includes “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.”

            Supplementarily, the Uniform Commercial Code (UCC) provides for Rules to determine whether certain obligations and interests are considered securities.[7] While the UCC is a model code, it has been adopted by 50 states and the District of Columbia as part of their state law. Based on this, the following are considered securities:[8]

1. Share or similar equity interest issued by a corporation, business trust, joint stock company, or similar entities;
2. Investment Company Security;
3. An interest in a partnership or limited liability company that is (a) dealt in or traded on securities exchanges or in securities markets, (b) its terms expressly provide that it is a security under the Uniform Commercial Code, or it is an investment company security; and
4. Security certificate.

• TESTS TO DETERMINE IF THERE IS A SECURITIES TRANSACTION

In addition to the definition provided by law, courts have developed tests to determine whether a financial instrument or transaction qualifies as a security or not. The most common tests are the Howey Test and the Reves Test, discussed below.

1. Howey Test         

The Howey Test determines whether a financial instrument or transaction is considered a security or not and was developed by the Supreme Court of the United States in the case of SEC v. W.J. Howey Co..[9] The test found that if the following elements are present in the transaction, it would be considered security and would need to be registered:[10]

1. There is an investment of money;
2. Such investment is made in a common enterprise;
3. There is an expectation of profits from the investment; and
4. The profits come from the efforts of others, either primarily or substantially.

If the above test is satisfied, it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value. [11]

This article does not go into an in-depth analysis of each of the elements described above, but those are analyzed in detail in the Howey case and in the cases where such test is applied.

• Reves Test

This test was also developed by the US Supreme Court, in the case of Reves v. Ernst & Young.[12] The case involved a determination of whether a note is considered a security within the meaning of the Securities Exchange Act. The Court chose not to apply the Howey Test to determine whether a note is considered a security. It explained that the Howey Test was originally meant for a different kind of instrument and using it would overlook the other types of instruments enumerated in the law.[13]

The test presumes that every note is a security unless it bears a strong resemblance to one of the categories of notes that are not considered as securities. These categories, identified by a long list of Second Circuit decisions, include the following:

1. The note delivered in consumer financing;
2. The note secured by a mortgage on a home;
3. The short-term note secured by a lien on a small business or some of its assets;
4. The note evidencing a character loan to a bank customer;
5. Short-term notes secured by an assignment of accounts receivable; or
6. A note which simply formalizes an open-account debt incurred in the ordinary course of business. [14]

To determine if a note bears a familial resemblance to one of the above-enumerated categories, the Court weighs four (4) factors:[15]  

1. Motivation of the parties to enter into the transaction;
2. Plan of distribution of the instrument;
3. Reasonable expectations of the investing public; and
4. Whether some factor, such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Act unnecessary.

• EXEMPTIONS TO THE OBLIGATORY REGISTRATION OF SECURITIES

As a general rule, securities must be registered with the SEC before they can be offered or sold. However, the law provides specific exemptions that allow certain securities or transactions to bypass registration as long as they meet certain requirements. In this section, we will discuss these exemptions and requirements under Section 3 and Section 4 of the Securities Act, as well as Regulations D and S.

1. Section 3 of the Securities Act

Section 3 of the Securities Act exempts the following securities from registration:[16]

1. Securities issued or guaranteed by the United States government, any Territory thereof, by the District of Columbia, by any State of the United States, or political subdivision of the State or Territory;
2. Securities issued or guaranteed by a bank;
3. Commercial papers, which are any note, draft, bill of exchange or banker’s acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which have a maturity at the time not exceeding 9 months;
4. Certificates issued by a receiver or by a trustee in a bankruptcy, with the approval of the court;
5. Securities exchanged by the issuer with its existing security holders, but only when no commission or other remuneration is given directly or indirectly for soliciting such exchange;
6. Court -or government approved exchanges; or
7. Subject to the qualifications under the Securities Act, equity security issued in connection with the acquisition by a holding company of a bank under the Bank Holding Company Act of 1956 or the Home Owner’s Loan Act.

It is worth noting, however, that this exemption does not eliminate the liability of issuers under Section 12 or 17 of the Securities Act – imposing civil liability in connection with prospectuses and communications as well as penalty for involvement in fraudulent interstate transactions, respectively – or under Section 10(b) of the Exchange Act or Rule 10(b)-5 under the Exchange Act – which regulates the use of manipulative and deceptive devices to effect a sale of securities.

• Section 4 of the Securities Act

Section 4 of the same Securities Act also provides exemption from registration requirements for the following transactions[17]:

1. Transactions by any person other than an issuer, dealer or underwriter;
2. Transactions by an issuer not involving a public offering (Private Placement Exemption);
3. Transactions by a dealer that is no longer acting as an underwriter in an offering, depending on the number of days after a public offering is completed;
4. Brokers’ transactions that are executed upon a customer’s order on any exchange or in the over-the-counter market. This does not include the solicitation of orders;
5. Transactions by an issuer made only to one or more accredited investors if (a) the aggregate offering price does not exceed $5 million, (b) there is no advertising or general solicitation of the transaction, and (c) the issuer files a Form D with the SEC within 15 days after the date of the first sale of securities;
6. Transactions involving the offer or sale of securities by an issuer provided that the aggregate amount sold to all investors under the exemption does not exceed $1 million within any 12-month period and all other offering conditions under Section 4(a)(6) are complied with; or
7. Transactions for resales of securities that meet certain requirements, including each purchaser be an accredited investor.

One of the principal exemptions under Section 4 is found in Section 4(a)(2), which pertains to sales that do not involve a public offering (item 2 of the above list). This exemption under Section 4(a)(2) is the basis for many private placements, where securities are sold to a limited number of investors. Although the requirements for a private placement exemption are not explicitly outlined in the Securities Act, the following factors are commonly considered when determining whether an offering qualifies for this exemption:[18]

• Private offering: The exemption is generally available for private offerings that are not made to the general public. The issuer must restrict the offering to a limited number of sophisticated investors or individuals with a pre-existing relationship with the issuer.[19]
  • Access to information: Investors often have access to information about the issuer, its management, and financial condition. This access allows investors to evaluate the investment opportunity even without the protections provided by a registered offering.
  • Investor sophistication: The exemption is typically available to “sophisticated” investors who have the knowledge and experience to evaluate the risks and merits of the investment. The issuer may require potential investors to provide representations regarding their financial status and investment experience.
  • Investment intent: The investors must intend to acquire the securities for investment purposes rather than with the intention of distributing or reselling them to the public. To rely on the exemption, the issuer must ensure that the offering is not part of a larger plan to conduct a public offering. This means that subsequent offerings or sales of securities must be separate and distinct from the original private placement.

• Regulation D of the Securities Act 1933

Regulation D (“Reg D”) is a set of rules – including Rules 504 and 506 – promulgated by the SEC that provides specific exemptions for certain private offerings of securities under Section 4(a)(2) of the Securities Act. The rules facilitate capital raising by allowing securities to be sold without registration, provided that the company meets certain conditions. Reg D is essentially a safe harbor rule. This means that issuers are protected from liability related to registration requirements as long as they follow the regulation guidelines.

• Rule 504

Rule 504 permits the sale of securities of up to $10 million within a 12-month period without the need for registration with the SEC.[20] If a second transaction fails to meet the limitation on the aggregate offering price, it does not affect the availability of this exemption to the first transaction.

However, not all companies are eligible to rely on this exemption. Rule 504 specifically excludes the following entities[21]:

1. Investment Companies;
   1. Companies required to report under the Securities Exchange Act;[22]
   1. A development stage company that:
      1. Has no specific business plan or purpose; or
      1. Has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies; [23]  or
   1. Companies that are liable for a “bad actor” disqualification.[24]

The “bad actor” disqualification provisions disqualify offerings from relying on Rule 504 if the issuer or other covered persons[25] have experienced a disqualifying event,[26] such as being convicted of, or sanctioned for, securities fraud or other violations of specified laws.[27] Further details about bad actor disqualification below.

• Rule 506

Rule 506 allows companies to raise an unlimited amount of capital through the sale of securities, without needing to register the same with the SEC. However, the availability of this exemption is subject to certain conditions, as enumerated below, and is dependent on whether the purchaser is a non-accredited investor or an accredited investor:[28]

            506(b) – Sale to non-accredited investors; no general solicitation:[29]

1. There are no more than 35 non-accredited purchasers of securities from the issuer in any 90-day calendar day period.
2. Such investor must be a “sophisticated” investor or someone who is capable of evaluating the merits and risks of the investment.
3. No general solicitation.
4.  Comprehensive information needs to be provided.

506(c) – Sale to accredited investors: [30]

1. Purchaser is an accredited investor; and
2. Issuer has taken reasonable steps to verify that the purchaser is accredited.
3. General solicitation accepted.

A key consideration under Rule 506 is the prohibition on general solicitation and advertising when offerings are made to non‑accredited investors. This means that any advertisement or announcement through websites or any other form of media is not allowed. To avoid mistakenly making a “general solicitation”, the company can limit its offering to investors with whom the company has a pre-existing relationship with.[31] On the other hand, if the offering is made to only accredited investors, then the issuer is permitted to broadly solicit through advertisements, or media.[32]

Accredited investors are those who meet any of the wealth, income, or financial sophistication criteria outlined by the SEC. As to wealth and income criteria for individuals, for example, such person must have a net worth or joint net worth with a spouse or partner of at least $1 million, not including the value of his or her primary residence, or an income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse or spousal equivalent exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.[33] For entities, the requirements vary, and they may be considered an accredited investor if (a) they possess assets that are valued over $5 million; (b) own investments in excess of $5 million; (c) all equity owners are accredited investors; or (d) if they are a bank, insurance company, or a registered investment company or trusts with assets in excess of $5 million. [34] These examples are not an exhaustive list. [35]

Another key consideration in Rule 506 offerings is compliance with disclosure requirements. If non‑accredited investors are included in the offering, issuers must furnish disclosures equivalent to those mandated in registered offerings[36]. That is, issuers are generally required to provide the same kind of information as described in Part I of a registration statement and financial statements although these statements are not required if the company is newly formed and has not completed its first fiscal years, or if there have been no material operations or financial activity [37]. On the other hand, if the offering is limited to only accredited investors, the SEC does not require any specific disclosure obligations beyond relevant anti-fraud provisions. However, in practice, most issuers still provide a Private Placement Memorandum (PPM) to mitigate liability.

It must also be noted that to be eligible for the exemption under this rule, the issuer must file a notice of sales (Form D filing) no later than 15 days from the date of the first sale. The form serves to provide the SEC with information about the issuer and the offering, even though the offering is exempt from full registration.

• Bad Actor Disqualification

Rule 506 also excludes those issuers from relying on the exemption if they, or certain persons associated with them, are subject to a “bad actor” disqualification.[38]  Under the Bad Actor Disqualification provisions, an issuer is prohibited from offering or selling securities under Regulation D exemptions if it or its related parties have been involved in certain disqualifying events, such as criminal convictions, court injunctions, suspension or expulsion from membership in a self-regulatory organization, such as FINRA, securities law violations, or regulatory sanctions.[39] Note that the disqualification applies not only to the issuer but to other related parties as follows: [40]

1. Any predecessor of the issuer;
2. Any affiliated issuer;
3. Any director, executive officer, other officer participating in the offering, general partner or managing member of the issuer;
4. Any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
5. Any promoter connected with the issuer in any capacity at the time of such sale;
6. Any investment manager of an issuer that is a pooled investment fund; any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of securities;
7. Any general partner or managing member of any such investment manager or solicitor; or
8. Any director, executive officer or other officer participating in the offering of any such investment manager or solicitor or general partner or managing member of such investment manager or solicitor.

• Regulation S of the Securities Act 1933

            Regulation S serves as a safe harbor for offerings and sales of securities made outside the United States, ensuring that these international offerings are not subject to the registration requirements of the Securities Act.

• General Conditions to Comply with Regulation S

There are two (2) general conditions that must be met in both cases in order to come under categories of the Regulation S safe harbor:

1. The offer or sale must be made in an offshore transaction; and
2. No directed selling efforts may be made in or into the United States.

These conditions will be discussed in more detail below.

Offshore Transaction

            One of the fundamental elements of Regulation S is the requirement for an “offshore transaction”. This means that the securities must be sold outside the U.S. to a “non-U.S. person”. Non-U.S. persons are defined under the Rules as any of the following:[41]

1. Any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-U.S. person by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States;
2. Any estate of which any professional fiduciary acting as executor or administrator is a U.S. person if the executor or administrator of the estate, who is not a U.S. person, has sole or shared investment discretion with respect to the assets of the estate, and the estate is governed by foreign law;
3. Any trust of which any professional fiduciary acting as trustee is a U.S. person, if a trustee who is not a U.S. person has sole or shared investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a U.S. person;
4. An employee benefit plan established and administered in accordance with the law of a country other than the United States and customary practices and documentation of such country;
5. Any agency or branch of a U.S. person located outside the United States if:
   1. The agency or branch operates for valid business reasons; and
   1. The agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located; and
6. International organizations, their agencies, affiliates, and pension plans.

No Directed Selling Efforts

Issuers and others involved in the offering cannot engage in activities that could be considered “directed selling efforts” toward U.S. persons (such as advertising in the U.S. or otherwise attempting to reach U.S. investors).

• Categories of Regulation S

Regulation S is divided into two safe harbor provisions:

1. Issuer Safe Harbor: Offers and sales made in offshore transactions and involving no directed selling efforts to U.S. persons. These offerings are usually fully exempt from U.S. registration requirements, provided that the conditions are met.[42]

• Resale Safe Harbor: This applies to the resale of securities by investors or other market participants in offshore transactions, subject to certain restrictions. For example, resales may be limited by certain holding periods or resale limitations. This ensures that the securities do not prematurely re-enter the U.S. market. Offerings that rely on this are also exempt but are subject to additional conditions. [43]

Issuer Safe Harbor

Under the first safe harbor rule, the SEC has identified three (3) sub-categories, organized in accordance with the amount of risk that shares sold offshore might flow back into the United States. The higher the risk is, the more conditions the sale or offering of these securities will need to meet. Below is a summary of the three categories:

Category	Description	Conditions
Category 1	These involve securities that are deemed least likely to flow back into the US or are most likely to stay offshore. Thus, the risk is low.	Category 1 is only subject to the 2 general conditions discussed above.
Category 2	Those securities that have a substantial US market interest and have a greater risk – as compared to that of Category 1 – of flowing back into the US,	In addition to the conditions under Category 1, Category 2 transactions are subject to (a) Transactional Restrictions;[44] and (b) Offering Restrictions.[45]
Category 3	This presents the highest risk of having the securities flow back into the US and which have the most US market interest. Thus, they are subject to stricter scrutiny.	Category 3 transactions are subject to all conditions under Category 2 albeit with more transactional restrictions, depending on the type of security and the type of buyer.

Resale Safe Harbor

            Rule 904 is the resale safe harbor which applies to resales abroad by anyone other than the issuer, distributor, any of their affiliates, or any person acting on their behalf. This safe harbor is typically used when the securities being offered are restricted securities (e.g., securities that are acquired in a private placement). This allows for lawful resale without triggering U.S. registration requirements under the Securities Act.

• RESALE OF SECURITIES

1. Rule 144 of the Securities Act 1933

            The resale of restricted securities (those securities that are acquired through unregistered, private transactions) and controlled securities (securities owned by affiliates of the issuer) are regulated by the SEC under Rule 144. Thus, before these securities may be resold to other persons, it must be ensured that the requirements of Rule 144 are met. This Rule allows for the sale of restricted and controlled securities to accredited and non-accredited investors if the following conditions under the Rule are observed:

1. Adequate current public information with regard to the issuer of securities must be made available to the purchases.
   1. For reporting issuers, the issuer has filed all required reports under the Securities Exchange Act during the 12 months preceding such sale and that it has been submitted electronically pursuant to the Rules of the Security Act.[46]
   1. For non-reporting issuers, information about the company, including its financial statements, is made publicly available.[47]

• The purchaser must hold the restricted securities for a period of time, depending on whether the securities were issued from a company subject to the normal reporting requirements:
  • Company subject to the Securities Exchange Act reporting requirements: Holding period should be at least 6 months.[48]
  • Company not subject to the reporting requirements: Holding period should be at least 1 year. [49]

• The Rule provides for a 1% threshold for the amount of securities that may be sold, which depends on the following:
  • During a 3-month period, an affiliate may only sell up to 1% of the outstanding shares of the same class sold or if listed on a stock exchange, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144[50]
  • If debt securities are involved, then the amount of debt securities sold for the account of an affiliate of the issuer, regardless of whether those securities are restricted, shall not exceed the 1% limit. [51]

• Notice through Form 144 must be filed if the sale involves 5,000 shares or more, or if the value of the shares exceeds $50,000 in any 3-month period.[52]

Once the above conditions are complied with, then the securities are permitted to be resold.

• Rule 144A of the Securities Act 1933

            Rule 144A – Private Resales of Securities to Institutions – allows for the resale of eligible securities to Qualified Institutional Buyers.[53] Under this rule, if a buyer purchases a security from an issuer that is relying on any of the exemptions mentioned above, the buyer may subsequently resell these securities to Qualified Institutional Buyers without

waiving the original exemptions.

The rules that were discussed above are the primary regulations that we commonly encounter. However, we note that the SEC has enacted additional exemptions that may not be covered in this article. These other rules may offer alternative ways for compliance and should be considered on a case-by-case basis.

• STATE SECURITIES REGULATION – BLUE SKY LAWS

In addition to the federal securities laws, every state has its own set of securities laws, commonly referred to as “Blue Sky Laws”, that are designed to protect investors against fraudulent sales practices and activities.

Federal preemption under the Securities Act of 1933 limits Blue Sky Laws by exempting certain “covered securities” from state registration, but states can still require notice filings and fees. So as mentioned before, readers are advised to investigate the applicable state law prior to engaging in the structure of funds or offering of securities in the United States.

1. INVESTMENT ADVISERS

            The Investment Advisers Act empowers the SEC to oversee the regulation, registration, and reporting requirements of investment advisers.[54] For clients who provide advice regarding investments or recommend investments, it is important to assess whether such activities fall under the definition of an investment adviser in order to avoid unintended violations, as well as understanding if there are legal and regulatory obligations they must comply with.

1. INVESTMENTS ADVISERS, DEFINED

An Investment Adviser is any person or firm that, 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.[55] Thus, the test for determining whether a person or entity is considered an adviser is if they (1) provide advice or issue reports or analyses regarding securities; (2) is in the business of providing such services; and (3) provide such services in exchange for compensation.

As interpreted by the SEC, the advice should relate to investing in securities. It thus includes: (1) providing desirability of investing in securities in the course of developing a financial program for a client, (2) selecting an investment adviser or manager, (3) providing advice on the relative advantages and disadvantages of investing in the security, as compared to other investments, or (4) a person who advises employee benefit plans on funding plan benefits by investing in, purchasing, or selling securities, as opposed to, or in addition to, insurance products, real estate not involving securities, or other funding media.[56]

To be deemed “in the business” of providing investment advice, such advice need not be the principal business activity of the adviser, nor does it need to be a particular portion of its business activities. Instead, the frequency of the activity, that is, its regularity, is considered.[57] Thus, if the giving of advice is infrequent, or non-recurring, it may not rise to the level of being considered “in the business” of providing such advice.

• FORM ADV     

Investment advisers are required by Section 203(a) of the Investment Advisers Act to register with the SEC. That is, unless they are exempted from registration. Under the Act, Investment Advisers are duty-bound to provide advice that is in the best interest of their client, disclose material facts, provide advice and monitoring over the course of their relationship, and to be loyal to their client.[58] Registered Investment Advisers must file a Form ADV, as explained below.

            In addition to the aforementioned requirements, registered advisers with at least $150 million in private fund assets under management (“AUM”) – both US and non-US investors – need to submit periodic confidential reports to the SEC through Form PF.[59] Should the adviser be classified as a large hedge fund adviser or a large liquidity fund adviser, they are required to file quarterly update to the Form PF. On the other hand, if the adviser does not come under the definition of either of the “large” adviser, then they only have to file annual updates. We note that should there be a failure to update the Form PF, in accordance with the schedule and instructions, then it may be considered a violation of the SEC rules which could lead to the revocation of the investment adviser’s registration.[60]

      Persons or entities that are required to register as an investment adviser with the SEC should submit a Form ADV[61]electronically through the Investment Adviser Registration Depository (IARD).[62] This form contains four parts – Part 1A, 1B, 2, and 3. Part 1B requires information specific to state-registered advisers only and for the sake of this paper will not be discussed.[63] Similarly, Part 3 will not be discussed herein because this form applies where investors are considered “retail investors”, to whom advisers must deliver a relationship summary to.[64]

Part 1A of Form ADV requires the disclosure of certain information by the investment adviser which includes the following: (a) identifying information; (b) basis of registration eligibility; (c) information on its advisory business such as the number of employees, number of and types of clients, compensation, and amount of AUMs; (d) other business activities; (e) financial industry affiliations; (f) information on private funds managed; (g) proprietary interests in client transactions; (g) custody arrangements; (h) control persons; (i) separately managed accounts; and (j) criminal and regulatory disciplinary history of the adviser and its related persons.[65]

Part 2 of Form ADV similarly requires the disclosure of information to clients but this time through a brochure and brochure supplement.[66] These documents should be filed with the SEC and provided to clients at the beginning of the relationship and annually thereafter. Part 2 is composed of Part 2A and Part 2B. Part 2A requires the distribution of a brochure which includes plain English disclosures of the adviser’s business, which includes the information disclosed in Part 1A. Part 2B is for the preparation and distribution of a brochure supplement that contains information about each advisory employee who provides investment advice to its clients, such as their: (i) educational background; (ii) business experience; (iii) disciplinary history; (iv) supervision; and (v) other business activities.

• EXEMPTIONS

Just as certain securities offerings may qualify for exemptions, some investment advisers are also excluded from the requirements of the Investment Advisers Act,[67] particularly:

1. Investment adviser who does not give advice on securities that trade on a national securities exchange and whose clients are all residents of the state in which the adviser maintains its principal office and place of business;
2. Investment advisers whose sole clients are insurance companies;
3. Investment adviser who is a foreign private adviser;
4. Private Fund Adviser or those that provide advise solely to private funds and have less than $150 million in AUM in the US;[68]
5. Venture Capital Advisers or those that solely advises one or more venture capital funds, regardless of the amount of AUM.[69] To qualify as a “venture capital fund”, a fund must be a “private fund” that:[70]
   1. represents to investors that the fund pursues a venture capital strategy;
   1. does not provide investors with redemption rights;
   1. holds no more than 20% of the fund’s assets in non-qualifying investments[71] (excluding cash and certain short-term holdings); and
   1. does not borrow (or otherwise incur leverage) more than 15% of the fund’s assets and only on a short-term basis (no longer than 120 days).
6. Investment Adviser registered as a commodity trading advisor, but only if (a) not primarily engaged in providing securities-related advice and is not an adviser to a registered investment company or a business development company; or (b) an adviser to a private fund and is not primarily engaged in providing securities-related advice;
7. An investment adviser that is a charitable organization, if its advice is provided only to the charitable organization; or
8. An investment adviser that acts as an adviser solely to a small business investment company (SBIC) under the Small Business Investment Act of 1958.

Although exempt from SEC registration, Private Fund Advisers (item d above) and Venture Capital Advisers (item e above) must still report certain information. They may claim exempt reporting advisers (“ERA”) status through the filing of an initial exempt reporting Form ADV. Afterwards, ERAs must then file and update their abbreviated Form ADV annually within 90 days of the firm’s fiscal year end. Forms may need to be updated more frequently depending on material developments.[72]

Filing an abbreviated Form ADV means that ERAs are only required to file Part 1A of Form ADV, as discussed in the previous section, and complete only some sections of the form, particularly:

1. identifying information;
   1. basis of registration eligibility;
   1. the corporate form and state of organization of the ERA;
   1. financial industry affiliations (i.e., business activities of any related persons and affiliates);
   1. information on the private funds it manages;
   1. control persons; and
   1. disciplinary history of the adviser and its employees.

Unlike investment advisers that are required to register, ERAs do not have to distribute and file any brochure or brochure supplements, as required in Part 2.

Note that even though ERAs are not subject to registration with the SEC, they may still be subject to certain rules under the Investment Advisers Act, like Section 206 which lists the prohibited transactions that investment advisers may not engage in. It is also worth noting that ERAs may still be subjected to SEC examinations and in recent years the SEC has seemed to pursue enforcement actions against ERAs under Section 206. For example, action has been taken against advisers (a) using materially misleading statements regarding management fee calculations; (b) failing to disclose conflicts of interest; (c) failing to comply with fund agreements; and (d) making errors in calculating management fees. [73]

• PROHIBITION FROM REGISTRATION

It is worth noting that there are advisers that are prohibited from registering with the SEC. However, despite this prohibition with the SEC, they are still subject to registration requirements before the respective state securities authorities. These advisers are divided into two categories:

1. Small Advisers: Advisers with less than $25 million under management are prohibited from registering with the SEC and must register in the states in which they are doing business; and

1. Mid-sized Advisers: Advisers with assets under management between $25 million and $100 million are typically regulated by one or more states if they are registered with the state where they have their principal office and place of business.

A mid-sized adviser must register with the SEC if it is not required to be registered as an adviser with the state securities authority in the state where it maintains its principal office and place of business; or is not subject to examination as an adviser by the state where it maintains its principal office and place of business.

While the SEC does not dictate the exact methodology for calculating AUM, it is in the best interest of the company to adopt consistent and transparent practices to build trust with their investors and regulatory authorities. Many fund managers follow the guidelines set by industry associations like the CFA Institute or adopt methodologies used by widely recognized third-party data providers.

• SPECIAL NOTE ON INTERNET ADVISERS

In 2002, the SEC adopted a new rule – Rule 203A-2(f) under the Investment Advisers Act to exempt from the prohibition on federal registration those advisers that provide advisory services through the internet.[74] This rule was recently amended in March 2024 to adapt to the current technological advancements.[75] To come under the exemption from the prohibition, the internet adviser must meet the following requirements:

1. The investment adviser has an operational, interactive website or similar digital platform;
2. That the website or similar digital platform is the medium through which the investment adviser provides digital investment advisory services on an ongoing basis to more than one (1) internet client.[76] The investment adviser must provide advice to all its clients exclusively through the operational interactive website or similar digital platform.

Digital investment advisory services means that the investment advice must be generated by the website’s software-based models, algorithms, or applications.[77] Thus, if the advice was not generated and delivered through electronic means, then it would not be considered as an eligible activity.                                                    

• FINANCIAL INDUSTRY REGULATORY AUTHORITY

Under the SEC’s supervision exists one of the most relevant self-regulatory organizations in the United States which is the Financial Industry Regulatory Authority (FINRA). To emphasize, FINRA is not a government agency; it is a private, not-for-profit membership organization, funded by fees from its member firms. It operates independently but is subject to SEC oversight.^[78] FINRA’s primary mandate is to protect investors and maintain market integrity through the regulation of various firms and professionals.^[79]

FINRA’s key responsibilities include:^[80]

• Establishing and enforcing rules for every single brokerage firm, broker, and any of its representatives. These include reviewing broker advertisements, and other communications made to the public.
• Detecting and preventing fraud, market manipulation, and insider trading, as well as investigating such wrong doings.
• Disciplining those brokers or broker firms who violate FINRA rules.
• Educating investors to enhance financial literacy and protect them from fraud.
• Licensing firms and individuals to participate in the securities industry.
• Administration of arbitration and mediation forums to resolve disputes between investors and securities firms.

Who is considered Broker-Dealer?

A broker-dealer firm or individual must be registered with the SEC and become member of FINRA.[81] According to the SEC, a broker is any firm or individual engaged in the business of buying or selling securities for the account of others.^[82] A dealer is any firm or individual engaged in the business of buying or selling securities, but for their own account.^[83] Other activities may similarly require the firm or individual to register as a broker-dealer. For example, finding investors for companies or for funding rounds, funding buyers and sellers of businesses, operating a platform enabling trading of securities, or providing services to registered broker-dealers.^[84] A good indicator of whether a person is considered one is to determine whether they receive commissions or compensation based on the transaction or participate in the solicitation, negotiation, or execution of transactions.^[85]

A common question that arises when dealing with SEC and FINRA regulation involves companies that sell their own securities. Companies who issue its own securities are generally considered an issuer, not a broker, as it is the company selling securities on its own account, and not for the account of others.^[86] However the SEC has clarified that if an issuer purchases its securities from investors or effectively operates a market in its own securities, it may be required to register as a broker-dealer.^[87]

• STATE LAW

Each client that acts as an adviser should seek legal advice as to the need to register in a particular state. Advice should be, at the minimum, sought from lawyers practicing in the states where entities are formed, key persons are located, offices are located and/or business is performed from, and where clients are located.

• SPECIAL NOTE ON FEDERAL COVERED ADVISERS

Federal Covered Advisers, meaning those registered with the SEC are still mandated by law to do a “Notice Filing” in the States where they are exempted from registration. Notice Filing generally consist of submitting (i) a copy of the documents that were previously filed with the SEC together with (ii) the consent to service of process.

1. INVESTMENT COMPANIES

Aside from identifying whether an instrument is considered a security, if the security or the offering is subject to registration, or if a manager of a fund comes under the definition of an investment adviser, clients must also consider whether their vehicle subject to fundraising may be deemed an “investment company” under the Investment Company Act.

            The Investment Company Act regulates the organization of companies that engage primarily in investing, reinvesting, and trading in securities. [88]  Under the Act, a security is defined as any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, any put, call, straddle, option, or privilege on any security, or any put, call, straddle, option or privilege entered into on a national securities exchange relating to foreign currency or, in general, any interest or instrument commonly known as a security.[89]

1. REGISTRATION REQUIREMENT

According to the SEC, as a general rule, an investment company that is organized or otherwise created under the laws of the United States or of a state, that meets the definition of an investment company[90], and does not qualify for an exception or an exemption from registration, must register with the SEC.[91] An investment company is defined as any of the following:[92]

1. An issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities;
2. An issuer engaged in the business of issuing face-amount certificates; or
3. An issuer that holds more than 40% of its assets (other than cash and government securities) in investment securities. 

Under item 3 above, an issuer may become an investment company otherwise known as an “inadvertent investment company” if it unintentionally qualifies under the definition. In short, if more than 40% of the company’s total assets (excluding cash and government securities) consist of investment securities, the company may be considered an investment company. Naturally, if the company is deemed to be an investment company, it becomes subject to the regulation of the SEC and the failure to register as an investment company thereby becomes a violation. Moreover, contracts may become voidable since these contracts may have been executed in violation of the Investment Company Act.

• EXCEPTIONS

The Act outlines exceptions to the registration requirement by identifying entities that are not considered investment companies. These exceptions apply automatically once the criteria are met, and entities are therefore not required to register with the SEC.[93] Below are the exceptions:

1. Section 3(b)(1) – an issuer is not an investment company if the issuer is primarily engaged, directly or through a wholly owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities.

• Section 3(b)(2) – an issuer is not an investment company if the SEC, upon application by the issuer, finds and by order declares to be primarily engaged in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities either directly or (i) through majority-owned subsidiaries or (ii) through controlled companies conducting similar types of businesses.

• Section 3(c)(1) – private investment companies are excluded from the definition of Investment Companies if they are an issuer whose outstanding securities (other than short-term paper) are beneficially owned by 100 or fewer investors (or in the case of a qualifying venture capital fund, 250 persons) and has no plans for an initial public offering.

• Section 3(c)(7) – issuers with more than 100 investors but that maintain 2,000 or fewer qualified purchasers (over $5million in assets).

In determining whether the issuer is not considered an investment company under Sections 3(b)(1) and 3(b)(2), the SEC, through its decision in the case In the Matter of the Tonopah Mining Company of Nevada,[94] enumerated 5 factors to be considered:

1. Issuer’s historic development;
2. Issuer’s public representation of policy;
3. Activities of the issuer’s officers and directors;
4. Source of the issuer’s present income; and/or
5. Nature of the issuer’s present assets. [95]

Additionally, under Sections 3(c)(1) and 3(c)(7), the fund must maintain the number of investors under the threshold and not only at the time of issuance. If an investor is (i) classified as a private investment company and (ii) holds 10% or more of the voting securities of a Section 3(c)(1) investment company, the number of investors must be determined based on the count of beneficial owners.[96]

• SPECIAL NOTE ON FOREIGN INVESTMENT COMPANIES

As a rule, Section 7(d) of the Investment Company Act does not allow an investment company organized or created outside of the United States – a foreign company – to offer its shares publicly in the United States, unless the SEC authorizes it. Similarly, without the SEC authorization, it is also prohibited from registering under the Investment Company Act.

We note, however, that a foreign investment company is allowed to make a private offering in the United States if after the private offering, the company’s securities are held by no more than 100 beneficial owners resident in the United States.[97] Additionally, the SEC has stated that a foreign fund may privately offer and sell its securities to qualified purchasers in the United States in accordance with Section 3(c)(7) without violating Section 7(d).[98] Thus, a foreign fund that intends to offer and sell its securities privately in the United States, like a  U.S. private investment company, may rely on either Section 3(c)(1) or Section 3(c)(7).[99]

DISCLAIMER: THIS ARTICLE IS INTENDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE, OPINION, OR COUNSEL. THE CONTENT HEREIN IS NOT EXHAUSTIVE AND MAY NOT REFLECT THE MOST CURRENT LEGAL DEVELOPMENTS. READERS SHOULD CONSULT FOR ADVICE TAILORED TO THEIR SPECIFIC CIRCUMSTANCES.

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[1]              Securities Act of 1933, 17 CFR Part 230.

[2]              Legal Information Institute, Securities Act of 1933 (October 2023), https://www.law.cornell.edu/wex/securities_act_of_1933.

[3]              U.S. Securities and Exchange Commission, What is a Registration Statement?, (February 21, 2024), https://www.sec.gov/education/smallbusiness/goingpublic/registrationstatement

[4]              Securities Exchange Act of 1934, 17 CFR Part 240

[5]              Id.

[6]              Under Section 2(a)(1) of the Securities Act, “Securities” are any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. 

[7]              Uniform Commercial Code, §8-103.

[8]              Id.

[9]              SEC v. W.J. Howey Co., 328 U.S. 293 (1946)

[10]             Id.

[11]             SEC v. W.J. Howey Co., 328 U.S. 293 (1946)

[12]             Reves v. Ernst & Young, 494 U.S. 56 (1990)

[13]             Id.

[14]             Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 939 (CA2 1984) as mentioned in Reeves v. Ernst & Young 494 U.S. 56 (1990).

[15]             Marine Bank, 455 U.S. at 455 U. S. 557-559, as mentioned in Reeves v. Ernst & Young 494 U.S. 56 (1990).

[16]             Securities Act of 1933, 17 CFR Part 230.

[17]             Id.

[18]             U.S. Sec. & Exch. Comm’n, Small Biz Essentials: What Pathways Are Available to Raise Capital from Investors, https://www.sec.gov/resources-small-businesses/smallbiz-essentials-what-pathways-are-available-raise-capital-investors.

[19]             Securities Act of 1933, Section 4(a)(2).

[20]             17 CFR §230.504.

[21]             Id. §230.503(a)(1).

[22]             Id. §230.503(a)(1).

[23]             Id. §230.503(a)(1).

[24]             Id. §§30.504(a) (3).

[25]             “Covered persons” include: the issuer, including its predecessors and affiliated issuers; directors, officers, general partners or managing members of the issuer; beneficial owners of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power; promoters connected with the issuer in any capacity at time of sale; and persons compensated (directly or indirectly) for soliciting investors, including the general partners, directors, officers or managing members of any such solicitor.

[26]             “Disqualifying events” include: Certain criminal convictions; Certain court injunctions and restraining orders; Certain final orders of certain state and federal regulators; Certain SEC disciplinary orders; Certain SEC cease-and-desist orders; Suspension or expulsion from membership in a self-regulatory organization (SRO), such as FINRA, or being barred from association with an SRO member; SEC stop orders and orders suspending the Regulation A exemption; and U.S. Postal Service false representation orders.

[27]             SEC, Rule 504 of Regulation D: A Small Entity Compliance Guide for Issuers, SEC.gov (last updated Apr. 2024) https://www.sec.gov/resources-small-businesses/small-business-compliance-guides/rule-504-regulation-d-small-entity-compliance-guide-issuers#:~:text=The%20%E2%80%9Cbad%20actor%E2%80%9D%20disqualification%20provisions,other%20violations%20of%20specified%20laws.

[28]             Id. §230.506 (b) and (c).

[29]             17 CFR §230.506 (b).

[30]             Id. §230.506 (c).

[31]             U.S. Sec. & Exch. Comm’n, General Solicitation, https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/general-solicitation (last visited Jan. 20, 2026).

[32]             U.S. Sec. & Exch. Comm’n, General Solicitation—Rule 506(c), https://www.sec.gov/resources-small-businesses/exempt-offerings/general-solicitation-rule-506c (last visited Jan. 20, 2026).

[33]             Id. §230.501.

[34]             Id. §230.501.

[35]             For a more detailed list, see§230.501 of the Securities Act.

[36]             17 CFR § 230.502

[37]             U.S. Sec. & Exch. Comm’n, Regulation A: Guidance for Issuers, https://www.sec.gov/resources-small-businesses/regulation-guidance-issuers (last visited Jan. 20, 2026).

[38]             Id. §230.506.

[39]             17 CFR §230.506

[40]             Id.

[41]             Securities Act of 1933, §230.902 (k).

[42]             Securities Act of 1933, § 230.903.

[43]             Id. § 230.904.

[44]             Transactional Restrictions include a distribution compliance period and a notice requirement. The distribution compliance requirement prohibits the offer or sale of the securities to, or for the benefit of, a US person for 40 days from the later of the date the securities are first offered to the public and the closing date of the offering. The notice requirement requires that the distributor must give the buyer notice that the buyer shall be subject to the same restrictions on offers and sales that the distributor is also subject to.

[45]             Offering Restrictions require that offering materials include a restrictive legend that describes the type of security offered, that it has not been registered under the Securities Act, and that it cannot be offered or sold in the US or to US persons without registration or an available registration exemption.

[46]             Securities Act of 1933, §230.144(c)(1).

[47]             Id. §230.144(c)(2).

[48]             Id. §230.144(d)(1).

[49]             Id. §230.144(d)(2).

[50]             Id. §230.144(e)(1). See also https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144#main-content.

[51]             Id. §230.144(e)(2).

[52]             Id. §230.144(h)(1) and (2).

[53]             Id. §230.144A.

[54]             17 CFR Part 275.

[55]             Id. § 202(a)(11).

[56]             SEC, Applicability of the Investment Advisers Act to Financial Planners, Pension Consultants, and Other Persons Who Provide Investment Advisory Services as a Component of Other Financial Services (October 8, 1987), https://www.sec.gov/files/rules/interp/1987/ia-1092.pdf.

[57]             Id.

[58]             Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 17 CFR Part 276 (July 12, 2019).

[59]             Rules and Regulations, Investment Advisers Act of 1940, 17 CFR Part 275,Rule 204(b)-1.

[60]             SEC, Form PF General Instructions, https://www.sec.gov/files/formpf.pdf

[61]             Form ADV, U.S. Securities and Exchange Commission, https://www.sec.gov/files/formadv.pdf.

[62]             Filing Online, Investment Adviser Registration Depository, https://www.iard.com/filingonline.

[63]             Form ADV Part 1B, North American Securities Administrators Association, https://www.nasaa.org/wp-content/uploads/2011/08/Form-ADV-Part-1B.pdf

[64]             Form ADV Part 3, U.S. Securities and Exchange Commission, https://www.sec.gov/about/forms/formadv-part3.pdf

[65]             Form ADV Part 1A, U.S. Securities and Exchange Commission, https://www.sec.gov/about/forms/formadv-part1a.pdf

[66]             Form ADV Part 2, U.S. Securities and Exchange Commission, https://www.sec.gov/files/form-adv-part2.pdf

[67]             17 CFR §230 (b)(1).

[68]             A “private fund” is an issuer of securities that would be an investment company “but for” the exceptions provided for in section 3(c)(1) or 3(c)(7) of the Investment Company Act. Section 3(c)(1) relates to a fund that does not publicly offer its securities and has 100 or fewer beneficial owners of its outstanding securities. Section 3(c)(7) relates to a fund that does not publicly offer its securities and limits its owners to qualified purchasers.

[69]             Id. §203A(a).

[70]             Id. §203(l).

[71]             Qualifying investment means generally directly acquired investments in equity securities of private companies (generally, companies that at the time of investment have not made a public offering) and that do not incur leverage or borrow in connection with the venture capital fund investment and distribute proceeds of such borrowing to the fund (i.e., have not been acquired in a leveraged buy-out transaction)

[72]             SEC, Form ADV: General Instructions, https://www.sec.gov/about/forms/formadv-instructions.pdf

[73]             See Alumni Ventures Group, LLC, et al., SEC Release No. IA-5975 (March 4, 2022); see also Corona Associates Capital Management, LLC, et al., SEC Release No. IA-6062 (June 30, 2022), Energy Innovation Capital Management, LLC, SEC Release No. IA-6104 (September 2, 2022), SparkLabs Global Ventures Management, LLC, et al., SEC Release No. IA-6121 (September 12, 2022), Naya Ventures, LLC et al., Advisers Act Release No. 5461 (Mar. 12, 2020), Lone Star Value Management LLC and Jeffrey Eberwein, Advisers Act Release No. 5448 (Feb. 24, 2020, and Burrill Capital Management, LLC et al., Advisers Act Release No. 4360 (Mar. 30, 2016).

[74]             SEC, Exemption for Certain Investment Advisers Operating through the Internet, 17 CFR Parts 275 and 279 (December 12, 2002).

[75]             SEC, Exemption for Certain Investment Advisers Operating through the Internet, 17 CFR Parts 275 and 279 (March 27, 2024). The rule becomes effective on July 8, 2024, and the compliance date for the rule is March 31, 2025.

[76]             Id.

[77]             Id. Note that even though generated by algorithm, the adviser still has the duty to inform the client that an algorithm is being used to manage the client accounts.

[78]             FINRA – How We Operate, Financial Industry Regulatory Authority, https://www.finra.org/about/how-we-operate(last visited Feb. 11, 2025).

[79]             Five Steps to Protecting Market Integrity, Financial Industry Regulatory Authority, https://www.finra.org/about/what-we-do/five-steps-protecting-market-integrity(last visited Feb. 17, 2025).

[80]             Id.

[81]             Registration, FINRA, https://www.finra.org/registration-exams-ce/registration (last visited Aug. 14, 2025)

[82]             Office of the Advocate for Small Business Capital Formation, U.S. Securities and Exchange Commission, https://www.sec.gov/files/oasb-broker-dealer-building-block.pdf(last visited Feb. 17, 2025).

[83]             Id.

[84]             Broker-Dealers, U.S. Securities and Exchange Commission, https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/broker-dealers(last visited Feb. 17, 2025).

[85]             Broker-Dealers, U.S. Securities and Exchange Commission, https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/broker-dealers(last visited Feb. 17, 2025).

[86]             Id.

[87]             Id.

[88]             Investment Company Act of 1940, 17 CFR Part 270.

[89]             Id. § 2(a)(36). We note that this definition is less comprehensive than the definition provided under the Securities Act.

[90]             15 U.S. Code § 80a-3

[91]             U.S. Securities and Exchange Commission, Investment Company Registration and Regulation Package (November 7, 2022), https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504

[92]             Id. § 3 (a)(1).

[93]             Id.

[94]             In the Matter of the Tonopah Mining Company of Nevada 26 S.E.C. 426 (S.E.C. Release No.), 1947 WL 26116 (July 21, 1947)

[95]             SEC, CEVA, Inc. Form 10-K, File No. 0-49842, (November 5, 2012) fhttps://www.sec.gov/Archives/edgar/data/1173489/000119312512451447/filename1.htm

[96]             15 U.S.C. § 80a-3(c)(1)(A).

[97]             Securities Act Release No. 6862 (April 23, 1990).

[98]             SEC, Response of the Office of Chief Counsel Division of Investment Management, §3(c)(1), §3(c)(7), and §7(d); https://www.sec.gov/divisions/investment/noaction/1997/goodwinprocterhoar022897.pdf (February 28, 1997); see also  SEC, Response of the Office of Chief Counsel Division of Investment Management, §3(c)(1), §3(c)(7), and §7(d); https://www.sec.gov/divisions/investment/noaction/1998/goodwinproctehoar100598.pdf (October 10, 1998).

[99]             Id.