Under 21VAC5-80-215, Virginia follows the “NASAA Model Rule,” which provides an exemption from full registration for investment advisers who solely advise private funds.
However, Virginia is more restrictive than the SEC. If you are a Virginia-based ERA, you must meet the specific investor and auditing standards outlined in the code to keep your “exempt” status.
1. The Investor Rule (Qualified Clients)
For any fund that is not a Venture Capital Fund (specifically 3(c)(1) funds), Virginia requires all investors to be “Qualified Clients” at the time of their investment.
- Net Worth Threshold: Under SEC Rule 205-3, a “Qualified Client” must currently have a net worth of at least $2.2 million (excluding the value of their primary residence) or at least $1.1 million in assets under your management.
- Accredited vs. Qualified: Note that being an “Accredited Investor” (the standard $1M net worth) is not enough in Virginia; you must meet the higher $2.2M “Qualified” bar.
2. The Audit Rule
Under 21VAC5-80-215(C)(3), Virginia requires all private fund advisers to:
- Obtain an Annual Audit: Each private fund you manage must have its financial statements audited by an independent CPA annually.
- Delivery Deadline: You must deliver these audited financial statements to every beneficial owner (investor) in the fund within 120 days of the end of the fund’s fiscal year.
3. Disclosure Requirements
At the time of purchase, you must disclose in writing to every investor:
- All services provided to individual beneficial owners.
- All duties the investment adviser owes to the beneficial owners.
- Any other material information regarding the relationship.
4. Statutory Disqualification (“Bad Actor” Clause)
You cannot qualify for ERA status in Virginia if the adviser or any of its “control persons” are subject to disqualification under 21VAC5-80-215(B). This includes:
- Certain criminal convictions (felonies or finance-related misdemeanors).
- Court orders or injunctions related to securities violations.
- Final orders from state or federal regulators (like the SEC or FINRA) barring the person from the industry.
Summary of Filing Requirements
| Requirement | Detail |
|---|---|
| Initial Filing | Submit Form ADV Part 1A through the IARD system. |
| Notice Fee | $250 paid to Virginia SCC. |
| Renewal | Annual update to Form ADV + $250 renewal fee. |
| Transition | If you hit $150M AUM, you have 90 days to register as a full RIA. |
Legal Reference: You can find the full text of the regulation at Virginia Law – 21VAC5-80-215.
Would you like to know how the “grandfathering” clause works if you already have investors who do not meet the $2.2M net worth requirement?
The “grandfathering” clause in Virginia’s Administrative Code (21VAC5-80-215) is a crucial protection for advisers who already have established funds with investors who may not meet the newer, higher “Qualified Client” standards ($2.2 million net worth).
How the Grandfathering Clause Works
Under 21VAC5-80-215(D), the “Qualified Client” requirement does not apply to a fund that existed prior to the effective date of the regulation, provided certain conditions are met:
- Existing Investors: You can continue to advise a private fund that has investors who were not “Qualified Clients” at the time they invested, as long as they became beneficial owners of the fund before the rule went into effect.
- No New Non-Qualified Investors: You cannot bring new investors into that same fund unless they meet the current $2.2 million “Qualified Client” net worth threshold.
- Subsequent Funds: Any new funds you launch must comply strictly with the current “Qualified Client” rules for all investors from day one.
Why This Matters for Your Compliance
This clause prevents you from being forced to kick out existing investors or lose your ERA status just because the state raised the bar for what constitutes a “sophisticated” investor.
Comparison: Virginia ERA vs. Crowdfunding
It is important to distinguish the ERA “Qualified Client” rule from other Virginia exemptions like Intrastate Crowdfunding, which you may have explored for projects like 113 W Main St:
- ERA Requirements: Generally require “Qualified Clients” ($2.2M net worth) for private funds to avoid full registration.
- Crowdfunding (Rule 147/147A): Allows you to raise up to $2M from any Virginia resident, with non-accredited investors limited to $10,000 each.
- Private Placement (Rule 506(c)): Allows for an unlimited raise but is strictly limited to Accredited Investors ($1M net worth).
Strategic Note: If you are transitioning a real estate project from a standard crowdfunding model to a more formal private fund structure, you must be careful. While crowdfunding allows for smaller, non-accredited investors, an ERA-managed private fund in Virginia will generally trigger the much higher $2.2M net worth requirement for all new participants.
Would you like me to draft a specific “Investor Attestation” form that includes the Virginia-specific “Qualified Client” language for your new fund?