Posted by: samhenry | September 1, 2009

eBay ‘reaches deal to sell Skype’ to Private Equity Group; New Bill Would Regulate Private Groups

by SamHenry

eBay has reached an agreement with a private equity firm to sell SKYPE.  A sale has been sought for some time.

Skype’s software lets computer and mobile phone users talk to each other for free and make cut-price calls to mobiles and landlines.

Unlike traditional mobile calls, which are transmitted over a cellular network, Skype turns your voice into data and sends it over the internet.

Since being acquired, the number of registered Skype users has risen to 405 million from 53 million, though free user-to-user calls still dominate the service.

Increasingly, companies have been “disappearing” into private investment firms that are not publicly traded.

Obama Administration Proposes Legislation Requiring Registration of Investment Advisers to Private Funds and Imposing New Recordkeeping and Reporting Requirements Relating to Private Funds –

July 20, 2009

Elimination of Private Adviser Exemption

On July 15, 2009, the Obama Administration announced proposed legislation to require investment advisers to private funds, including hedge funds, private equity funds and venture capital funds, to register with the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Currently, under Section 203(b)(3) of the Advisers Act, an investment adviser is exempt from registration if during the preceding 12 months the adviser has fewer than 15 clients (with each fund being considered one client) and does not hold itself out generally to the public as an investment adviser or act as an investment adviser to a registered investment company or a company which has elected to be a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). The proposed legislation, which is entitled the “Private Fund Investment Advisers Registration Act of 2009,” would eliminate this “private adviser” exemption and would effectively require all investment advisers to private funds (except a “foreign private adviser,” which is discussed below) with more than $30 million of assets under management to register under the Advisers Act. However, the impact of this proposal would not be limited to advisers of private funds: eliminating the “private adviser” exemption would mean that any investment adviser with an office in the United States and more than $30 million in assets under management would need to register under the Advisers Act regardless of how many clients it has or whether it advises any funds — unless one of the remaining fairly limited exemptions from Advisers Act registration applies.

Definition of “Private Fund”

The proposed legislation would define a “private fund” as an investment fund that (i) would be an investment company (as defined under the 1940 Act) but for section 3(c)(1) or 3(c)(7) of the 1940 Act, and (ii) either (A) is organized or otherwise created under the laws of the United States or a state or (B) has 10 percent or more of its outstanding securities owned by U.S. persons. This definition is also broad enough to encompass investment vehicles that are not typically thought of as hedge funds, private equity funds or venture capital funds, such as structured finance vehicles that rely on section 3(c)(7) of the 1940 Act. The definition of private fund would not apply to funds that invest only in real estate, i.e., land, buildings and fixtures, but it would apply to funds that invest in real estate related securities, such as mortgage-backed debt and REIT shares.

New SEC Authority to Require Recordkeeping, Reporting and Disclosures Concerning Private Funds

The proposed legislation would grant the SEC broad authority to require registered investment advisers to maintain records of and submit to the SEC such reports concerning private funds advised by each adviser as are necessary or appropriate in the public interest for the assessment of systemic risk by U.S. regulators. The proposed legislation specifies that these reports would include, at a minimum, information about each private fund’s assets under management, use of leverage (including off-balance sheet leverage), counterparty credit risk exposures, trading and investment positions, and trading practices.

The proposed legislation also would authorize the SEC to establish rules requiring advisers registered under the Advisers Act to provide such reports, records and other documents to investors, prospective investors, counterparties and creditors of any private fund advised by the adviser as the SEC determines to be necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk. This new rulemaking authority could be used by the SEC to prescribe, among other things, disclosure in the offering documents and periodic reports that private funds must provide to investors and prospective investors.

All records of a private fund maintained by a registered investment adviser would be subject to examination by the SEC. The SEC would make available to the Board of Governors and the Financial Oversight Council copies of all reports, documents, records and information filed with or provided to the SEC as the Board or the Council may consider necessary for the purpose of assessing the systemic risk of a private fund or assessing whether a private fund should be designated a Tier 1 financial holding company. All such information obtained by the Board or the Council from the SEC would be kept confidential. The proposed legislation provides that the SEC would not be compelled to disclose any supervisory report or information contained therein required to be filed with the SEC under Section 204(b) except in certain circumstances, including to comply with a request for information from another federal department or agency or any self-regulatory organization requesting the report or information for purposes within the scope of its jurisdiction.

New SEC Authority to Define “Client”

The proposed legislation would also expand the rulemaking authority of the SEC, including to ascribe different meanings to terms (including the term “client”) used in different provisions under the Advisers Act as the SEC determines necessary to effect the purposes of the Advisers Act. This would give the SEC authority to effectively overrule the Goldstein Appeals Court decision in 2006 that barred the SEC from requiring investment advisers to treat investors in funds as “clients” for purposes of the Advisers Act.

The proposed legislation would delete Section 210(c) of the Advisers Act, which limits the ability of the SEC to require any investment adviser to disclose the identity, investments or affairs of any client of such investment adviser, except as may be necessary or appropriate in a particular proceeding or proceeding with respect to enforcement of the Advisers Act.

Foreign Private Adviser Exemption

The proposed legislation would exempt from Advisers Act registration any investment adviser that is a foreign private adviser. A “foreign private adviser” would mean any investment adviser who (i) has no place of business in the United States, and (ii) during the preceding 12 months has had fewer than 15 clients in the United States and assets under management attributable to clients in the United States of less than $25 million, or such higher amount as the SEC may determine, and (iii) neither holds itself out generally to the public in the United States as an investment adviser nor acts as an investment adviser to a registered investment company or a company which has elected to be a business development company under the 1940 Act. The proposed legislation does not define the term “client” for purposes of the “foreign private adviser” exemption, and thus does not make it clear whether non-U.S. advisers must count U.S. investors in non-U.S. funds towards the 15 client or $25 million assets under management limits. Thus, at least for the moment one presumably may rely upon the Goldstein decision’s definition of “client,” which does not require a look through, in determining whether the “foreign private adviser” exemption applies. However, it would be prudent for non-U.S. investment advisers to assume that if the proposed legislation is approved, the SEC will use its new authority to define the term “client” as mentioned above to require non-U.S. advisers, at least in some circumstances, to look through non-U.S. funds they advise and count U.S. investors in those funds as clients for purposes of determining whether the “foreign private adviser” exemption applies.

Testimony by Andrew Donohue

On the same day as the Obama Administration announced the proposed legislation, Andrew Donohue, the Director of the SEC’s Division of Investment Management, testified before the Subcommittee on Securities, Insurance, and Investment of the Senate Committee on Banking, Housing, and Urban Affairs. Mr. Donohue stated that securities laws have not kept pace with the growth and market significance of hedge funds and other private funds, and as a result, the SEC has very limited oversight authority over these vehicles. His testimony focused on how registration of advisers to private funds under the Advisers Act would greatly enhance the SEC’s ability to properly oversee the activities of private funds and their advisers. He also stated that other options to address the private fund regulatory gap might be to (i) register the funds themselves under the 1940 Act (in addition to registering their advisers under the Advisers Act) and/or (ii) provide the SEC with the rulemaking authority that allows for additional regulatory flexibility to take action, particularly because it is difficult to predict today what rules will be required in the future to protect investors and to obtain sufficient transparency.


While one cannot predict the actions of Congress, it is reasonable to expect that this proposed legislation will be adopted in some form by the end of the year. If the proposed legislation is adopted, many details would still need to be considered, including (i) the form, content and frequency of reports concerning private funds required to be filed with the SEC, (ii) the disclosures required to be made by investment advisers to prospective investors, investors, counterparties and creditors of the private funds managed by them, (iii) the timing of when registration will be required and (iv) the definition of “client” for purposes of the “foreign private adviser” exemption.

This alert was authored by Rich Goldman, John Holton, Rob Leonard and Meredyth Whitford. For assistance, please contact the following lawyers in the Securities Area:

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