With the enactment of the National Securities Markets Improvement Act of 1996, Congress divided registration authority over investment advisers between the Securities and Exchange Commission and state securities regulators. In general, large advisers (i.e., those with at least $25 million in assets under management) were required to register with the SEC and smaller advisers were subject to state registration.

Fund advisers, however, found themselves in an anomalous situation. Because former Section 203(b)(3) of the Investment Advisers Act exempted advisers with fewer than 15 clients, many did not register with the SEC. However, failure to register exposed them to state registration requirements. California’s Department of Corporations responded by adopting Rule 260.204.9. That rule exempted from state registration certain advisers having assets under management of at least $25 million or exclusively advising “venture capital companies” as defined.