Overview
If you're building an algorithmic trading platform, robo-adviser, or investment-related SaaS product, one of the first legal questions you'll face is whether you need to register as an investment adviser under the Investment Advisers Act of 1940.
The answer isn't always straightforward. Many founders assume their "pure software" platform doesn't constitute investment advice, but the SEC has consistently taken a broad view of what qualifies as investment advisory activity.
⚠ Why This Matters
Operating as an unregistered investment adviser is a federal violation with serious consequences: SEC enforcement actions, monetary penalties, disgorgement of fees, and potential criminal liability. The SEC has actively pursued fintech companies that crossed the line.
The Three-Part Test
Under the Investment Advisers Act, you are an "investment adviser" if you meet all three of the following criteria:
Investment Adviser Definition (Section 202(a)(11))
Any person who, 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.
1. Advice About Securities
Your service must provide advice about "securities" - which includes stocks, bonds, ETFs, options, and most investment contracts. Notable exceptions:
- Futures and commodities - Regulated by CFTC, not SEC
- Forex - Primarily regulated by CFTC and NFA
- Crypto - Regulatory status varies; some tokens may be securities
💡 Pure Software vs. Investment Advice
The SEC has distinguished between tools that help users make their own decisions (potentially not advice) and tools that provide specific recommendations (likely advice). Key factors include: degree of individualization, specificity of recommendations, and whether the tool exercises any judgment about suitability.
2. In the Business Of
You must be "in the business of" providing investment advice. This doesn't require that advisory services be your primary business. The SEC looks at:
- Whether you hold yourself out as providing investment advice
- Whether you receive any compensation for the advice
- Whether advice is provided with some regularity
3. For Compensation
You must receive compensation for your advisory services. "Compensation" is interpreted broadly:
- Direct fees (subscription, AUM-based, performance fees)
- Commissions or referral fees
- Soft dollar arrangements
- Even indirect compensation through affiliated products
✓ Free Services
If your service is truly free with no compensation from any source (including affiliates, data monetization, or referral arrangements), you may not meet the "compensation" prong. But be careful - the SEC looks at economic reality.
Common Scenarios for Trading Platforms
| Business Model | Likely Classification | Key Factors |
|---|---|---|
| Robo-adviser (automated portfolio management) | IA Registration Required | Discretionary management is textbook IA activity |
| Signal provider with specific buy/sell alerts | IA Registration Required | Specific recommendations = advice |
| Auto-trading via API (user's account) | IA Registration Required | Executing on behalf of clients = IA |
| Pure backtesting/charting tools | May Not Require | Tools without recommendations may be exempt |
| Educational content (no specific recs) | May Not Require | General education has exclusion |
| Data/analytics platform (no recs) | Fact-Specific | Depends on how data is presented |
Statutory Exclusions
Even if you meet the three-part test, certain categories are excluded from the definition of investment adviser:
Publisher Exclusion
The "publisher's exclusion" applies to "any bona fide newspaper, news magazine or business or financial publication of general and regular circulation." To qualify:
- Content must be impersonal (not tailored to individuals)
- Publication must have general circulation
- Publisher cannot implement trades
- Content cannot be based on client's specific situation
⚠ Lowe v. SEC Limitations
The Supreme Court's Lowe decision narrowed this exclusion. Modern interactive platforms that personalize recommendations typically don't qualify, even if they also publish general content.
Other Exclusions
- Banks and bank holding companies
- Lawyers, accountants, engineers, teachers (when advice is incidental to profession)
- Broker-dealers (when advice is incidental to brokerage and no special compensation)
- Government securities advisers (separate registration regime)
Exemptions from Registration
Even if you are an investment adviser, you may be exempt from SEC registration:
Private Fund Adviser Exemption
Available to advisers who only advise private funds with less than $150 million in AUM. You must still comply with reporting requirements.
Venture Capital Fund Adviser Exemption
Available to advisers who only advise venture capital funds. Still requires reporting to the SEC.
Foreign Private Adviser Exemption
For advisers with no place of business in the U.S., fewer than 15 U.S. clients, and less than $25 million in U.S. client AUM.
💡 Exemption vs. Exclusion
If you're excluded, you're not an investment adviser at all. If you're exempt, you are an investment adviser but don't need to register with the SEC. Exempt advisers may still need to register with states and must comply with antifraud provisions.
SEC vs. State Registration
If you must register, the question becomes where:
| AUM Level | Registration |
|---|---|
| Under $25 million | State only (SEC prohibited) |
| $25M - $100M | State, unless state doesn't require registration |
| $100M - $110M | May choose SEC or state |
| Over $110 million | SEC registration required |
Next Steps
- Use the IA Decision Tree to get a preliminary assessment
- Document your business model clearly - what exactly does your platform do?
- Review your compensation structure - all sources of revenue
- Consider structural alternatives - can you structure to avoid IA status?
- Consult with counsel - this is a fact-intensive analysis