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Unauthorized Use of Banksy’s Work: Does a Street Artist Have Legal Recourse Against an Exhibition?

September 23, 2024 – The TMCA

by Catherine Parrish Lake and kaitlyn nielson

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Artist Rights in Unauthorized Exhibitions

Recent unauthorized Banksy exhibits highlight the ongoing struggle of what obligations society owes to artists. While intellectual property laws primarily provide artists with economic protections and redress, what of artists who are less concerned with economic remedies and more concerned with the integrity of their works? The unauthorized use of Banksy’s works raises such questions and highlights the dilemma and limits of legal protections.

Banksy is a street artist who has built a career on covertness and intrigue. With a hidden identity, Banksy began producing street art in the 1990s in England, which has since extended to locations worldwide. Works like “Love is in the Air,” “Girl with Balloon” and “Bomb Hugger” are replete with social commentary and activism. Banksy has mastered the visual oxymoron—juxtaposing two images to make a statement. “Love is in the Air,” for example, depicts a masked man winding up to throw a flower bouquet where one might expect to see a grenade or Molotov cocktail. This subversion of visual and emotional norms has attracted much viewership and notoriety.

Banksy has sold prints at very democratic prices throughout his career. He has further lampooned the sky-high prices fetched on the secondary market for his works, famously causing a print of his iconic “Girl with Balloon” to shred upon purchase at auction. An act that, ironically, increased the value of the new work, retitled “Love is in the Bin”.

Banksy has also exhibited his works in bombastic shows like the chaotic 2003 London exhibit “Turf War,” which featured real painted animals, stencils on walls and originals in various media, all of which were displayed eclectically. The exhibit was held at a secret location, revealed shortly prior to opening, and closed early after the police responded to complaints. The exhibit also overcame at least some of Banksy’s anti-consumerism sentiment as it teamed with Puma for collaborative merchandise and sponsorship.

Despite allegedly viewing copyright as part of the capitalist system his art mocks, Banksy appears to care about fakes and, unsurprisingly, commercial use of his work. He created Pest Control to issue certificates for authentic works. The Pest Control website cheekily states:

Please do not use Banksy’s images for any commercial purpose, including launching a range of merchandise or tricking people into thinking something is made or endorsed by the artist when it isn’t. Saying “Banksy wrote copyright is for losers in his book” doesn’t give you free rein to misrepresent the artist and commit fraud.

Numerous groups have sought to bring Banksy’s work to more people. Some exhibitions feature only genuine Banksy pieces. Others, such as “The Art of Banksy: Without Limits,” consist primarily of unauthorized reproductions, many of which include modified versions of Banksy originals, and, of course, end in a gift shop. The Without Limits exhibit advertises itself as an “unauthorized exhibition” but also indicates that it features his art. Reports indicate that only about 34 of the 150 works on display are original, and the originals are not readily identifiable.

The modified works included in the Without Limits exhibit exchange the textured, colored city walls of Banksy’s originals for screen-printed or painted canvases. The exhibit’s works lack the texture and context of the buildings and city in which Banksy originally placed them, or the eclectic mix of one of his shows. The exhibit has also adapted works, for instance showing a depiction of “Love is in the Air” as a white sculpture holding red roses and sporting a black baseball cap. Additionally, it appears many works have been scaled down, colors have been changed, and duplicates of art have been lined in rows with minor color variations.

Does Banksy have recourse for decontextualizing his works and turning them into a curated and commercial experience? Can Banksy prevent modifications of his art in a fashion that eliminates key attributes of the original works? Banksy has decried the exhibit as a fake but has not yet taken legal action against unauthorized exhibits like Without Limits.

One might expect moral rights to offer some relief. The United States codified certain moral rights in the Visual Artists Rights Act (VARA) of 1990, trailing many other countries in recognizing such rights. VARA gives artists rights of attribution – allowing an artist to claim, or deny, ownership of their work – and rights of integrity – allowing artists to prevent others from distorting or destroying a work. Such rights are reserved to works of a certain caliber of art such as paintings, drawings, and sculptures. Banksy’s works would almost certainly be protected as we have reported, graffiti is protected art.

VARA protection, however, reaches only to original works or certain limited editions. Congress expressly excluded reproductions, depictions, and other portrayals from VARA claims. Thus, while defacing a Banksy mural would violate VARA, creating modified reproductions of his works and displaying them without permission does not, at least under US law.

Other branches of intellectual property law provide a host of other claims though. Copyright law gives authors control over who reproduces, displays, and distributes protected works. Perhaps more importantly, copyright allows authors the right to grant or withhold permission to create derivative works of – or to modify – an original. The right to prohibit modifications can be seen as an additional means to protect the integrity of an author’s works. As copyright infringement requires only that the infringer have access to the original work – admitted in the Without Limits case – and that one of the restricted actions be taken, it is clear the Without Limits exhibit has infringed Banksy’s rights.

The Without Limits exhibit may argue the fair use doctrine excuses their infringing reproductions, displays, distributions, and derivative works. Fair use protects certain unauthorized uses of works to protect free expression. To determine whether fair use applies, courts consider four factors: 1. The purpose and character of the use; 2. The nature of the copyrighted work; 3. How much of the copyrighted work is used; and 4. The effect of the use on the market or value of the copyrighted work.

The purpose and character factor is generally the most important. In the recent Warhol decision, the Supreme Court provided a two-part test to analyze whether the purpose and character of use is fair. First, how is the purpose and character of an unauthorized use different from the purpose of the original? Second, is the unauthorized use commercial or non-commercial? Where the unauthorized and original purposes are the same or quite similar and the unauthorized use is commercial, the first factor likely will weigh in favor of the copyright owner. The Without Limits exhibits are unquestionably commercial, so the purpose and character would be paramount. Without Limits has publicly commented their exhibits serve to make the scope of Banksy’s works available to the public, who would otherwise need to travel hundreds of miles to see the works. Their exhibits also educate the public about Banksy’s works and provide commentary on such works. Such arguments would likely hold sway for the exhibit as a whole. Further, exhibiting original works is protected under the first sale doctrine, which allows the owner of a tangible copy of a copyrighted work the ability to, among other things, display the work. Such arguments lose power when applied to the individual reproductions and modified works displayed in the exhibit and sold in the gift shop though. Those unauthorized works provide little to no commentary on Banksy or alternative purpose to the originals, other than to turn a profit. Accordingly, the first factor would favor Banksy as to the unauthorized reproductions.

The three remaining factors all likely favor Banksy too. Street art and pop art, as noted above, are generally valued, so the nature of the works would lend to protection. The Without Limits exhibits, and individual works, use the whole of many Banksy works and directly compete with Banksy’s exhibits and authorized sales, harming the market and value of his originals. Accordingly, it seems unlikely Without Limits would be able to excuse all copyright infringements as fair use.

And what of Without Limits calling the exhibit “The Art of Banksy” when most of the art is not actually his? Similar to copyright law, some unauthorized use is excused as “fair.” A mechanic can identify the brand of car on which services are performed, for instance. Fair use only applies to authentic products though. It does not excuse counterfeits.

Further, causing consumer confusion is the exact harm trademark laws seek to prevent and redress. Reviews of Without Limits exhibits in the United States question whether the works shown are real or fake, indicating at least some level of actual confusion. It should, therefore, be possible for Banksy, or Pest Control, which owns trademark registrations in the United States for BANKSY and images of several of his works, to make successful claims for trademark infringement against the exhibition as well as the gift shop items. Indeed, the exhibit appears ripe for false advertising and misrepresentation claims as well.

So why hasn’t Banksy taken any legal action? Most accounts conclude he has refrained from pursuing litigation to remain anonymous. In the United States, however, it may be possible to bring copyright claims under the Banksy pseudonym if the court decides the need for anonymity outweighs the public’s interest in identifying him. It is also possible Pest Control could bring copyright claims as the beneficial owner. Further, trademark rights are based on use, and Pest Control, as the owner of the registrations, could pursue claims. Accordingly, a desire for anonymity fails to explain his lack of action. Perhaps Banksy shirks the relief these laws offer as a rejection of the economic concerns the laws primarily protect. The laws, however, also offer injunctive relief – stopping the unauthorized or misrepresentative uses – which may appeal more to the principles Banksy purports to uphold. Or maybe he sees limiting exposure to his art (or interpretations of it) as antithetical to the messages he seeks to convey through the work.

Firm Highlights

Insights

EPA Limits Title V Re-Litigation of NSR Permits

Overview On September 25, 2026, the U.S. Environmental Protection Agency (“EPA”) published a final rule that significantly limits the ability of third parties to use the Clean Air Act (“CAA”) Title V permitting process to revisit New Source Review (“NSR”) permitting decisions years after those decisions were made. The rule establishes that NSR permitting determinations generally must be challenged during the original permitting proceeding, thereby providing regulated sources with greater permitting certainty and finality for major capital projects. Published in the Federal Register titled Clarifying the Scope of “Applicable Requirements” Under State Operating Permit Programs and the Federal Operating Permit Program (Docket ID No. EPA-HQ-OAR-2023-0401), the rule amends 40 C.F.R. Parts 70 and 71 to codify EPA’s interpretation regarding when requirements established under other CAA programs may be reviewed, modified, or implemented through the Title V operating permit program. The rule becomes effective 30 days after publication. The rule addresses two principal issues: (1) the relationship between NSR preconstruction permitting and Title V operating permits, and (2) the treatment of the General Duty Clause under CAA section 112(r)(1). Most significantly, the rule provides greater certainty for sources navigating the NSR permitting process. EPA’s amendments are intended to ensure that NSR permitting decisions made through an approved public process are generally not revisited later through Title V permit proceedings. The rule responds to a circuit split between the U.S. Courts of Appeals for the Fifth and Tenth Circuits. In Environmental Integrity Project v. EPA, 969 F.3d 529 (5th Cir. 2020), the Fifth Circuit upheld EPA’s interpretation, concluding that it was consistent with the text, structure, and purpose of Title V. In contrast, the Tenth Circuit reached the opposite conclusion in Sierra Club v. EPA, 964 F.3d 882 (10th Cir. 2020), finding that the then-existing regulatory definition of “applicable requirement” did not support EPA’s position. By amending the regulatory language on which the Tenth Circuit relied and codifying the interpretation approved by the Fifth Circuit, EPA has established a nationwide framework governing the interaction between NSR and Title V. NSR and Title V: EPA Establishes a Uniform Nationwide Framework At the core of the rule is EPA’s effort to define the respective roles of NSR and Title V. The rule codifies the approach EPA has applied since 2017: once a source obtains an NSR permit under an EPA-approved permitting program, and that permit was issued following public notice with an opportunity for comment and judicial review, the permit establishes the NSR-related “applicable requirements” of the State Implementation Plan (“SIP”) or Federal Implementation Plan (“FIP”) for Title V purposes. Under this framework, Title V is not a vehicle for re-examining underlying NSR permitting decisions. EPA does not intend to use the Title V process to revisit applicability determinations, emissions calculations, control technology determinations, permit conditions, or other issues resolved through the NSR permitting process. This principle applies regardless of the stage of the Title V proceeding; whether the NSR permit was issued pursuant to a SIP or FIP; the type of NSR issue involved; or whether the NSR permit is incorporated into Title V sequentially or concurrently. Limited Exceptions EPA recognizes several circumstances in which NSR issues may still be reviewed through the Title V program: No NSR permit was issued at all; The permit was issued without public notice and an opportunity for comment and judicial review; or The issue involves substantive overlap between Title V and NSR requirements, such as the adequacy of monitoring provisions. As a result, the rule does not insulate unpermitted projects or foreclose review of matters that independently arise under Title V. Key Regulatory Amendments The rule revises the definition of “applicable requirement” in 40 C.F.R. §§ 70.2 and 71.2. Paragraph (1): Where an NSR permit is issued with public notice and an opportunity for comment and judicial review, the permit establishes and defines the applicable SIP or FIP requirements for Title V purposes. Paragraph (2): All NSR permit terms, including terms contained in minor NSR permits, constitute applicable requirements that must be incorporated into Title V permits. Paragraph (4): CAA section 112(r)(1) (the General Duty Clause) is expressly excluded from the definition of “applicable requirement,” while section 112(r)(7) Risk Management Program requirements remain included. EPA also amended 40 C.F.R. §§ 70.8 and 70.12 to clarify that alleged defects in requirements established outside the Title V process generally do not provide a basis for EPA objection to a Title V permit or for a Title V citizen petition. General Duty Clause Exclusion The rule also codifies EPA’s longstanding position that the General Duty Clause in CAA section 112(r)(1) is not an “applicable requirement” for Title V purposes. EPA points to several considerations supporting that conclusion, including the distinction between the General Duty Clause and Title V permit terms, the provision’s origins in the Occupational Safety and Health Act’s general duty clause, and the different enforcement structures applicable to the General Duty Clause and Title V permit requirements. Importantly, excluding section 112(r)(1) from the definition of “applicable requirement” does not eliminate EPA’s authority to enforce the General Duty Clause independently of the Title V program. The final rule instead clarifies that the General Duty Clause need not—and should not—be incorporated into Title V permits as an applicable requirement. Practical Implications for Regulated Sources Greater Finality for NSR Permits  For projects requiring PSD, nonattainment NSR, or minor NSR permits, the permitting process becomes the primary forum for resolving disputes regarding applicability determinations, emissions calculations, control technology requirements, offsets, and permit conditions. Once an NSR permit is issued through a qualifying public process, regulated sources should face substantially reduced risk that those same issues will be challenged years later through Title V permit proceedings. Reduced Risk of Collateral Permit Challenges Stakeholders have sometimes sought to use Title V permit issuance, renewal, revision, or citizen-petition proceedings to challenge underlying NSR determinations. The final rule makes clear that Title V is not the appropriate vehicle for challenging whether an applicable requirement was correctly established in the first instance. This should reduce the risk of permit delays and uncertainty associated with collateral challenges to previously issued NSR permits. The rule does not, however, eliminate all Title V challenges relating to an NSR permit. Challenges concerning the Title V permit itself—including whether it appropriately incorporates applicable requirements or contains adequate compliance provisions—remain possible. Increased Importance of the Initial NSR Proceeding Because Title V generally will not provide a second opportunity to challenge the substantive validity of an NSR determination, the administrative record developed during the NSR process becomes increasingly important. Permit applicants should ensure that applicability analyses, emissions calculations, control technology evaluations, modeling demonstrations, and supporting technical documentation are thoroughly developed during the original permitting proceeding. For significant projects, applicants may therefore have an additional incentive to identify and resolve potential permitting issues before the NSR permit is issued rather than assuming that unresolved issues can be addressed during a subsequent Title V proceeding. Potential Incentive for Broader Public Participation EPA also notes that permitting authorities may choose to provide public notice and an opportunity for comment for a broader range of NSR permits because permits issued through a qualifying public process receive the benefit of the finality framework established by the rule. Some permitting authorities may conclude that greater public participation at the NSR stage is preferable to uncertainty during subsequent Title V proceedings. Conclusion The final rule is principally a permitting-certainty measure. For sources that obtain NSR permits through a public process, EPA has substantially limited the ability of third parties to revisit underlying NSR determinations through the Title V program. As a result, regulated entities should benefit from greater finality regarding key permitting decisions, reduced risk of collateral permit challenges, and increased certainty when planning and implementing capital projects.

Insights

The Supreme Court Update - October 8, 2026

On September 29, 2026, the Supreme Court granted certiorari in one case: Department of Homeland Security v. D.V.D., No. 26-426: This case concerns the Trump Administration’s “third-country removal” procedures, where immigrants are deported to countries not listed in the removal orders. In granting certiorari, the Court granted the Government’s application to stay a lower court decision halting the practice, which will allow third-country removals to continue pending resolution of the case. The issues presented are: (1) Whether the district court had jurisdiction over respondents’ claims; (2) whether the district court had authority to enter class-wide declaratory relief and APA vacatur under 8 U.S.C. § 1252(f)(1); (3) whether the Government’s guidance on third-country removals is unlawful under 8 U.S.C. § 1231(b), the due process clause, or FARRA/CAT and its implementing regulations; and (4) such other questions that the Government determines are appropriate for the proper disposition of the case. On October 1, 2026, the Court granted certiorari in three additional cases: Rhoney v. Barbosa da Cunha, No. 26-104: Immigration officials detained Ricardo Aparecido Barbosa da Cunha—a Brazilian citizen who had lived in the United States for approximately twenty years after entering without inspection—and denied him a bond hearing under 8 U.S.C. § 1225(b)(2)(A). The Second Circuit held that his detention was instead governed by § 1226(a), which permits release on bond, because § 1225(b)(2)(A)’s mandatory-detention requirement applies only to noncitizens apprehended while entering the country or shortly thereafter. The question presented is: Whether 8 U.S.C. § 1225(b)(2)(A) mandates the detention pending removal proceedings of aliens who, like Barbosa da Cunha, are present in the United States without having been admitted. Missionaries of St. John the Baptist, Inc. v. Frederic, No. 25-113: A Catholic religious organization sought to build a shrine to the Virgin Mary on land the organization owned adjacent to its church in Park Hills, Kentucky. Local zoning restrictions prohibited the proposed construction. The question presented is: Whether a land-use regulation that prohibits a religious institution from building a religious structure on its own property constitutes a “substantial burden” on religious exercise under the Substantial Burden Provision of the Religious Land Use and Institutionalized Persons Act, 42 U.S.C. § 2000cc(a). Marschner v. Marschner, No. 25-1349: Under the Uniformed Services Former Spouses’ Protection Act (“USFSPA”), a veteran’s longevity-based retirement pay can be divided in a divorce, but retirement pay based on disability and retirement pay that was waived to receive disability pay are indivisible. The question presented is: Does the USFSPA require state courts to refuse enforcement of indemnification provisions in a divorce settlement agreement?

Insights

Energy Law: Month in Review - September 2026

Welcome to Dorsey’s Energy Law: Month in Review. We provide this update to our clients to identify significant developments in the previous month. Please reach out to any of the authors, listed above, to discuss these issues. Regulatory Developments Massachusetts Ratchets Up State and Local Regulation of AI Data Centers In early September, Governor Maura Healey of Massachusetts signed an executive order requiring that artificial intelligence data centers secure the approval of local communities as a precondition to proceeding with a given project. According to the terms of the order, data center developers will need to secure a “community benefits agreement” as a precondition to receiving permits from numerous state agencies, including the Department of Environmental Protection, the Energy Facilities Siting Board, and the Massachusetts Environmental Policy Act Office. Beyond requiring community benefits agreements, the order also mandates that developers mitigate utility costs to consumers, prohibits the use of nondisclosure agreements, and requires various state agencies to develop measures to limit data center impacts on the environment. North Carolina Regulators Decline Approval of Duke Energy Gas Turbine On September 18, 2026, North Carolina Utilities Commission (NCUC) denied Duke Energy’s application for a certificate of public convenience and necessity required to construct a gas-fueled combustion turbine at its Smith Energy Complex in North Carolina. The NCUC objected strongly to the $584 million price tag and noted that Duke appeared to be constructing the facility “based on anticipated data center customer additions.” The NCUC rejected that anticipated growth as “insufficiently reliable for the Commission to act at this point.” In rejecting Duke’s application, the NCUC also noted that Duke had signed the White House Ratepayer Protection Pledge, in which it represented that it would not shift data center costs to consumers. The NCUC observed that the record did not demonstrate how Duke “intends to adhere to its commitments under the Ratepayer Protection Pledge with regard to the Proposed Facility.” Notably, commission staff had actually supported the construction of the turbine, citing concerns about Duke’s reserve margins. The NCUC noted that it “understands the Public Staff’s expressed concerns,” but those concerns were outweighed by the NCUC’s reservations, including questions of demand. Department of Energy Approves Funds for Grid Improvement The U.S. Department of Energy (DOE) recently announced that it would fund 31 grid-improvement projects in 26 states. The funding initiative is part of the DOE’s “SPARK” initiative. The funding will include $1.9 billion in federal funding from DOE and $3.35 billion in recipient cost-sharing funding. The funds will go to projects designed to improve grid reliability and lower electricity costs. Recipients plan to reconductor over 1,500 miles of transmission lines and will deploy grid-enhancing technologies across approximately 21,000 miles. DOE stated that this initiative will make available over 23 additional gigawatts of electricity. Texas Moderates Rules Governing Data Center Interconnection The Texas Public Utility Commission adopted new regulations governing large-load interconnections. The rules impose a flat study fee of $100,000 for all proposed interconnections, which departs from the initial proposal to impose study fees using a tiered system based on project size. Additionally, the final rule eliminates the PUC’s previous proposal to impose a non-refundable interconnection fee of $50,000 per MW of contracted peak demand. The final rule also moderates the initially proposed regulations governing Electric Reliability Council of Texas (ERCOT) notifications for large-load customers’ non-utilized capacity. The proposed rules would have required notifying ERCOT within 30 days of missing a scheduled energization milestone by six months. The final rules, however, do not require informing ERCOT unless a scheduled energization milestone is missed by 24 months. FERC Denies TransAlta 202(c) Cost-Recovery Plan The Federal Energy Regulatory Commission (FERC) recently rejected TransAlta’s plan to recover $19.9 million in expenses stemming from a DOE order in which DOE prohibited TransAlta from retiring its coal-powered Centralia power plant. TransAlta had previously intended to retire the facility at the end of 2025. TransAlta’s cost recovery plan proposed spending an additional $23 million on repairs to continue operating the unit. FERC’s main objection had to do with geographic scope. TransAlta’s recovery plan called for recovering costs from California Independent System Operator (CAISO) and the Southwest Power Pool (SPP), but the DOE’s order requiring operation of the plant was designed to ensure reliability in the Northwest assessment area (Montana, Oregon, Washington, and parts of northern California and northern Idaho). Accordingly, FERC was unwilling to allow cost recovery from CAISO and SPP when the order that precipitated the additional costs only related to the Northwest assessment area. FERC informed TransAlta that it would only approve cost recovery from load-serving entities in the Northwest assessment area. FERC’s decision comes amid a rush of DOE emergency orders requiring the continued operation of coal-fired generating units. Litigation Appeals Court Upholds Washington Hydropower Plant With Caveats In a September 21, 2026, opinion, the Washington Court of Appeals largely upheld a Clean Water Act water quality certification by the Washington Department of Ecology for the Goldendale Energy Storage Project, a proposed pumped-water storage hydropower system adjacent to, but off-stream from, the Columbia River. A nonprofit (Columbia Riverkeeper) and the Confederated Tribes and Bands of the Yakama Nation appealed the certification, contending that it failed to impose necessary conditions and monitoring requirements to protect the water quality of the Columbia River. Most saliently, the plaintiffs argued that the project had the potential to leak 100 acre-feet of water per year into tributaries of the Columbia River. The Court of Appeals broadly rejected plaintiffs’ challenge to the state’s conclusion that “the project was designed not to leak.” That said, the Court of Appeals did reverse on one narrow issue. Specifically, the court determined that the state’s conclusion that “leakage from the project’s tunnels would be monitored and reported” was not supported by the evidence because the certification “does not explicitly require monitoring and reporting to determine whether there is any leakage.” Accordingly, the court remanded the matter to the state to impose monitoring and reporting requirements but otherwise affirmed the certification. Legislative Developments California Legislates Restrictions on Data Center Energy Use and Grid Costs On September 21, 2026, California Governor Gavin Newsom signed seven bills broadly regulating data centers in the state. SB 1168 directed the California Public Utilities Commission to assess the energy used by data centers. It also requires the PUC to pass costs of transmission and distribution upgrades and load increases on to data centers, rather than customers. SB 886 and SB 887 compel data centers to pay for infrastructure upgrade and generation costs, and wildfire mitigation costs, in addition to imposing environmental review. The statutes additionally increase local oversight of data centers. AB 1577 imposes a monthly reporting requirement that requires data centers to supply energy consumption and efficiency data to the California Energy Commission. AB 2383 contains incentives for data centers to use onsite clean energy generation. Finally, AB 2469 and AB 2619 require data center developments to assess water supply and develop a water scarcity plan. The statutes also mandate statewide water reporting as a precondition to obtaining and renewing business licenses.

Insights

SEC Proposes Expansion of Investment Adviser Performance-Based Compensation Rule

On September 30, 2026, the Securities and Exchange Commission (the “SEC”) proposed amendments to Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which provides an exemption from the general prohibition under Section 205(a)(1) of the Advisers Act on registered investment advisers receiving performance-based compensation (the “Proposal”) so long as performance-based compensation is limited to “qualified clients”.1 Most notably for private fund sponsors, the Proposal would expand the definition of “qualified client” to include any investors that satisfy the “accredited investor” definition under Regulation D. The Proposal may also have implications for private fund managers that rely on exemptions from investment adviser registration under state law because certain state-level investment adviser registration exemptions incorporate or otherwise reference the federal qualified client definition. Expansion of the Qualified Client Definition Under the current Rule 205-3, an investor generally may qualify as a qualified client if, among other alternatives, the investor has at least $1.4 million under management with the adviser or has a net worth exceeding $2.7 million. These thresholds are higher than the financial thresholds applicable to many accredited investors under Regulation D. As a result, an investor may currently qualify as an accredited investor for purposes of investing in a private offering without qualifying as a qualified client for purposes of paying performance-based compensation. The Proposal would expand the qualified client definition to include any natural person or legal entity investor that satisfies the accredited investor definition under Regulation D. The Proposal would also remove the assets under management and net worth thresholds under the current Rule 205-3 qualified client test. For private funds relying on Section 3(c)(1) of the Investment Company Act of 1940, this change could reduce the need to apply a separate qualified client standard to investors that already qualify as accredited investors. Dorsey Observations and Next Steps If adopted as proposed, the expanded qualified client definition could be particularly significant for private fund managers. Most private fund offerings are already limited to accredited investors under Regulation D. However, the Proposal could expand the pool of prospective investors available to emerging private fund managers while reducing the regulatory burden associated with complying with Rule 205-3. The Proposal could also benefit advisers operating below the SEC registration threshold that rely on a state private fund adviser exemption. A number of states have adopted exemptions modeled on the North American Securities Administrators Association (“NASAA”) private fund adviser exemption, which may condition relief for advisers to certain funds relying on Section 3(c)(1) on each beneficial owner satisfying the federal qualified client definition. However, state requirements vary, and any effect of the Proposal would depend on the text of the applicable state exemption and how it incorporates Rule 205-3. Many emerging private fund managers may have a larger network of accredited investor relationships than qualified client relationships during the early stages of their investment advisory business. Currently, under Rule 205-3, private fund managers may receive performance-based compensation from investors who do not satisfy the qualified client definition if those investors were admitted to their private funds prior to registration with the SEC. Following registration with the SEC, however, managers may continue to permit investors that are not qualified clients to invest in future private funds but may not receive performance-based compensation from those investors with respect to such investments. In addition, because the net worth and assets under management thresholds for qualified client status are adjusted for inflation every five years, the pool of qualified client investors may diminish over time as previously eligible investors no longer satisfy the applicable thresholds. The Proposal could provide the dual benefit of greater flexibility for private fund managers to establish and maintain relationships with accredited investors as their businesses scale and they become registered with the SEC, and greater flexibility for certain accredited investors to participate in investment strategies that historically have been restricted to much larger institutional investors. Unless and until the Proposal is adopted, investment advisers should continue to comply with the existing qualified client requirements. If the Proposal is adopted, private fund sponsors should consider whether corresponding changes are appropriate for their subscription documents, investor questionnaires, and other offering materials. Advisers that are state-registered or rely on a state-level exemption should also consult the laws and regulations of each relevant jurisdiction before changing investor eligibility standards or performance-based compensation practices, because adoption of the federal amendments may not automatically modify state requirements. Comments on the Proposal will be due 60 days after publication in the Federal Register. 1 Investment Adviser Performance-Based Compensation Modernization, Investment Advisers Act Release No. IA-7022 (Sept. 30, 2026), available at https://www.sec.gov/rules-regulations/2026/09/s7-2026-28#33-11443proposed.