As we mentioned in a blog post last week, the SEC introduced a new exemption from registration under the Investment Advisers Act for advisers that manage only venture capital funds. Central to the new exemption is the definition of “venture capital fund.”
For advisers to qualify for Venture Capital Fund Registration Exemption, their funds must meet all of the following criteria:
- Represents itself as pursuing a venture capital strategy: This determination is made on the basis of all of the statements (and omissions) made by the fund to its investors and prospective investors, including those made in marketing materials and governing agreements.
- Makes qualifying investments: Generally, “qualifying investment” is defined as an investment in equity securities issued by portfolio companies and acquired by the fund directly from portfolio companies. However, there are some exceptions. For instance, funds may acquire any asset other than a qualifying investment so long as not more than 20% of the fund’s capital consists of non-qualifying investments.
- Limits leverage: The aggregate amount of a fund’s borrowing, issued debt obligations, guarantees of third-party obligations, and other leverage must not exceed 15% of the fund’s capital. Additionally, any such borrowing, obligations, guarantees, and other leverage must have a non-renewable term of 120 days or less.
- No redemption rights: The fund must not issue securities that grant investors a right to withdraw, redeem, or require the repurchase of such securities except under extra-ordinary circumstances. However, investors may be entitled to receive pro rata distributions from the fund.
- No Registration under the Investment Company Act: The fund must not be registered as an investment company or have elected to be a business development company under the 1940 Act.
- Is a “private fund”: In most cases, this means that the fund has availed itself of U.S. jurisdictional means when fundraising or engaging in certain other activities.
The new rules do offer a reprieve from this strict definition for pre-existing venture capital funds under a grandfather provision. We invite you to stay tuned to tomorrow’s post for more information.
How We Can Help Ensure Compliance
Of course, this post provides only a brief overview of the compliance issues facing advisers that manage venture capital funds. Moreover, it is important to note that fund managers relying on the venture capital exemption will still be subject to certain SEC requirements as exempt reporting advisors. Therefore, you should consult with experienced counsel to meet the new rules.
With the March 2012 deadline fast approaching, advisers to hedge and private equity funds should be beginning the registration process in earnest. If you are concerned about your company’s progress, please contact us to find out how we can help.
Eckerle Law offers a highest-quality and cost-effective alternative to the traditional law firm model for a wide variety of transactional and regulatory matters serving all your business law needs. Our experienced attorneys also provide a full range of compliance services for investment advisers, offering compliance tools that are tailored to fit the ever changing regulatory landscape as well as your business needs.
If your company would like to strengthen its business practices, please contact us today so we can leverage our experience to create real-life business and legal solutions to help your business thrive.