Prior to July 21, 2011, most advisers to venture capital funds that were within the definition of an "investment adviser" under the Advisers Act relied upon the "private adviser exemption" from registration under Section 203(b)(3) of the Advisers Act. In the Guidance Update, the Staff states that it would not object to warehoused investments being treated as qualifying investments for purposes of complying with the VC Exemption, provided that (i) such investment is initially acquired by the VC Adviser (or a person wholly owned and controlled by the VC Adviser) directly from the qualifying portfolio company solely for the purpose of acquiring the investment for a venture capital fund that is actively in the process of raising capital, and (ii) the terms of the warehoused investment are fully disclosed to prospective investors prior to their committing to invest in the fund. The fund must make the calculation as to whether it exceeds the 20% limit at the time each investment is made. but are unexpected in their timing or scope. In footnote 163 in the Release, the SEC indicates that it will propose even more recordkeeping and compliance requirements for private advisers in the future. Effective Date: advises venture capital funds is exempt from registration under the Advisers Act (the venture capital exemption) and directs the Commission to define venture capital fund within one year of enactment.18 New section 203(m) of the Advisers Act directs the Commission to provide an exemption from registration to any investment adviser . PDF Final Rule: Exemptions for Advisers to Venture Capital Funds, Private The next important question is: what is a qualifying portfolio company? A qualifying portfolio company has three requirements: (i) at the time of the investment by the fund, the company must not be a reporting company under the Securities Exchange Act of 1934 nor be listed or traded on any foreign exchange and is not an affiliate of (i.e. We are adopting amendments to the rule that defines a venture capital fund (rule 203 ( l )-1) and the rule that implements the private fund adviser exemption (rule 203 (m)-1) under the Investment Advisers Act of 1940 (the "Advisers Act") in order to reflect changes made by title LXXIV, sections 74001 and 74002 of the Fixing America's Surface Tra. Such a transaction could be considered a nonqualifying investment under the VC Exemption, because the securities in question have not been acquired by the venture capital fund directly from the qualifying portfolio company. The SEC suggests that advisers submit their Form ADV filings by February 14, 2012 to ensure registration by the deadline. Section 203(l) of the Investment Advisers Act of 1940 (the Advisers Act), also known as the venture capital adviser exemption, provides that an investment adviser that solely advises venture capital funds is exempt from registration with the SEC under the Advisers Act. To qualify as a Venture Fund adviser, a private fund manager must manage only qualifying funds and not other types of funds and must not provide investment advisory services to other clients, such as separate accounts or pooled employees' securities; there is some risk, for example, that a single-investor vehicle is likely to be viewed by the SEC as equivalent to a separate account and thus not as a private fund. In order to qualify as a "venture capital fund" for purposes of the Venture Capital Exemption, a fund may only invest in the equity securities 9 of qualifying portfolio companies, cash and cash equivalents, and US Treasuries with a remaining maturity of 60 days or less. The Staff also cautioned VC Advisers to consider their fiduciary obligations under the antifraud provisions of the Advisers Act (including Section 206(3) and Rule 206(4)-8). Rely on the venture capital fund exemption. The RBIC Advisers Relief Act also amended Advisers The venture capital fund can retain this investment even after the company goes public as the test for whether an investment is a qualifying investment is applied at the time of initial investment by a fund. The amendment requires advisers to provide information on "private funds" and expands the amount of information formerly required to be reported by registered advisers by adding basic organizational, operational and investment characteristics of each private fund, the nature of the investors in the fund, and the fund's service providers. If they are, then the predecessor vehicles must be reviewed to determine if they are private funds that meet the venture capital fund definition or are grandfathered into that definition. Called the Developing and Empowering our Aspiring Leaders Act of 2023 or the "DEAL Act of 2023" (Congress loves catchy acronyms), it specifically orders the SEC to revise the venture capital fund adviser exemption's definition of a "qualifying investment" to include secondary acquisitions and investments in other venture capital funds. The trigger events for these rights are typically beyond the control of the adviser and fund investor (e.g., tax and regulatory changes). SEC Charges Private Equity Fund Adviser for Overcharging Fees and Venture Capital Exemption from Investment Advisor's Act - Explained If the 3(c)(1) fund is not a private equity, real estate, or venture capital fund (as those terms are defined in subsection (a)(4)-(6)), the . The sole example the SEC gives is a material change in law or regulation. [1] The SEC has also noted that Exempt Reporting Advisers may in any event also be subject to state registration and other requirements. This memorandum is focused upon the Final Rule and those aspects of the Implementing Rules most applicable to Exempt Reporting Advisers for Venture Funds. Registered investment advisers are also obligated to have a chief compliance officer who must be responsible for and monitor the firm's compliance with a multitude of requirements such as restrictions on trading activities of firm personnel, extensive books and records maintenance and monitoring, significant restrictions on marketing activities, custody of fund assets, disaster recovery policies, and others. Short-Term Holdings and Fund Leverage. Subject to the additional requirements of paragraph (c) below, a private fund adviser shall be exempt from the registration requirements of Section XXX . [4] Advisers whose principal office and place of business is outside of the United States are not permitted to omit from Item 7.B information for private funds that are not organized in the United States and not offered to or owned by U.S. persons if those funds are treated as private funds for purposes of the Venture Capital Exemption. However, the Advisers Act, as amended by Dodd-Frank, now also includes new exemptions from registration for advisers to some "private funds," including a new Section 203(l) exemption for private fund advisers that solely advise Venture Funds. PDF Investment Advisor Registration Exemptions - Gibson Dunn [2] A "private fund" is defined as a fund that relies on the exemptions from the definition of investment company provided in either section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940. [5] Notwithstanding this helpful guidance with respect to feeder funds, the Guidance Update does not address whether other types of alternative investment vehicles (such as alternative investment vehicles formed for tax, legal or regulatory purposes that make one or more nonqualifying investments in lieu of the venture capital fund) would similarly be disregarded. While some funds may want to park their assets in relatively low-risk liquid investments such as commercial paper, municipal bonds, foreign debt, and repurchase agreements, none of these assets would qualify. Intermediary Holding Companies. As a result of these two requirements, the leverage restrictions contained in the SECs definition of a portfolio company are very limiting, effectively preventing any funds that use significant leverage from utilizing the venture capital exception to investment adviser registration. While the Final Rule also maintains the requirement that any such borrowing, indebtedness or leverage has a non-renewable term no longer than 120 days, this time limit was eliminated for individual company guarantees up to the amount of the value of the Venture Fund's investment in each qualifying portfolio company. The approximate percentage of the fund owned by the investment adviser or related persons, by fund of funds and by non-United States persons. [1]To qualify as a "venture capital fund" for this purpose, Advisers Act Rule 203(l)-1 provides that a fund must be a private fund[2] that, among other things, holds not more than 20% of its aggregate called capital contributions and uncalled capital commitments (excluding cash and cash equivalents) in non-qualifying investments (the "Qualifying Investment Requirement"). Designed by Herrmann Advertising | Branding | Technology, http://www.sec.gov/rules/final/2011/ia-3222.pdf, http://www.sec.gov/rules/final/2011/ia-3221.pdf. PDF Modernizing the SEC's Definition of Venture Capital Fund Consequently, in the event an investment adviser seeks to qualify for the . SEC Issues Interpretive Guidance on the Venture Capital Fund Adviser The Final Rule maintains the proposed rule's definition of "equity securities" which is taken from Section 3(a)(11) of the Securities Exchange Act of 1934. The Release also does not indicate how the SEC would treat less traditional venture fund structures, such as pledge funds or other vehicles in which investors have opt-out rights on an investment-by-investment basis. Start Excluded advisor type1? Not a Registered Investment Company. However, the test is not applied continuously, so if certain qualifying investments subsequently decline in value or if non-qualifying investments increase in value, the fund will still be in compliance with regulations even if valuation changes would cause the non-qualifying basket to exceed the 20% limit. As under the proposed rule, the Final Rule provides in Rule 203(l)-1(b) that the definition of a Venture Fund includes any private fund that (i) issued securities to one or more investors not related to the adviser prior to December 31, 2010, (ii) does not issue any additional securities after July 21, 2011, and (iii) represented to investors and potential investors at the time of the offering that it pursues a venture capital strategy (as described above). Yes No Less than $25M in AUM from U.S clients Registration not required Reportingnotrequired Exemptionfilingnotrequired Fewer than YesYes15 U.S. &clients & AdvisorRegistration Foreign Private Fund AdviserExemption No Holds itself Noout to publicIs an IA to in U.S.an IC or BDC? March 27, 2023 While private fund advisers are often exempt from registering with the Securities and Exchange Commission ("SEC") as an investment adviser due to certain exemptions under the Investment Advisers Act of 1940, private fund advisers must still often contend with state investment adviser registration requirements. This memorandum focuses on the Venture Capital Exemption and the reporting obligations of advisers who intend to utilize it. SEC Adopts Final Rules Regarding Advisers to 'Venture Capital Funds The most important change from the proposed rule is the SEC's adoption in Final Rule 203(l)-1(a)(2) of a recommendation by the National Venture Capital Association ("NVCA") that Venture Funds be permitted to hold no more than 20% of the amount of the fund's capital in assets which are not "qualifying investments" (the "Basket"). In addition, a venture capital fund may choose one of two methods in its ongoing calculations used to verify compliance with the limits on non-qualifying investments. Thus, withdrawal, exclusion or similar "opt-out" rights would be deemed "extraordinary circumstances" if they are triggered by a material change in the tax law after an investor invests in the fund, or the enactment of laws that may prohibit an investor's participation in the fund's investment in particular countries or industries. Managerial Assistance/Control Not Relevant. The fund shall not offer its investors early redemption or other similar liquidity rights except in extraordinary circumstances; 4. A business development company is a form of publicly traded private equity fund designed to provide capital to small, developing, and financially troubled companies. Item 2.B (SEC Reporting by Exempt Reporting Advisers); Item 7 (Financial Industry Affiliations and Private Fund Reporting); The corresponding sections of Schedules A, B, C and D. As amended, Part A of Section 7.B requires: Basic identifying information about the fund (including the name of the fund, the jurisdiction in which it was organized and the name(s) of the fund's general partner, directors or persons serving in a similar capacity); Operational and structural information (including the strategy of the fund and whether it is part of a master-feeder arrangement); The Company Act exemption on which it relies; The name of any foreign regulatory authority with which the fund has registered; The type of private fund (hedge fund, liquidity fund, private equity fund, real estate fund, securitized asset fund, venture capital fund or other type of fund); The approximate number of beneficial owners; and.
