When Is An Investment Adviser Managing Venture Capital Funds Exempt From Registration?

Many investment advisers may be aware of the exemption from Securities and Exchange Commission (SEC) registration that is available for those who manage venture capital funds. But who exactly is eligible for an exemption, and how is a “venture capital fund” defined? After receiving a high volume of inquiries, the SEC’s Division of Investment Management (the Division) has released guidance for December 2013 addressing the possible nuances involved in the precise application of such an exemption.

A “venture capital fund”, according to Rule 203(I)-1 of the Adviser’s Act, is a private fund which: a) represents a venture capital strategy, b) does not provide redemption rights, c) holds no more than 20% of the fund’s aggregate capital contributions and commitments in non-qualifying investments, d) does not incur or borrow more than 15% of the contribution and commitments of the fund, and e) is not treated as a business development company. The Division’s guidance not only sought to reiterate this definition within the realm of investment advisers, but also to present five scenarios and Division conclusions in which advisers, due to certain actions or fund restructuring, may no longer be eligible for exemption.

Some highlights of the Division’s conclusions include the following:

For more information, or for assistance on other compliance topics, please contact us at (619) 278-0020, or email us at info@corecls.com.

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