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 that: 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:
- An investment adviser may still be exempt from registration if an “intermediate holding company” is “wholly-owned collectively” by more than one venture capital fund that is managed by the same adviser.
- An investment adviser may continue to claim the exemption if a venture capital fund’s “Side Fund” (a private fund in parallel with a “Main” venture capital fund) acquires securities from a qualified portfolio company as long as the transfer takes place within 1 year of the final closing of the “Main” fund, and the disclosure of this possibility is made in constituent documents of both the Main Fund and any Side Fund.
- An investment adviser may continue to be exempt from registration if a venture capital fund’s remaining portfolio is transferred into a liquidating trust of which the adviser or an affiliate serves as the liquidating trustee, under the conditions that: a) the possibility of a liquidating trust and its terms are disclosed in constituent documents, and b) the purpose of the liquidating trust is to act as a successor to the fund and to liquidate the assets of the fund.
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