This is the fifth post in a series exploring recent SEC regulations which define the term “venture capital fund” for the purposes of determining whether a fund’s manager is exempt from SEC registration requirements under the Dodd-Frank Act.
Previously in the first installment of this series, I provided a general overview of how the SEC has defined the term “venture capital fund.” A private fund manager that solely advises venture capital funds (as defined in SEC regulations) qualifies for an exemption from investment adviser registration under the Investment Advisers Act. There are five elements to the definition. In the second installment, I described the first element of the definition, which is that the fund must represent to investors and potential investors that it pursues a venture capital strategy. In the third installment, I began to describe the second element, which is that no more than 20% of the fund’s total assets (including committed but not yet invested capital) can be invested in assets that are not “qualifying investments” or “short term holdings.” In the third installment and the fourth installment, I discussed what constitutes a “qualifying investment,” which, roughly speaking, is an equity security issued by a private company which is not an investment fund and which does not incur debt in connection with the VC fund’s investment. This post discusses what constitutes a “short term holding.”
The definition of “short term holding” is relatively straightforward. However, it certainly isn’t written in a straightforward manner and contains multiple cross references to other statutes. Here is a simplified list of what constitutes a short term holding for a VC fund:
1. Bank deposits, certificates of deposit, bankers acceptances, and similar bank instruments;
2. U.S. Treasuries with a remaining maturity of 60 days or less; and
3. Money market funds.
That’s it! I did say it was straightforward. Unfortunately, this definition is also very restrictive. VC Funds may want to park their assets in relatively low risk liquid investments such as commercial paper, municipal bonds, foreign debt, and repurchase agreements. Under the new regulations, none of these assets would qualify. A VC fund may certainly invest in these assets as part of its 20% non-qualifying basket, but must steer clear of them as a general cash management tool.
As always, you should consult an attorney who is familiar with securities regulatory issues in assessing whether your particular fund management business is required to register with the SEC.
© 2011 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.