This is the tenth post in a series exploring recent SEC regulations that 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. In my subsequent posts, I described the requirements private funds must meet in order to qualify for this exemption. The requirements are quite specific, and therefore, many existing funds would be required to register, which would be an unanticipated consequence for these fund managers that relied on then-current law to structure their funds. Luckily, the SEC has provided grandfathering provisions in the regulations which exempt funds that raised their capital prior to the effectiveness of the new regulations. In this post, I will discuss such how grandfathering provisions work.
The grandfathering provisions of the regulations provide that a fund will be considered to qualify as a venture capital fund if (1) it has represented to investors and potential investors during its offering that it pursues a venture capital strategy; (2) it actually sold interests to outside investors (i.e. not related parties to the fund manager) before December 31, 2010; and (3) it does not take new subscriptions after July 21, 2011. Essentially what this has done is reduced the number of requirements for preexisting funds from five to just one. In order to qualify for the exemption, new funds must also hold themselves out as pursuing a venture capital strategy, but they must also meet a number of other requirements. The grandfathered venture capital funds will not be required to meet these other requirements. Nonetheless, this means that if a fund called itself something other than a venture capital fund (like a private equity fund) it would not qualify for the grandfathered exemption, even if in substance, the fund made VC-type investments.
One other important item to note is that while the fund must have finished taking new subscriptions by July 21, 2011, it can continue to accept new capital pursuant to the commitments investors made in their pre-July 21 subscriptions.
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.