venture capital fund adviser exemptionsales compensation surveys
The other approach a fund may take is to value all investments at their historicalcostso that the value of an investment never changes regardless of market fluctuations. 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. First, a venture capital fund may not borrow, incur indebtedness, or guarantee debts of portfolio companies in a total amount in excess of 15% of the funds aggregate capital contributions and uncalled committed capital. The proposed rule had required the Venture Funds to have represented itself as a "venture capital fund." (3) Qualifying investment means: Although it may seem simple to qualify for the venture capital adviser exemption by limiting the advisers business to advising solely venture capital funds, whether a fund meets the complex conditions for being a venture capital fund can be quite complex. 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 amended, Part B of Section 7.B requires identifying and other information on the fund's service providers, including auditors, prime brokers, custodians, administrators and marketers. 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. The definition of venture capital fund that the Commission originally proposed focused on distinguishing a venture capital fund from hedge funds and private equity funds by imposing restrictions on a Venture Fund's investments and fund-level operations. AIVs do not, therefore, technically comply with the Qualifying Investment Requirement. SEC Proposes Exemptions for Advisers to Venture Capital Funds - Fund It does not mean that 80% of the fund's capital commitments must be invested in qualifying investments, as it is recognized by the SEC that a fund rarely invests 100% of its capital commitments. The non-qualifying basket refers to the portfolio of investments that are not qualifying investments or short-term holdings. No more than 20% of a venture capital funds total assets, including committed but not yet invested capital, can be invested in the non-qualifying basket. What are Portfolio Companies? Also note that a private fund adviser exempt under the venture capital exemption is still an exempt reporting adviser, which means it will still be required to provide an abbreviated Form ADV to the SEC. Liquidating Trusts. 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. Secondary Acquisitions. 2. Recall that at least 80% of the funds investments must be in qualifying investments or short-term holdings. The definition of short-termholdings is limited to the following: (i) bank deposits, certificates of deposit, bankers acceptances, and similar bank instruments; (ii) U.S. Treasuries with a remaining maturity of 60 days or less; and (iii) money market funds. Perhaps as important, the determination of the 20% Basket calculation need only be made at the time of making an investment in a proposed Basket asset, based on the Basket asset held by the Venture Fund immediately after the asset acquisition. In the Guidance Update, the Staff states that it will not object if a VC Adviser disregards an intermediary holding company that is wholly owned by multiple venture capital funds for purposes of complying with the VC Exemption, so long as all of the funds are advised by the same VC Adviser (or its related persons). Venture Capital Strategy. The Final Rule defines "venture capital fund" in a manner that should exempt from registration under the Advisers Act most firms generally considered to be "venture capital firms" under common industry usage. Registered investment advisers are subject to annual reporting and updating of the complete Form ADV (all of Parts 1 and 2) which, in general, includes information similar to that included in a typical fund offering memorandum. However, there are some potential problems. Generally, the rule defines a venture capital fund as any private fund that: (i) holds no more than 20 percent of the fund's capital commitments in non-qualifying investments (other than short-term holdings); (ii) does not borrow or otherwise incur leverage in excess of 15 percent of the fund's capital commitments, other than limited short-term . Practically speaking, this means that private funds, such as venture capital funds, are either (i) limited to 100 or fewer accredited investors or (ii) limited to qualified purchasers. The offering documents of private funds must restrict the transferability of interests in the fund as a condition to making use of Regulation D; however, there are certain exemptions such as Rule 144, Section 4(a)(7) of the Securities Act of 1933, or the so-called Section 4(1) exemption that permit resale. 3221 (June 22, 2011), available at http://www.sec.gov/rules/final/2011/ia-3221.pdf (the "Implementing Release"). The Private Adviser Exemption was the exemption relied upon by many advisers to futures funds, hedge and private equity funds, family offices, foreign-based advisers and others. Exempt Reporting Advisers: Requirements for Investment Advisers that Exempt reporting advisers to Venture Funds must submit their initial reports on Form ADV within 60 days of relying on the exemption from registration under section 203(l) of the Advisers Act. However, Item 7.B and its related Schedule D section have been expanded to require significantly more types of information regarding private funds advised by Exempt Reporting Advisers. 1. A fund is not necessarily required to use the words venture capital in the name of the fund. Qualifying Investments; Short Term Holdings; Basket. A venture capital fund is a private fund that pursues a venture capital strategy, holds no more than 20% of assets in non-qualifying investments, does not borrow or incur leverage and does not grant investors redemption rights, except in . 4. What is the Venture Capital Exemption from Investment Advisor's Act? 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. Clients of Proskauer should contact their assigned lawyer to discuss any implications that the new Guidance Update may have on their businesses. directly or indirectly under common control with) an Exchange Act reporting company or a publicly traded foreign company; (ii) the company may not borrow or issue debt obligations in connection with the funds investment in the company and distribute to the fund the proceeds of such borrowing or issuance in exchange for the private funds investment (i.e. It needs to determine if new funds contemplated can comply with the Final Rule. 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 that, among other things, holds not more than 20% of its aggregate . Now, most fund advisers are required to register as "investment advisers" under the Advisers Act and to comply with substantial disclosure, reporting, recordkeeping, operational and SEC examination obligations. In general, equity securities include (i) common and preferred stock, (ii) warrants, convertible debt (e.g., convertible bridge loans), and other securities that are convertible into stock, and (iii) certain limited partnership interests. A fund meets the definition of a venture capital fund under the Investment Advisers Act of 1940 (Advisers Act) if it: Does not invest more than 20% of the fund's committed capital in non-qualifying investments, such as debt, secondaries, public issuances, fund-of-fund investments, or digital assets Follow-on investments in a public company, however, would not qualify and instead would be non-qualifying investments subject to the Basket. Venture Funds may also choose to have Basket assets measured at fair value, but the cost or fair value methodology must be applied consistently throughout the term of the Venture Fund. 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"). Written by Jason Gordon Updated at April 15th, 2022 Marketing, Advertising, Sales & PR Accounting, Taxation, and Reporting Professionalism & Career Development Law, Transactions, & Risk Management A qualifying portfolio company also cannot itself be a private fund, so an investment in another Venture Fund or other fund would not be a qualified portfolio company. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. This may provide additional liquidity to founders and employees of venture-backed companies who may want to sell personal equity to Venture Funds. Exempt Reporting Advisers are required to annually file and update certain parts of Form ADV Part 1. In particular, the Guidance Update clarifies that certain structures and practices common in the venture capital fund industry will not impact the availability of the VC Exemption. 2. The final requirement of the definition ensures that the definition of the term venture capital fund will not include any kind of fund of funds, even if the underlying funds are themselves venture capital funds. 5. No Leverage. Intermediary Holding Companies. adviser who solely advises venture capital funds, by stating that RBICs are venture capital funds for purposes of the exemption. It should consider if it can continue to operate all these funds with the Final Rule and, if so, prepare and file its Form ADV reports in a timely manner. The SEC issued the proposed exemption for advisers to venture capital funds on November 19, 2010[2] and requested comments by January 20, 2011. There are two main consequences to this definition. Exempt reporting advisers must file their first reports on Form ADV with the SEC through the Investment Adviser Registration Depository ("IARD") operated by FINRA between January 1 and March 30, 2012. However, since the definition of qualifying portfolio company looks to the time of investment, a Venture Fund can continue to hold public securities after a qualifying portfolio company's initial public offering. A fund may choose to value each investment at its fair value, which essentially is a mark to market approach. Funds that are evergreen (that continually accept new investors and allow redemptions as hedge funds usually do) or funds that utilize a special limited partner and intend to make distributions to the special limited partner that are not pro rata with the investors may have difficulty qualifying under the definition. 3222 (June 22, 2011), available at http://www.sec.gov/rules/final/2011/ia-3222.pdf (the "Release"). At times, VC Advisers will warehouse investments in qualifying portfolio companies for a venture capital fund that is in the fundraising process by investing in the portfolio company itself and then transferring the investment over to the fund at or shortly after the fund's initial closing. Again, the fund must not be registered under Section 8 of the Company Act and not elect to be treated as a "business development company" under Section 54 of the Company Act. However, there will be some funds that will not qualify under the SECs definition as a result of this requirement. 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. It should be recalled that there are also several other exemptions and exclusions from registration for which advisers and capital pools may qualify. Venture Capital Exemption from Investment Advisor's Act - Explained The term venture capital fund is not defined in the text of the Advisers Act; instead, the term is defined in SEC Rule 203(l)-1(a) as a private fund that meets certain conditions. A business development company is a form of publicly traded private equity fund designed to provide capital to small, developing, and financially troubled companies. Of course, a venture capital fund can invest in other funds as part of its non-qualifying basket. 2. Enter your email address below to subscribe to our newsletter. [2] See Fairfield and Woods, P.C., "SEC Proposes Definition of 'Venture Capital Fund' for Exemptions from Investment Advisers Act Registration and Outlines Reporting Obligations" (November 27, 2010), available at https://www.fwlaw.com/SEC_Venture_Capital_Exemption.pdf. However, unlike registering or registered advisers, Exempt Reporting Advisers only have to respond to the following items on Form ADV, Part 1A: Exempt Reporting Advisers do not have to complete the other Items in Part 1A or prepare a client brochure (Form ADV, Part 2). However, if the fund acquires additional shares of a portfolio company after it goes public, then that investment would not be considered a qualifying investment. Therefore, if a venture capital fund is asked to enter into an agreement to participate in all future rounds of financing of a portfolio company, that any such requirement carves out shares sold in an IPO.
