Key Takeaways:
- On August 21, 2024, the Securities and Exchange Commission adopted a final rule adjusting the dollar threshold for a “qualifying venture capital fund” under the Investment Company Act of 1940 to a maximum of $12 million. Previously, the maximum fund size under this exemption was $10 million.
- A private fund meeting the definition of “qualifying venture capital fund” can accept up to 250 investors and still qualify for an exemption from Investment Company registration under Section 3(c)(1). Otherwise, the Section 3(c)(1) limit is 100 investors.
- This increase is very helpful to emerging venture fund managers that want to accept a larger number of smaller investors. The final rule will take effect 30 days from publication in the Federal Register.
The two most common exemptions from registration under the Investment Company Act of 1940 (the “Act”) utilized by private funds are under Section 3(c)(7) and Section 3(c)(1). Funds that do not qualify for an exemption under the Act must register as an Investment Company with the Securities and Exchange Commission and are subject to various restrictions and disclosure requirements.
Under Section 3(c)(1), private funds may be exempt from registration under the Act if they have not more than 100 beneficial owners. However, a “qualifying venture capital fund” under the Act, may have up to 250 beneficial owners and still be exempt from registration requirements. On August 21, 2024, the Securities and Exchange Commission adopted a final rule adjusting the dollar threshold for a “qualifying venture capital fund” under the Act to those with not more than $12 million in aggregate capital contributions and uncalled committed capital (up from the current maximum of $10 million). The final rule also provides for subsequent raises indexed to inflation to occur every five years.