SEC Proposes Narrow Definition of “Venture Capital Fund” for Registration Exemption

The SEC has proposed the definition of “venture capital fund” for purposes of the exemption from adviser registration under Dodd-Frank. “Venture capital fund” is defined as a private fund (i.e. not publicly offered) that (a) represents to investors that it is a venture capital fund, (b) owns only equity securities (i.e. no debt) of portfolio companies, (c) purchases securities directly from the portfolio companies (i.e. no buy-out funds), (d) offers to provide management assistance or controls the portfolio companies, (e) does not borrow or incur debt, (f) issues securities that do not allow redemption rights, and (g) cannot invest in companies that issue debt or allow redemptions/exchanges in connection with the fund’s investment. The proposal also adds definitions to the exemption for private fund managers with less than $150 Million in assets under management. Most notably, uncalled capital commitments are included in the determination of AUM. The proposal also includes rules around the new foreign private adviser exemption.

OUR TAKE: We cannot envision how the SEC could have defined “venture capital fund” more narrowly. Even if the fund meets all the other tests, it must describe itself as a “venture capital fund” in its offering documents and marketing materials.