The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) repealed the exemption from registration under the Investment Advisers Act of 1940 (Advisers Act) that was frequently utilized by advisers to private equity funds, hedge funds and venture capital funds: the so-called “15 client” exemption. The Dodd-Frank Act also provided a much narrower registration exemption under the Advisers Act for such advisers and authorized the Securities and Exchange Commission (the Commission) to prepare implementing regulations for the new limited exemptions. Recently proposed regulations reflect the Commission’s effort to further define the exemptions applicable to: (i) advisers solely to venture capital funds, without regard to the number of such funds advised by the advisor or the size of such funds; (ii) advisers solely to “private funds” with less than $150 million in assets under management in the United States, without regard to the number or type of private funds advised; and (iii) non-U.S. advisers with less than $25 million in aggregate assets under management from U.S. clients and private fund investors and fewer than fifteen such clients and investors.
Venture Capital Fund Advisers
Proposed regulation 203(1)-(1) defines the terms “venture capital fund” and “pre-existing venture capital fund.” A venture capital fund is a “private fund” that:
* invests in equity securities of private companies in order to provide operating and business expansion capital and at least 80 percent of each such company’s securities owned by the fund must be acquired directly from the company;
* directly, or through its investment advisers, offers or provides significant managerial assistance to, or controls, each portfolio company;
* does not borrow or otherwise incur leverage;
* does not regularly offer its investors redemption or other similar liquidity rights;
* represents itself as a venture capital fund to investors; and
* is not registered under the Investment Company Act and has not elected to be treated as a business development company.
In addition to exempting from federal registration all advisers providing advice solely to venture capital funds fitting the definition above, the proposed regulations also grandfather advisers to certain pre-existing venture capital funds (a term also defined in the proposed regulations).