The Economic Growth, Regulatory Relief and Consumer Protection Act, signed by President Trump on May 24, 2018, expands the Section 3(c)(1) exclusion under the Investment Company Act to allow up to 250 beneficial owners of smaller venture capital funds.
Historically, Section 3(c)(1) has excluded from definition of "investment company” any fund with less than 100 beneficial owners that does not make a public offering of its securities. The new act expands the exclusion by adding a "qualifying venture capital fund.” A qualifying venture capital fund shall not be an investment company provided it meets the following criteria:
- the fund must no more than 250 beneficial owners;
- the fund has no more than $10 million in aggregate capital contributions and uncalled committed capital;
- the fund is a "venture capital fund” as that term is defined for the “venture capital fund adviser” exemption under the Investment Advisers Act; and
- the fund does not make a public offering of its securities.
A venture capital or other fund may still rely on the traditional Section 3(c)(1) exclusion.
Although the amount that can be raised is limited, the new exclusion does provide for venture capital fund managers to take advantage of the ability to induce a larger number of investors – now 250 rather than 100 – to invest by means of general solicitation under Securities Act Rule 506(c). The Jumpstart Our Business Startups Act provides that general solicitation in such a Rule 506(c) offering will not constitute a “public offering” for purposes of the Section 3(c)(1) exclusion, whether such general solicitation offering is directly made by the fund manager or through a third party, such as a Section 506(c) investor portal.