The SEC has issued its final rules exempting advisers to venture capital funds from registration under the Investment Advisors Act. Importantly, the rules exempt certain pre-existing venture capital funds from regulation. Under the rule, the definition of ― venture capital fund includes any private fund that:
- represented to investors and potential investors at the time the fund offered its securities that it pursues a venture capital strategy;
- has sold securities to one or more investors prior to December 31, 2010; and
- does not sell any securities to, including accepting any capital commitments from, any person after July 21, 2011.
A grandfathered fund would thus include any fund that has accepted all capital commitments by July 21, 2011 (including capital commitments from existing and new investors) even if none of the capital commitments has been called by such date. The calling of capital after July 21, 2011 would be consistent with the grandfathering provision, as long as the investor became obligated by July 21, 2011 to make a future capital contribution.
It is not necessary for a qualifying fund to name itself as a venture capital fund in order for its adviser to rely on the venture capital exemption. A fund may qualify of the exemption even if its name does not use the words venture capital as long as its name is not inconsistent with pursuing a venture capital strategy. Whether or not a fund represents itself as pursuing a venture capital strategy, however, will depend on the particular facts and circumstances. Statements made by a fund to its investors and prospective investors, not just what the fund calls itself, are important to an investor‘s understanding of the fund and its investment strategy. The appropriate framework for analyzing whether a qualifying fund has satisfied the holding out criterion depends on all of the statements (and omissions) made by the fund to its investors and prospective investors. While this includes the fund name, it is only part of the analysis. The SEC does not expect existing funds identifying themselves as pursuing a “private equity” or “hedge fund” strategy would be able to rely on this element of the grandfathering provision.
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