Investment advisers to venture capital funds are exempt from registration under the Investment Advisors Act if certain requirements are met.  Amongst those requirements is that certain investments be made in qualifying portfolio companies.  One prong of the definition of “qualifying portfolio company” requires that at the time of investment, the portfolio company is not reporting or foreign traded and does not control, is not controlled by or under common control with another company, directly or indirectly, that is reporting or foreign traded.  “Reporting” means a company that is subject to the SEC’s reporting requirements under Sections 13 or 15(d) of the Securities Exchange Act.  A qualifying portfolio company can later go public without destroying the exemption, because the test is made at the time of investment.

The SEC issued a no-action letter meant to provide relief from certain unintended consequences of the venture capital fund advisers exemption.  The no-action relief is premised on some specific examples that have to be reviewed in detail for a full understanding of the relief.  However, a common thread is this:  There are two portfolio companies under common control by a fund manager, one of which has become a reporting company.  The reporting company status of the public portfolio company is not problematic, because that is addressed by the rules.  However, issues arise with respect to the non-reporting company, because it has come under common control with the reporting company, and a literal interpretation of the rule means that it is no longer a qualifying reporting company.

The SEC agreed that application of the literal wording of the rule has unintended consequences. It therefore granted no-action relief if a company fails to meet the definition of “qualifying portfolio company” solely by reason of the circumstances set forth in the examples in the no-action request