The Securities and Exchange Commission (SEC) has adopted implementing rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act including, by a unanimous vote, a new definition for venture capital funds that will exempt advisers who manage qualified funds from the registration and reporting requirements applicable to many hedge funds and private equity firms.

According to SEC, the rules (i) “require advisers to hedge funds and other private funds to register with the SEC,” (ii) “establish new exemptions from SEC registration and reporting requirements for certain advisers,” and (iii) “reallocate regulatory responsibility for advisers between the SEC and states.” SEC also amended rules to expand disclosure by investment advisers, “particularly about the private funds they manage,” and revised its “pay-to-play” rule.

SEC now defines “venture capital fund” as a private fund that invests primarily in “qualifying investments”—generally shares in private companies—but may also invest in a “basket” of non-qualifying investments of up to 20 percent of its committed capital and hold certain short-term investments. In addition, a venture capital fund (i) “is not leveraged except for a minimal amount on a short-term basis”; (ii) “does not offer redemption rights to its investors”; and (iii) “represents itself to investors as pursuing a venture capital strategy.” A grandfather clause allows funds that started raising money last year to be automatically considered as venture capital funds.

“The rules implement a transitional exemption period so that private advisers, including hedge fund and private equity fund advisers, newly required to register do not have to do so until March 20, 2012,” according to SEC. “The rules regarding exemptions for venture capital fund and certain private fund advisers are effective July 21, 2011.” See SEC Press Release and The New York Times, June 22, 2011.