The SEC is moving much faster in releasing proposed rules after the SEC Open Meetings. After Friday morning’s open meeting discussing the exemption from registration for venture capital funds, the SEC has released the full text of the proposed rule merely several hours later.
I have been waiting to see how broad this exemption will be. I’m still holding on to the slim chance that I could squeeze into the exemption. Given that the SEC is still looking for some broad reporting and subjecting venture capital firms to examination, I’m not sure the exemption will offer much benefit.
Here is the SEC’s proposed definition of a venture capital fund for purposes of the exemption:
A venture capital fund is any private fund that:
(1) Represents to investors and potential investors that it is a venture capital fund;
(2) Owns solely:
(i) Equity securities issued by one or more qualifying portfolio companies, and at least 80 percent of the equity securities of each qualifying portfolio company owned by the fund was acquired directly from the qualifying portfolio company; and
(ii) Cash and cash equivalents, as defined in § 270.2a51-1(b)(7)(i), and U.S. Treasuries with a remaining maturity of 60 days or less;
(3) With respect to each qualifying portfolio company, either directly or indirectly through each investment adviser not registered under the Act in reliance on section 203(l) thereof:
(i) Has an arrangement whereby the fund or the investment adviser offers to provide, and if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of the qualifying portfolio company; or
(ii) Controls the qualifying portfolio company;
(4) Does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage, in excess of 15 percent of the private fund’s aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days;
(5) Only issues securities the terms of which do not provide a holder with any right, except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such securities but may entitle holders to receive distributions made to all holders pro rata; and
(6) Is not registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), and has not elected to be treated as a business development company pursuant to section 54 of that Act (15 U.S.C. 80a-53).
SEC Release IA-3111 Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers