United States: SEC Issues Interpretive Guidance On The Venture Capital Fund Adviser Exemption

On December 2, 2013, the SEC's Division of Investment Management issued a new "Guidance Update" that provides some important interpretive guidance on the exemption from registration under the Investment Advisers act of 1940 (the "Advisers Act") for certain venture capital fund advisers (the "VC Exemption"). In particular, the Guidance Update clarifies that certain structures and practices common in the venture capital fund industry will not impact the availability of the VC Exemption.

By way of background, the VC Exemption exempts from registration under the Advisers Act investment advisers whose business is limited solely to advising one or more venture capital funds ("VC Advisers").1 To qualify as a "venture capital fund" for this purpose, Advisers Act Rule 203(l)-1 provides that a fund must be a private fund2 that, among other things, holds not more than 20% of its aggregate called capital contributions and uncalled capital commitments (excluding cash and cash equivalents) in non-qualifying investments (the "Qualifying Investment Requirement").3 A "qualifying investment" is generally defined as an equity security acquired directly from a qualifying portfolio company. A "qualifying portfolio company" is defined generally as a private operating company (i.e., a company that is not itself an investment company or private fund) that is not publicly traded in the U.S or elsewhere (nor a control affiliate of a company that is publicly traded).4

The Guidance Update focuses on various scenarios in which compliance with the Qualifying Investment Requirement could be called into question under a literal reading of Rule 203(l)-1. In particular:

  1. Intermediary Holding Companies. Venture capital funds frequently invest in portfolio companies through intermediary holding companies, which do not technically qualify as qualifying portfolio companies because they are not operating companies. Although Rule 203(l)1 expressly permits venture capital funds to ignore wholly owned intermediary holding companies for purposes of complying with the Qualifying Investment Requirement, the Rule does not address situations in which multiple funds invest in a portfolio company through a single intermediary holding company. In the Guidance Update, the Staff states that it will not object if a VC Adviser disregards an intermediary holding company that is wholly owned by multiple venture capital funds for purposes of complying with the VC Exemption, so long as all of the funds are advised by the same VC Adviser (or its related persons).
  2. Feeder Funds. Venture capital funds frequently set up feeder funds to address varying tax, legal or regulatory concerns of their investors. Feeder funds (referred to as "AIVs" in the Guidance Update) invest all of their assets in a master fund, which is not a qualifying portfolio company because it is not an operating company. AIVs do not, therefore, technically comply with the Qualifying Investment Requirement. In the Guidance Update, the Staff states that it would not object to VC Advisers disregarding AIVs for purposes of complying with the VC Exemption, provided that (i) the AIV is formed solely to address investors' tax, legal or regulatory concerns, and (ii) such AIV is not intended to circumvent the VC Exemption's general limitation on investing in other investment vehicles.5
  3. Warehousing Transactions. At times, VC Advisers will warehouse investments in qualifying portfolio companies for a venture capital fund that is in the fundraising process by investing in the portfolio company itself and then transferring the investment over to the fund at or shortly after the fund's initial closing. Such a transaction could be considered a nonqualifying investment under the VC Exemption, because the securities in question have not been acquired by the venture capital fund directly from the qualifying portfolio company. In the Guidance Update, the Staff states that it would not object to warehoused investments being treated as qualifying investments for purposes of complying with the VC Exemption, provided that (i) such investment is initially acquired by the VC Adviser (or a person wholly owned and controlled by the VC Adviser) directly from the qualifying portfolio company solely for the purpose of acquiring the investment for a venture capital fund that is actively in the process of raising capital, and (ii) the terms of the warehoused investment are fully disclosed to prospective investors prior to their committing to invest in the fund.6 The Guidance Update does not, however, specifically address situations where an existing venture capital fund warehouses investments for a successor venture capital fund during the successor fund's fundraising process.
  4. Side Funds. Similarly, the Staff also took the interpretive position in the Guidance Update that it would not object to any transfers between a venture capital fund and any side funds established to invest in parallel with the venture capital fund after the venture capital fund is closed, provided that (i) such transfer takes place within 12 months of the final closing of the venture capital fund, and (ii) the potential for this type of transfer is fully disclosed in the governing documents for both the main fund and the side fund.7
  5. Liquidating Trusts. Finally, the Staff took the interpretive position in the Guidance Update that it would not object to the transfer of investments in qualifying portfolio companies from a venture capital fund to a liquidating trust for the purposes of winding up the affairs of the venture capital fund.

* * *

A complete copy of the Guidance Update can be found on the SEC's Website at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-13.pdf. Clients of Proskauer should contact their assigned lawyer to discuss any implications that the new Guidance Update may have on their businesses.


1. Although exempt from registration under the Advisers Act, investment advisers that rely on the VC Exemption are still required to file annual reports on Form ADV with the SEC as "exempt reporting advisers."

2. A "private fund" is defined as a fund that relies on the exemptions from the definition of investment company provided in either section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940.

3. The other conditions that a "venture capital fund" must meet are:(i) the fund must represent to investors that it pursues a venture capital strategy; (ii) the fund may not offer investors redemption rights (except in extraordinary circumstances); (iii) the fund may not borrow or otherwise incur leverage in excess of 15% of the fund's aggregate called capital contributions and uncalled capital commitments (and then, only on a short-term basis); and (iv) the fund may not be a registered investment company or a business development company under the 1940 Act.

4. Qualifying portfolio companies also are prohibited from borrowing or issuing debt securities in connection with the venture capital fund's investment in such company and distributing the proceeds of such borrowing or issuance in exchange for the venture capital fund's investment.

5. Notwithstanding this helpful guidance with respect to feeder funds, the Guidance Update does not address whether other types of alternative investment vehicles (such as alternative investment vehicles formed for tax, legal or regulatory purposes that make one or more nonqualifying investments in lieu of the venture capital fund) would similarly be disregarded.

6. In a footnote to the Guidance Update, the Staff advised that it would typically expect to see the following items of information disclosed to prospective investors in connection with a fund's contemplated warehousing transactions: (i) the name of the portfolio company; (ii) the cost at which the warehoused investment was acquired; (iii) how the price at which the fund will acquire the warehoused investment will be determined (e.g., fair market value or cost plus interest) and whether such price accounts for any adverse event that may have occurred; and (iv) any potential conflicts of interests arising as a result of the warehoused transaction. The Staff also cautioned VC Advisers to consider their fiduciary obligations under the antifraud provisions of the Advisers Act (including Section 206(3) and Rule 206(4)-8).

7. As with the Staff's guidance with respect to warehoused transactions, the Staff cautioned VC Advisers to consider their fiduciary obligations under the antifraud provisions of the Advisers Act when engaging in transactions between a venture capital fund and any related side funds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions