United States: Congress Grants Increased Flexibility For Small Venture Funds And Small Public Companies With Passage Of The Economic Growth, Regulatory Relief, And Consumer Protection Act

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Reform Act") which includes federal securities law and regulation reforms for privately held, high-growth companies, venture capital funds, and public reporting companies. The amendments include (1) an amendment to the Investment Company Act of 1940 (the "1940 Act") exempting certain small venture capital funds with no more than 250 investors from registering under such Act, (2) a change to Rule 701 raising the disclosure limit to $10 million in any twelve-month period, and (3) a revision of Regulation A allowing public reporting companies to take advantage of the exemption allowed under the title. These changes are discussed in more detail below.

  • Investment Company Act of 1940

    • Background: Section 3(c)(1) of the Investment Company Act of 1940 allows privately offered funds, including venture capital funds, with no more than 100 investors to avoid increased regulatory burdens associated with registering as an investment company under the 1940 Act. For small venture capital funds, this 100-investor limit was a significant regulatory burden limiting the total size of venture capital funds that could not rely on other 1940 Act's other exemptions, including Section 3(c)(7) exemption for funds that do not make public offerings and who only sell to "qualified investors" (generally, individuals with at least $5 million in "investments" or entities with at least $25 million in "investments" as defined by the SEC).
    • Amendment: The Economic Growth Act amends Section 3(c)(1) by raising the 100 investor limit to 250 investors before a venture capital fund would be required to register as an investment company under the 1940 Act. However, the fund must (1) have, at all times, less than $10 million in aggregate capital contributions and uncalled committed capital, and (2) meet the definition of a venture capital fund as defined in the Investment Advisers Act of 1940. A venture capital fund is generally defined in the Investment Advisers Act as the fund that: (i) would be an investment company but for the exceptions provided under Sections 3(c)(1) or 3(c)(7) of the 1940 Act, (ii) represents to investors that it pursues a venture capital strategy, (iii) invests predominantly in private operating companies and (iv) employs a limited amount of leverage. The $10 million limit, which includes not only the aggregate capital contributions but also the uncalled commitments, will be adjusted every five years to account for inflation. This change will allow small venture capital fund managers more flexibility in structuring their funds, potentially also reducing some of the need for side-by-side fund structures that managers often used when the 100-investor limit was in place under Section 3(c)(1) to create a parallel fund for qualified investors under Section 3(c)(7). However, even when accepting up to 250 investors, venture capital fund sponsors should be aware that if they were to go above the new monetary limit set forth in section 3(c)(1), they will not be able to rely on this new exemption. This amendment is immediate in its effects and does not similarly apply to funds other than venture capital funds (e.g., private equity funds or hedge funds) which remain subject to a 100-investor limit when relying on Section 3(c)(1) exemption under the 1940 Act. In addition, funds that rely solely on this amended exemption, however, would still be considered "covered funds" for purposes of the Volcker Rule, which would continue to limit banking entities' ability to invest in such funds.
  • Rule 701

    • Background: Rule 701 is an exemption from the registration requirements under the Securities Act of 1933 for the issuance of securities to employees, directors, and certain consultants available only to private companies. The Rule 701 requires securities to be granted or sold under a written compensatory benefit plan and also that the value of such securities at the time of issuance in any twelve-month period does not exceed the greater of (1) $1 million, (2) 15% of the issuer's total assets, or (3) 15% of the issued securities of the same class being offered, not including those offered under Rule 701, in each case (2) and (3) as measured by the most recent balance sheet date. If sales exceed $5 million in any twelve-month period, the company is subject to heightened disclosure requirements for all securities, including those issued before the threshold was met.
    • Amendment: The Reform Act raises the bar for enhanced disclosure requirements to $10 million in any twelve-month period. Now, if a company meets or exceeds this threshold, it must provide recipients of its securities with (1) a summary of the material terms of the compensatory plan, (2) information about the risks associated with applicable securities (similar to the risk information contained in a private placement memorandum), and (3) financial statements complying with Generally Accepted Accounting Principles within 180 days of the date of issuance or sale of the securities. The effects of this change, however, will not be felt immediately, as the SEC must first amend Rule 701 as directed by the Act within 60 days of enactment. Interested parties should await these specific changes for further detail.
  • Regulation A

    • Background: Regulation A granted an exemption from registration requirements under the securities act to certain private companies allowing them to raise up to $50 million in a twelve-month period. It gave such companies significant regulatory reprieve by allowing them to file a smaller Form 1-A with the SEC instead of the much longer and more thorough Form S-1 required under the traditional IPO process. Regulation A provides for two types of offerings: Tier 1 permitting up to $20 million in a twelve-month period, and Tier 2 permitting up to $50 million in the same period but requiring issuers to meet ongoing periodic reporting obligations. Tier 2 offerings have an advantage, however, of preempting state securities registration requirements (often called Blue Sky Laws). In addition, securities sold under Regulation A are not considered to be "restricted" under Securities Act Rule 144 and thus can generally be sold to any investor and resold at will.
    • Amendment: The Act mandates that the SEC amend Regulation A to allow public reporting companies to qualify for the same exemption for securities offerings that is given to certain private companies. Once the SEC revises the Regulation, such reporting companies can make offerings under Regulation A, and those making offerings under Tier 2 will be presumed to have satisfied periodic disclosure requirements if they have satisfied their periodic disclosure obligations under the Securities Exchange Act of 1934. This change mainly benefits small public companies, as the disclosures mandated by Regulation A are less complex and less costly and may allow such companies to avoid complying with Blue Sky Laws. Like the change to Rule 701, interested parties should be on the lookout for the SEC's amendments in the coming months.

Overall, the changes to the Investment Company Act, Rule 701, and Regulation A are intended to create additional liquidity mechanisms for venture funds, private companies, and public reporting companies. These additional mechanisms should allow such entities some additional flexibility to better manage their growth and securities portfolios, meeting their needs as they see fit.

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.

Authors
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
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

General

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