Two bills are currently being advanced in the U.S. House of Representatives that, if enacted, will significantly impact two key exemptions that venture capital funds and their managers often rely on. The Developing and Empowering Our Aspiring Leaders Act of 2025 (DEAL Act) would expand the category of qualifying venture investments to include fund-of-funds and secondary investments. The Improving Capital Allocation for Newcomers Act of 2025 (ICAN Act) would increase the size and investor limits for "qualifying venture capital funds" relying on the Section 3(c)(1) exemption from registration under the Investment Company Act of 1940.
The DEAL Act
Currently, investment advisers that solely advise "venture capital funds" (as defined by SEC Rule 203(l)-1) are exempt from registration with the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. To rely on this exemption, a fund manager must ensure that each fund it manages invests no more than 20% of its aggregate capital contributions, and uncalled commitments may be invested in assets that are not "qualifying investments." Under the current rule, "qualifying investments" generally refers to equity securities (including securities convertible into or exchangeable for equity) acquired directly from qualifying portfolio companies.
The DEAL Act would direct the SEC to amend Rule 203(l)-1 to expand the definition of "qualifying investments" to include (i) portfolio company securities acquired in secondary transactions and (ii) investments in other venture capital funds. Under this legislation, at least 51% of a venture capital fund's aggregate capital commitments and uncalled committed capital (other than short term holdings) must be invested in equity securities acquired directly from a qualifying portfolio company, including immediately after the acquisition of any asset. Up to 49% of the venture capital fund's aggregate capital contributions and uncalled committed capital (other than short term holdings) can be invested in one or more venture capital funds, as well as securities acquired in a secondary acquisition. Non-qualifying investments will continue to be limited to the 20% allowance under the current rule.
If the DEAL Act is enacted, the SEC will have 180 days to implement the legislation.
The ICAN Act
The ICAN Act proposes targeted amendments to Section 3(c)(1) of the Investment Company Act of 1940 (the "1940 Act"), which exempts from registration under the 1940 Act any private funds that have no more than 100 beneficial owners and are not making any public offerings of their securities. In addition, "qualifying venture capital funds" may currently rely on Section 3(c)(1), so long as they have no more than 250 beneficial owners and the maximum fund size is capped at $12 million (increased from the former $10 million limit by means of an inflation adjustment implemented by the SEC in 2024).
The ICAN Act would raise the thresholds for qualifying venture capital funds relying on Section 3(c)(1) so that (i) the maximum number of permitted beneficial owners would be raised from 250 to 500 and (ii) the threshold for aggregate commitments would be raised from $12 million to $50 million.1 The ICAN Act would not remove or replace the 100-beneficial owner limit for private funds that are not "qualifying venture capital funds."
Key Takeaways
If enacted, the DEAL Act may benefit venture capital managers—and in particular emerging managers—by providing greater operational flexibility in building diversified venture capital investment portfolios while continuing to rely on the less burdensome regime of operating under the venture capital fund adviser exemption from registration. In addition, the inclusion of secondary investments would be expected to create additional paths to liquidity for existing investors in private companies by expanding the pool of potential buyers for private company securities.
If the ICAN Act is enacted, it could significantly open the fundraising pathways for venture fund managers and investment opportunities for accredited but non-institutional investors by allowing managers to pool a greater number of smaller investors and still establish a pooled vehicle with sufficient capital to build a well-diversified portfolio of venture assets.
Like most bills, the path between proposed legislation and adoption into law is typically long and uncertain. We will continue to monitor the progress of these bills given the clear benefits they would provide to the U.S. venture capital community.
Footnote
1 The original version of the bill would have raised (i) the maximum beneficial owners from 250 to up to 2,000, and (ii) the threshold for aggregate commitments from $12 million to up to $150 million, but recent amendments have revised these values as reflected above.
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