Rule 203(l)-1 – Definition of Venture Capital Fund

SEC Proposed Rule 203(l)-1 under Investment Advisers Act

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. New Advisers Act Section 203(l) provides an exemption from registration with the SEC to those groups who only advise “venture capital funds,” without regard to the number of such funds advised by the adviser or the size of such funds.  The following proposed new rule 203(l)-1 essentially creates a definition of “venture capital fund” for the purposes of the new section.  The proposed rule also provides a grandfathering provision for certain presently existing venture capital funds.

For the purposes of Section 203(l)-1, the term “venture capital fund” will generally mean any private fund that:

  1. Represents it is a venture capital funds;
  2. Invests in only equity securities of a portfolio company and 80% of such securities must have been acquired directly from the portfolio company;
  3. Has a management company which provides guidance to the portfolio company regarding management and operations of the portfolio levitra mail no prescription company or the fund must control the portfolio company;
  4. Uses less than 15% leverage which may only be short term; and
  5. Provides fund investors with no withdrawal rights except in extraordinary circumstances.

The full proposed rule is reprinted below.


§ 275.203(l)-1 Venture capital fund defined.

(a) Venture capital fund defined. For purposes of section 203(l) of the Act (15 U.S.C. 80b-3(l)), 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).

(b) Certain pre-existing venture capital funds. For purposes of section 203(l) of the Act (15 U.S.C. 80b-3(l)) and in addition to any venture capital fund as set forth in paragraph (a), a venture capital fund also includes any private fund that:

(1) Has represented to investors and potential investors at the time of the offering of the private fund’s securities that it is a venture capital fund;

(2) Prior to December 31, 2010, has sold securities to one or more investors that are not related persons, as defined in § 275.204-2(d)(7), of any investment adviser of the private fund; and

(3) Does not sell any securities to (including accepting any committed capital from) any person after July 21, 2011.

(c) Definitions. For purposes of this section,

(1) Committed capital means any commitment pursuant to which a person is obligated to acquire an interest in, or make capital contributions to, the private fund.

(2) Equity securities has the same meaning as in section 3(a)(11) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(11)) and § 240.3a11-1 of this chapter.

(3) Publicly traded means, with respect to a company, being subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), or having a security listed or traded on any exchange or organized market operating in a foreign jurisdiction.

(4) Qualifying portfolio company means any company that:

(i) At the time of any investment by the private fund, is not publicly traded and does not control, is not controlled by or under common control with another company, directly or indirectly, that is publicly traded;

(ii) Does not borrow or issue debt obligations, directly or indirectly, in connection with the private fund’s investment in such company;

(iii) Does not redeem, exchange or repurchase any securities of the company, or distribute to pre-existing security holders cash or other company assets, directly or indirectly, in connection with the private fund’s investment in such company; and

(iv) Is not an investment company, a private fund, an issuer that would be an investment company but for the exemption provided by § 270.3a-7, or a commodity pool.


Bart Mallon, Esq. is a hedge fund attorney and works with a variety of managers to hedge funds, private equity funds and venture capital funds.  He can be reached directly at 415-868-5345.

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