The SEC Division of Investment Management has provided guidance regarding the application of the exemption from investment adviser registration available to an investment adviser that advises solely one or more “venture capital funds” as defined in Rule 203(l)-1 of the Advisers Act (the “VC Exemption”).
The guidance clarifies, among other things:
Venture capital advisers may have multiple private funds participating in any given portfolio company investment. For example, two venture capital funds with the same adviser (or advisers that are “related persons”) may each invest in the same portfolio company. They may do so through a single intermediate holding company that is not wholly owned by either of the funds, but rather is wholly owned by the two funds collectively. The Division will not object if an intermediate holding company is wholly owned collectively by more than one venture capital fund advised by the same investment adviser (or its related persons).
Venture capital advisers will often accommodate U.S. tax-exempt and non-U.S. investors by forming an alternative investment vehicle (“AIV”) that is separate from the venture capital fund and that will elect to be taxed as a corporation. The Division will not object if an adviser relying on the VC Exemption disregards alternative investment vehicles when determining whether it can meet the requirements of the VC Exemption provided that the AIV is formed solely to address investors’ tax, legal or regulatory concerns and such AIV is not intended to circumvent the VC Exemption’s general limitation on investing in other investment vehicles.
The guidance discusses investments acquired by the adviser during fund raising and later transferred to a venture capital fund, referred to as “Warehoused Investments.” The Division will not object to an adviser treating a Warehoused Investment as if it were acquired directly from the qualifying portfolio company for purposes of the definition of “venture capital fund” under Rule 203(l)-1 of the Advisers Act provided that: (i) the Warehoused Investment is initially acquired by the adviser (or a person wholly owned and controlled by the adviser) directly from a qualifying portfolio company solely for the purpose of acquiring the investment for a prospective venture capital fund that is actively fundraising; and (ii) the terms of the Warehoused Investment are fully disclosed to each investor in the venture capital fund prior to each investor committing to invest in the fund.
The Division also gives guidance on the use of “side funds” and, at the end of a fund’s life, liquidating trusts.