Qualifying venture capital fund

Author:

The Carta Policy Team

|

Read time:

2 minutes

Published date:

April 11, 2023

A qualifying venture capital fund is private fund with no more than 250 beneficial owners and $12 million in assets. It also must meet the statutory definition of a venture capital fund.

What is a qualifying venture capital fund?

Qualifying venture capital funds are a subset of all venture capital funds. Generally, venture capital funds are limited to 100 beneficial owners. Qualifying venture capital funds, however, have the opportunity to raise money from more investors (up to 250 beneficial owners) if they manage less than $12 million.

Qualifying venture capital fund requirements

Under Section 3(c)(1) of the Investment Company Act of 1940, a “qualifying venture capital fund” is a private fund that remains exempt from registering with the SEC as an investment company by meeting three criteria:

• It has no more than 250 beneficial owners
• It manages no more than $12 million in assets
• It meets the definition of a “venture capital fund” stipulated by the Investment Advisers Act of 1940 (Advisers Act).

Definition of a venture capital fund

A fund meets the definition of a venture capital fund under the Advisers Act if it:

• Does not invest more than 20% of the fund’s committed capital in non-qualifying investments, such as debt, secondaries, public issuances, fund-of-fund investments, or digital assets
• Restricts borrowing and all other leverage to 15% of the fund size, and repays any related debts within 120 days
• Limits limited partner (LP) redemption rights (their ability to cash out of the fund) to “extraordinary circumstances”
• Represents to investors and potential investors that it pursues a venture capital strategy

Venture fund strategy

Venture fund strategies can include characteristics such as industry and stage of investment. While there are exceptions, the typical lifecycle of a venture fund (the total period the fund will hold investment assets) is 10 years.

Other fund exemptions

Other venture capital funds may use the Section 3(c)(7) exemption of the Investment Company Act, which allows a fund to have up to 1,999 investors as long as they’re all qualified purchasers—a higher bar than accredited investors.