Proposed Exemption From Dodd-Frank for Venture Capital Funds and
Funds Under $150 Million

A proposed rule has been introduced by the U.S. Securities and Exchange Commission (SEC) to exempt advisers of venture capital funds and other funds with less than $150 million in private fund assets under management from the registration requirements of the Investment Advisers Act of 1940 that were enacted in connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Without this exemption in place, as of July 21, 2011, all advisers of private fund assets regardless of size would be required to be registered under and comply with the Investor Advisers Act of 1940.

The proposed rule provides the following criteria to qualify as a "venture capital fund:"

"A private fund that: (i) invests in equity securities of private companies in order to provide operating and business expansion capital (i.e., 'qualifying portfolio companies') and at least 80 percent of each company’s equity securities owned by the fund were acquired directly from the qualifying portfolio company; (ii) directly, or through its investment advisers, offers or provides significant managerial assistance to, or controls, the qualifying portfolio company; (iii) does not borrow or otherwise incur leverage (other than limited short-term borrowing); (iv) does not offer its investors redemption or other similar liquidity rights except in extraordinary circumstances; (v) represents itself as a venture capital fund to investors; and (vi) is not registered under the Investment Company Act and has not elected to be treated as a BDC [business development company]."

The proposed rule does include a grandfathering provision which is applicable to advisers of venture capital funds that:

1. represented to investors that the fund was a venture capital fund;

2. has sold interests prior to Dec. 31, 2010; and

3. will not sell or accept any additional capital commitments after July 21, 2011 (accepted capital commitments that have not been called by this date will not be impacted).

The proposed rule also creates a "private fund adviser exemption" for advisers with less than $150 million in assets under management. This $150 million threshold is an aggregate threshold (i.e. two $80 million funds would not qualify) and uncalled capital commitments would count toward this total. The fair value of the assets under management would be made on a quarterly basis. If the fair value of the assets under management exceeds the $150 million threshold through additional outside investment or organic growth of the existing portfolio, the adviser would then have three months to register with the SEC.

The proposed rule also provides guidance for foreign private advisers and their ability to qualify for the exemptions.

With the publishing of this proposed rule, the SEC has opened a 45-day window for public comment and we will advise of any additional changes that are made after public comments are received.

If you are interested in learning more about these exemptions or whether your fund would qualify for this exemption, please contact Michael Millikan or any of the other attorneys in Ice Miller's Business Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

Nov. 23, 2010