15 February 2024

SEC Proposes lifting VC fund threshold

The SEC published a proposed rule that would increase the dollar threshold used to define a “qualifying venture capital fund” under the Investment Company Act.

The change aims to account for inflation since the definition was first introduced in 2018.

If adopted, more venture capital funds would qualify for reduced regulatory burdens going forward.

Here are 3 things you need to know.

1) New $12 Million Threshold

The proposed rule would immediately boost the capital limit for qualifying venture funds from US $10 million to $12 million. This adjustment reflects inflation since 2018 based on the Personal Consumption Expenditures price index.

In addition, the SEC would issue an order every five years to update the threshold for inflation. This aims to maintain the original scope of venture funds intended to qualify under the definition over time.

2) More Funds Potentially Excluded from 1940 Act

By raising the dollar limit, the proposed rule would enable more venture capital funds to qualify for an exclusion under the Investment Company Act of 1940. Currently, three funds that currently fall between the old and new thresholds could newly qualify based on SEC analysis.

Funds that meet the definition of a qualifying venture capital fund do not have to register with the SEC as investment companies. This reduces regulatory burdens in areas like disclosure, governance, and compliance.

3) Maintaining Intent of Earlier Reforms

The proposed inflation adjustment seeks to uphold the aim of 2018 reforms that first defined qualifying venture funds. Those changes sought to strike the right balance in regulating an innovative sector of the economy. Keeping the thresholds current for inflation maintains the calibration of those earlier reforms.

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