SEC Rule Change Impacts Compliance for Venture Capital Funds

The Securities and Exchange Commission (SEC) has adopted a new rule that will require venture capital funds to reassess their compliance status under the Investment Company Act of 1940. The rule, announced today, updates the definition of "qualifying venture capital funds" by raising the capital threshold from $10 million to $12 million.

Rule 3c-7, as it's officially known, modifies the criteria for funds seeking exemption from the Act's definition of an "investment company." Compliance officers and fund managers must now ensure their funds meet the new $12 million threshold in aggregate capital contributions and uncalled committed capital to maintain their exempt status.

This adjustment, mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, is the SEC's response to inflationary pressures over the past five years. The Commission used the Personal Consumption Expenditures Chain-Type Price Index to calculate the new threshold.

Importantly for long-term compliance planning, the rule establishes a mechanism for automatic adjustments every five years. This means compliance teams will need to stay vigilant and prepare for potential threshold changes in 2029 and beyond.

The rule change becomes effective 30 days after Federal Register publication, giving affected funds a brief window to ensure compliance. Funds that no longer qualify for the exemption may need to quickly adapt to the full regulatory requirements of the Investment Company Act.

This update underscores the importance of staying abreast of regulatory changes in the venture capital space. Compliance officers are advised to closely monitor SEC announcements and prepare for potential impacts on their fund's regulatory status and compliance obligations.

As the venture capital industry adapts to this change, it's expected that compliance departments will play a crucial role in navigating the updated regulatory landscape and ensuring their funds remain in good standing with the SEC.

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