This article is appearing simultaneously on The Venture Alley and on Startup Law Blog

The below flowchart may be helpful to you in answering the question whether you qualify for the exemption for “venture capital funds” under Section 203(l) of the Investment Adviser’s Act of 1940 ( the “Advisers Act”), pursuant to the final rules promulgated by the SEC.1  In all cases you should consult with an attorney.  For more detailed information regarding the federal exemption, check here.  Note that the Washington State Department of Financial Institutions (DFI) has proposed rules that are going to require many fund managers to register with the State as investment advisors.  We plan to prepare a separate flowchart to help you understand those rules once they are finalized.





1 Here is the full text of Section 203(l): “EXEMPTION OF VENTURE CAPITAL FUND ADVISERS.—No investment adviser that acts as an investment adviser solely to 1 or more venture capital funds shall be subject to the registration requirements of this title with respect to the provision of investment advice relating to a venture capital fund. Not later than 1 year after the date of enactment of this subsection, the Commission shall issue final rules to define the term ‘‘venture capital fund’’ for purposes of this subsection. The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.”

2 “Investment adviser” means, generally, any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.

3 “Qualifying investments” means (i) an “equity security” issued by a “qualifying portfolio company” that has been acquired directly by the private fund from the “qualifying portfolio company;” (ii) any equity security issued by the qualifying portfolio company in exchange for an equity security issued by the qualifying portfolio company described in section (i) above; or (iii) any equity security issued by a company of which a qualifying portfolio company is a majority-owned subsidiary, as defined in section 2(a)(24) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(24)), or a predecessor, and is acquired by the private fund in exchange for an equity security described in sections (i) or (ii) above.

4 “Qualifying portfolio company” means any company that: (i) at the time of any investment by the private fund, is not reporting or foreign traded and does not control, is not controlled by or under common control with another company, directly or indirectly, that is reporting or foreign traded; (ii) does not borrow or issue debt obligations in connection with the private fund’s investment in such company and distribute to the private fund the proceeds of such borrowing or issuance in exchange for the private fund’s investment; and (iii) is not an investment company, a private fund, an issuer that would be an investment company but for the exemption provided by Section 270.3a-7, or a commodity pool.

5 “Equity security” means any stock or similar security; or any security future on any such security; or any security convertible, with or without consideration, into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any other security which the Commission shall deem to be of similar nature and consider necessary or appropriate, by such rules and regulations as it may prescribe in the public interest or for the protection of investors, to treat as an equity security.

6 An exempt reporting adviser is an adviser that has to make public filing of certain information, despite being exempt from registration. For example, here is the exempt reporting adviser Form ADV for Union Square Ventures.