Signed into law last month, the Economic Growth, Regulatory Relief and Consumer Protection Act increased the number of beneficial owners in a “3(c)(1) fund” from 100 to 250, if the fund has less than $10M in capital. Please see my post on the Act’s changes to Regulation A+ here.
The Investment Company Act and Section 504
The Investment Company Act of 1940 spells out the regulations that investment companies must follow and provides standards for the industry. It provides various exclusions for what is an investment company, including Section 3(c)(1).
Section 504 of the Growth Act broadens the exemption of Section 3(c)(1) to include “qualifying venture capital funds.” This is defined as a venture capital fund with no more than $10 million in aggregate capital contributions and uncalled committed capital, with no more than 250 beneficial owners. Funds that rely solely on this amended exemption, however, would still be considered “covered funds” for purposes of the Volcker Rule, restricting “banking entities” from investing in such funds.
Previously, a venture capital fund was considered an investment company if it had more than 100 investors (unless another exemption applies). The idea to expand the Section 3(c)(1) exemption is not entirely new (the same change was proposed in the Supporting America’s Innovators Act of 2017). Proponents of the revision have promoted it as a way to help small businesses and startups by increasing access to capital. The expansion will also be of benefit to smaller venture capital funds.