Venture capital firms confused about whether they need to register with the Securities and Exchange Commission (SEC) as an investment advisor have been given additional guidance.
The SEC drew up five different scenarios to better explain when a venture capital advisor falls under its supervision, which entails regular reporting and surprise visits from inspectors.
Under rules adopted in June 2011, a venture capital advisor can avoid SEC registration if it markets itself as a venture capitalist, doesn’t use significant debt and generally invests in equity securities directly acquired by the fund. Exempt funds may use 20 percent of their committed capital for non-qualifying investments.
Under one scenario, the SEC confirmed venture capital firms can still rely on a registration exemption even when they use sister funds to finance an acquisition made using only one holding company.
The guidance also confirmed exempt venture capital advisors can use investment vehicles taxed as corporations in order to accommodate US tax-exempt and non-US investors. These types of vehicles are one step removed from the advisor’s principal fund, which led to concerns they would be classified as non-qualifying investments.
Another area where the SEC provided clarity was on the transfer of securities. The SEC said venture capital advisors wanting to move quickly on a deal can purchase assets directly then later transfer their ownership to the fund without risk losing their exempt status.
To read the SEC’s guidance in full click HERE.