Dodd-Frank update - SEC rules finalised

1 July 2011

The US Securities and Exchange Commission (SEC) has approved the final rules determining a venture capital exemption from registration under the Investment Advisers Act, as set out by the Dodd-Frank financial reform legislation.

SEC has defined what qualifies as venture capital investing, while at the same time allowing venture funds a "basket" of 20 per cent of committed capital to invest however they please.

A venture capital fund, the SEC ruled, must invest 80 per cent of its committed capital in qualifying investments, which are defined as equity securities; cannot borrow or provide leverage of more than 15 per cent of its fund size and for not more than 120 days; cannot offer redemption or liquidity rights to investors; must present itself in marketing as a venture capital fund; and cannot be registered under the Investment Company Act of 1940 or be registered as a business development company.

The US National Venture Capital Association (NVCA) said of the new regime: "We are pleased to see that the SEC recognized the need for flexibility in defining venture capital by creating a 20 per cent basket for fund activity which falls outside the rule."

The NVCA has published an analysis of the SEC ruling.

The deadline for private fund advisers to register with the SEC has been extended to 30 March 2012.