New Beneficial Owner Threshold Eases VC Fundraising

By Talia S. Primor, Rachel Gholston, Daniel I. DeWolf

Small venture capital funds and special purpose vehicles, which otherwise qualify as “venture capital funds,” can now raise money from up to 250 beneficial owners and remain within the 3(c)(1) exemption of the Investment Company Act of 1940 (the “Investment Company Act”).

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) was signed into law. Among the financial industry reforms included in the Act is a modification to Section 3(c)(1). Section 3(c)(1) is a common exemption used by funds and special purpose vehicles to avoid registering as an investment company with the Securities and Exchange Commission. While previously limited to 100 beneficial owners, “qualifying venture capital funds,” those venture capital funds that do not have more than $10 million in aggregate capital contributions and uncalled committed capital, can now take advantage of the Section 3(c)(1) exemption if they have no more than 250 beneficial owners. 

Prior to the passage of the Act, the 100-owner limit presented fundraising challenges for smaller venture capital funds and special purpose vehicles, which tend to attract investors that invest relatively smaller amounts of capital. We believe the increase of the beneficial-owner threshold will allow asset managers, angel groups, and online platforms greater flexibility to access capital for their qualifying venture capital funds and special purpose vehicles by allowing them to raise capital from a larger number of investors. This additional flexibility is one more step forward in facilitating the raising of capital for emerging companies. 

If you have any questions about this change to the Investment Company Act and how it could affect you and your business, contact one of the authors of this article and we will be happy to discuss it with you.

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  • Venture Capital & Emerging Companies

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  • Talia S. Primor
  • Rachel Gholston
  • Daniel I. DeWolf

    • Related Practices

  • Venture Capital & Emerging Companies
  • Investment Funds

    • Related Industries

  • Technology

    • Authors

    Talia S. Primor

    Talia S. Primor

    Member

    Talia S. Primor focuses on the organization and operation of private investment funds, including private equity, venture capital, hedge funds, and other special-purpose investment vehicles. She represents a broad range of private investment fund sponsors, from emerging and middle-market firms to large institutional managers, across investment strategies and industries.
    Rachel Gholston

    Rachel Gholston

    Member

    Rachel Gholston is a Mintz attorney who represents early-stage companies, investment funds, and public companies in governance, securities offerings, acquisitions, and compliance matters. For early-stage companies, Rachel represents companies and investors in venture capital financing transactions.
    Daniel I. DeWolf

    Daniel I. DeWolf

    Member / Chair, Technology Practice; Co-chair, Venture Capital & Emerging Companies Practice

    Daniel I. DeWolf is a leading authority on growth companies and venture capital law — and has worked on pioneering online capital-raising methods. He is immersed in the national and international ecosystem of emerging companies and investors focused on start-ups. He has also been a member of NYU Law School’s faculty since 2003, where he teaches venture capital law.