The 2011 rule that decides who counts as a venture fund

The record

On 22 June 2011 the SEC adopted rules implementing the venture capital fund adviser exemption that Title IV of the Dodd-Frank Act added to the Investment Advisers Act. The adopting release, Release No. IA-3222, describes new rule 203(l)-1 as defining 'venture capital fund' for the exemption from SEC registration in section 203(l), alongside a separate exemption for smaller private fund advisers in the same release. The rules took effect 21 July 2011. The current codified text is at 17 CFR 275.203(l)-1 on eCFR.

What the sources establish

Both documents set out cumulative conditions a fund must meet. It must represent to investors that it pursues a venture capital strategy. Immediately after acquiring any asset other than a qualifying investment or a short-term holding, it must hold no more than 20 percent of its aggregate capital contributions and uncalled committed capital in non-qualifying assets, valued at cost or fair value. It may not incur leverage beyond 15 percent of that same base, and any such borrowing must be non-renewable and no longer than 120 days, except for a guarantee of a portfolio company's own obligations up to the value of the fund's investment in it. It may issue only securities without redemption rights beyond pro rata distributions, and it must not be registered, or have elected to be treated, as a business development company. A separate provision grandfathers certain funds formed before 31 December 2010 that stopped accepting new capital after 21 July 2011.

Scope and revision

These are conjunctive tests: a fund failing any one is not a venture capital fund under this rule regardless of how it markets itself. The rule's definitions of 'qualifying investment,' 'qualifying portfolio company' and 'short-term holdings' narrow what counts toward the 20 percent basket, so a fund holding public securities or debt-financed portfolio positions can breach that test without appearing obviously non-venture. The eCFR text also carries citations to amendments in 2018 and 2020, so the rule in force today is not word for word the 2011 text; a reader relying on this exemption should confirm the current codification rather than the original release alone.

The decision in front of you

An emerging manager, or an LP evaluating one, can check a fund's structure against these conditions as a factual matter, distinct from whether the manager calls itself a venture fund in marketing materials. This describes what the rule's own text requires, not a specific fund's status, which depends on facts the rule does not disclose publicly.

• Does the fund's non-qualifying-asset basket, valued as the rule specifies, stay at or under 20 percent of aggregate commitments?
• Is any fund-level borrowing capped at 15 percent of commitments and structured as non-renewable debt of 120 days or less?
• Do the governing documents withhold redemption rights beyond pro rata distributions, consistent with the rule's fourth condition?

Being called a venture fund and qualifying as one under rule 203(l)-1 are not the same claim, and only the second carries a registration exemption.