For ERA (and other) regulatory purposes, the SEC has defined a Venture Capital Fund as:
A private fund that meets the following qualifications:
- Pursues a venture capital strategy;
- Fund has no more than 20% of the fund’s total assets (including committed but not yet invested capital) in assets that are not “qualifying investments” or “short term holdings.”
- Qualifying investment is one of three things: (i) an equity security issued by a “qualifying portfolio company” that is acquired directly by the private fund from such qualifying portfolio company; (ii) any equity security that is issued by a qualifying portfolio company in exchange for an equity security in that qualifying portfolio company; (iii) any equity security issued by a parent of qualifying portfolio company in exchange for an equity security in that qualifying portfolio company.
- Qualifying portfolio company must meet three requirements: (i) at the time of the investment by the fund, the company must not be a reporting company under the SEC Act of 1943 nor be listed or traded on any foreign exchange and is not an affiliate of an Exchange Act reporting company or a publicly traded foreign company; (ii) the company not borrow or issue debt obligations in connection with the fund’s investment in the company and distribute to the fund the proceeds of of such borrowing or issuance in exchange for the private fund’s investment and; (iii) it cannot be a mutual fund, hedge fund, private equity fund, another venture capital fund, a commodity pool fund, or an issuer of asset backed securities.
- May not borrow, incur indebtedness, or guarantee debts of portfolio companies in a total amount in excess of 15% of the fund’s aggregate capital contributions and uncalled committed capital.
- Does not provide redemption rights except in extraordinary circumstances.
- Fund may not be registered under the Investment Company Act of 1940 and has not elected to be treated as a business development company.