In August 2024, the U.S. Securities and Exchange Commission (SEC) finalized a rule that adjusts the dollar threshold for defining “qualifying venture capital funds” under the Investment Company Act of 1940 to account for inflation. This adjustment, required under the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA), ensures that the threshold remains relevant over time. The SEC’s rule raises the threshold from $10 million to $12 million and outlines a mechanism for future inflation adjustments every five years.
Key Provisions of the Rule:
- Initial Adjustment to $12 Million:
- The dollar threshold for qualifying venture capital funds has been increased to $12 million, up from the previous $10 million, to account for inflation measured from 2018 to 2023 using the Personal Consumption Expenditures (PCE) Index. This adjustment ensures that more venture capital funds can take advantage of regulatory exclusions, helping smaller funds avoid registration under the Investment Company Act.
- Future Inflation Adjustments:
- Starting in November 2029, and every five years thereafter, the SEC will issue inflation adjustments to this threshold using the PCE Index. This mechanism allows for consistent updates without the need for new rulemaking, providing long-term flexibility as inflation impacts the venture capital market.
- Methodology:
- The rule specifies that future adjustments will be calculated by comparing the PCE Index at the end of the previous calendar year with the PCE value from 2018. This methodology was chosen over other inflation measures (like the Consumer Price Index) due to its broader scope, which includes expenditures from both urban and rural households.
- Impact on Venture Capital Funds:
- The adjustment expands the pool of venture capital funds eligible for regulatory relief, specifically those with aggregate capital contributions and uncalled committed capital between $10 million and $12 million. The rule will likely reduce compliance costs for funds that fall within this updated threshold by exempting them from certain investment company registration requirements.
Conclusion:
The SEC’s adjustment of the qualifying venture capital fund threshold to $12 million reflects the evolving economic landscape and the impact of inflation. By implementing a clear and consistent process for future adjustments, the SEC aims to preserve the regulatory framework that supports venture capital growth while ensuring these funds remain competitive and compliant. The rule is set to take effect on September 30, 2024, with future adjustments planned for November 2029 and every five years thereafter.
About Michael Rasmussen
Michael Rasmussen is the founder of United Atlantic Legal Services. He is a licensed attorney in Florida and registered solicitor in the United Kingdom. Michael has acted as General Counsel and Chief Compliance Officer to several investment advisers, including private fund managers, responsible for the management of billions of dollars in client assets.
Michael is also the founder of FinProLaw, an online learning platform where Michael has created courses designed for investment adviser compliance professionals. These courses include:
- Investment Adviser Compliance Essential for Chief Compliance Officers
- Foundations of Investment Adviser Compliance
- What is a “Security”?
- Investment Adviser Marketing Rule
- Regulation A – Exemption from Registration
- Regulation Crowdfunding – Exemption from Registration
- Regulation D – Exemption from Registration
Michael can also be found on LinkedIn.
Investment adviser firms who are also clients of United Atlantic Legal Services can receive many of these courses at a significantly reduced fee or, in some cases, at no expense. Contact us today or visit the FinProLaw to learn more.