USA Law and Practice Contributed by: D. Scott Bennett, Nicholas A. Dorsey, Virginia M. Anderson and Ellen H. Park, Cravath, Swaine & Moore LLP
Under the private fund adviser exemption, an investment adviser that acts solely for one or more “qualifying private funds” and manages less than USD150 million of private fund assets is exempt from registration as an investment adviser. While exempt reporting advisers are not sub - ject to registration as an investment adviser under the Advisers Act, they are still required to make a basic filing on Form ADV with the SEC and are subject to some of the Advisers Act’s substantive requirements, including broad anti- fraud provisions, pay-to-play requirements, the requirement to maintain written policies and pro - cedures to prevent the misuse of material non- public information, and record-keeping obliga - tions, as well as individual state law regulation. Other Regulatory Regimes Venture capital funds must also offer their inter - ests in compliance with US securities laws, which generally results in their interests being offered to investors under Rule 506(b) of Regu - lation D (described in 7.1 Securities Offerings ) or – with increasing frequency – by means of general solicitation under Rule 506(c). Other regulatory schemes applicable to venture capital funds include those relating to the US Securities Exchange Act of 1934 (the “Exchange Act” ), the US Commodity Exchange Act, the US Employee Retirement Income Security Act of 1974, various AML and privacy laws, and the US Bank Holding Company Act of 1956. 2.4 Particularities Challenging Fundraising Environment The private funds industry as a whole was signif - icantly impacted by the unexpectedly persistent high interest rate environment and slowdown in M&A and IPO activity in the USA. This has led
to a particularly difficult fundraising environment for venture capital funds, with more established and successful managers receiving coveted allocations from increasingly selective inves - tors facing significant liquidity constraints and over-allocations to private funds. This is likely to persist for a period of time even after interest rates fall and M&A and IPO activity renews once market confidence returns to the USA. In addi - tion, extensive investor diligence and scrutiny over venture capital sponsors is likely to con - stitute the new normal, as LPs get used to the benefits of increased negotiating leverage in the down market. Increased Regulatory Scrutiny While venture capital fund managers have long enjoyed complete or substantial exemption from 1940 Act and Adviser Act regulation, the regula - tory landscape has shifted and regulatory scru - tiny over the private venture capital industry has been increasing. By way of example, the SEC has demonstrated a willingness in recent years to increase its examination and enforcement activity in respect of exempt reporting advis - ers. In addition, as venture capital fund spon - sors seek to diversify their investment strategies for greater flexibility and attract greater levels of reliable institutional capital, many sponsors have elected to register voluntarily as investment advisers and become subject to the full comple - ment of the Advisers Act regulation. Structuring Innovations Venture capital funds comprise a vast range of strategies, life cycles (eg, seed stage or growth stage), and industries. Sponsors take different approaches to investing, with some routinely leading funding rounds and others investing more passively. Some hands-on sponsors are helping to create companies by investing in and alongside accelerators, “labs” and incubators,
625 CHAMBERS.COM
Powered by FlippingBook