SEC Updates Dollar Threshold for 3(c)(7) Funds: What Venture Capital Firms Need to Know
The Securities and Exchange Commission (“SEC”) has adopted a new rule, increasing the dollar threshold for a fund to qualify as a 'qualifying venture capital fund' under the Investment Company Act of 1940 (the “1940 Act”). Effective 30 days after publication in the Federal Register, Rule 3c-7 raises the threshold from $10 million to $12 million in aggregate capital contributions and uncalled committed capital.
The SEC's update is a timely response to economic inflation, providing much-needed clarity and flexibility for venture capital funds. The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 requires the SEC to adjust this threshold every five years to account for inflation. Rule 3c-7 also introduces an automatic inflation adjustment mechanism, ensuring the threshold remains up-to-date and providing long-term clarity for fund managers and investors.
Implications for Venture Capital Funds
- Existing Funds : Funds that previously qualified under the $10 million threshold will continue to meet the criteria if they remain below the new $12 million limit. If your fund is approaching the new limit, consider the implications of exceeding it, including potential registration requirements and compliance costs.
- New Entrants : Emerging venture capital funds can now raise up to $12 million while still benefiting from the exclusion under the 1940 Act. This may encourage the formation of new funds by reducing regulatory hurdles.
· Compliance Considerations : Funds should review their capital structures to ensure compliance with the updated threshold. Consulting with legal professionals can help in understanding the impact on registration requirements and compliance obligations.
We understand that navigating new rules and regulations can be challenging and we encourage you to reach out to the FinTech Law team or any questions or assistance.