Section 407 of the Dodd-Frank Wall Street Reform and Consumer Protection Act creates a new exemption from federal registration for investment advisers if all their investment advice is limited to one or more “venture capital funds”. Congress, however, did not say what a “venture capital fund” was. Rather, Congress told the Securities and Exchange Commission to define the term and gave the Commission one year to get the job done.
The California Commissioner of Corporations has already come up with a definition of “venture capital company” when it adopted Rule 260.204.9. That rule was adopted after the Commissioner abruptly changed the Department’s long-standing position that a general partner to a limited partnership was not giving advice to others. This position had been in effect for more than a quarter century. At the time, I criticized Release 110-C as having been issued “without judicial precedent, legislative direction or the opportunity for public comment”.
Accordingly, I urged the Department to adopt a rule to address the unique position of managers of venture capital companies with $25 million or more in assets. These managers were not registering with the SEC as advisers by virtue of the “private adviser” exemption in Section 203(b)(3) of the Investment Advisers Act (which the Dodd-Frank Act has deleted). Thus, they would find themselves in the odd position of having a federal exemption but no state exemption. Rule 260.204.9 was adopted to address this problem. In the course of adopting the rule, the venture capital community weighed in and the rule also exempts advisers who, among other things, provide investment advice only to “venture capital companies”. Thus, the Commissioner was required to define the term “venture capital company”.
Congress apparently found itself in very much the same position when it eliminated the “private adviser” exemption in Section 203(b)(3) and replaced it with several targeted exemptions, including the exemption with respect to advisers to a “venture capital funds”. It will be interesting to see whether the Commission looks to California’s definition.
Note that Rule 260.204.9 exempts an adviser to a venture capital from the registration requirements of Corp. Code Section 25230. However, the rule does not exclude venture capital company managers from the definition of “investment adviser” in Corp. Code Section 25009. In fact, the National Venture Capital Association had argued unsuccessfully for such an exclusion. As a result, the provisions of the Corporate Securities Law of 1968 that are applicable to “any investment adviser” (e.g., Corp. Code Section 25235) apply to managers of venture capital companies.