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The below flowchart may be helpful to you in answering
the question whether you qualify for the exemption for "venture capital funds"
under Section 203(l) of the Investment Adviser's Act of 1940 ( the "Advisers
Act"), pursuant to the final rules promulgated by the SEC.1 In
all cases you should consult with an attorney. For more detailed
information regarding the federal exemption, check
here. Note that the Washington State Department of Financial
Institutions (DFI) has proposed rules that are going to require many fund
managers to register with the State as investment advisors. We plan to
prepare a separate flowchart to help you understand those rules once they are
1 Here is the full text of Section
203(l): "EXEMPTION OF VENTURE CAPITAL FUND ADVISERS.-No investment adviser that
acts as an investment adviser solely to 1 or more venture capital funds shall
be subject to the registration requirements of this title with respect to the
provision of investment advice relating to a venture capital fund. Not later
than 1 year after the date of enactment of this subsection, the Commission
shall issue final rules to define the term ''venture capital fund'' for
purposes of this subsection. The Commission shall require such advisers to
maintain such records and provide to the Commission such annual or other
reports as the Commission determines necessary or appropriate in the public
interest or for the protection of investors."
2 "Investment adviser" means,
generally, any person who, for compensation, engages in the business of
advising others, either directly or through publications or writings, as to the
value of securities or as to the advisability of investing in, purchasing, or
3 "Qualifying investments"
means (i) an "equity security" issued by a "qualifying portfolio company" that
has been acquired directly by the private fund from the "qualifying portfolio
company;" (ii) any equity security issued by the qualifying portfolio company in
exchange for an equity security issued by the qualifying portfolio company
described in section (i) above; or (iii) any equity security issued by a
company of which a qualifying portfolio company is a majority-owned subsidiary,
as defined in section 2(a)(24) of the Investment Company Act of 1940 (15 U.S.C.
80a-2(a)(24)), or a predecessor, and is acquired by the private fund in
exchange for an equity security described in sections (i) or (ii) above.
4 "Qualifying portfolio
company" means any company that: (i) at the time of any investment by the
private fund, is not reporting or foreign traded and does not control, is not
controlled by or under common control with another company, directly or
indirectly, that is reporting or foreign traded; (ii) does not borrow or issue
debt obligations in connection with the private fund's investment in such
company and distribute to the private fund the proceeds of such borrowing or
issuance in exchange for the private fund's investment; and (iii) is not an
investment company, a private fund, an issuer that would be an investment
company but for the exemption provided by Section 270.3a-7, or a commodity
5 "Equity security" means any
stock or similar security; or any security future on any such security; or any
security convertible, with or without consideration, into such a security, or
carrying any warrant or right to subscribe to or purchase such a security; or
any such warrant or right; or any other security which the Commission shall
deem to be of similar nature and consider necessary or appropriate, by such
rules and regulations as it may prescribe in the public interest or for the
protection of investors, to treat as an equity security.
6 An exempt reporting adviser
is an adviser that has to make public filing of certain information, despite
being exempt from registration. For example, here is the exempt
reporting adviser Form ADV for Union Square Ventures.
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