A venture capital fund is a type of private fund managed by a venture capital firm, which may need to register with the SEC as an investment adviser. Venture capital (VC) funds typically invest in businesses in exchange for equity, and many VC firms specialize in certain industries or in companies at specific stages — such as early-stage startups, mature businesses, or late-stage companies preparing for exit.
Under Rule 203(l)-1 of the Investment Advisers Act, a venture capital fund must meet specific criteria to qualify as such. A VC fund:
1️⃣ Represents to investors that it pursues a venture capital strategy.
2️⃣ Generally limits redemption rights (meaning investors can’t easily withdraw their money).
3️⃣ Holds no more than 20% of its total capital in non-qualifying investments (commonly called the 20% non-qualifying basket).
4️⃣ Limits the use of leverage (borrowed money).
Venture capital investments are long-term by nature — investors typically remain committed until a liquidity event, such as an acquisition or an initial public offering (IPO), when they hope to earn returns on their investment. VC funds are often structured to last at least 10 years (and sometimes longer), giving managers time to grow and exit their portfolio companies.
If you’re researching what is a venture capital fund, how VC funds work, or venture capital investment strategies, these funds are a key driver of innovation and startup growth in many industries.
Building Blocks: Private Funds, Building Blocks: Starting a Private Fund, Building Blocks: Types of Investors, Federal Securities Laws, Rules Implementing Dodd-Frank Act Amendments to the Investment Advisers Act: A Small Entity Compliance Guide, Press Release and Fact Sheet: Dodd-Frank Act Amendments to Investment Advisers Act
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