VC Adviser Exemption vs Private Fund Adviser Exemption

Rule 203(l)-1 is the venture capital adviser exemption: you advise solely one or more venture capital funds, with no SEC AUM cap. Rule 203(m)-1 is the private fund adviser exemption: you advise solely qualifying private funds and manage private fund assets of less than $150 million. Both make you an exempt reporting adviser if you rely on them at the SEC. The ERA filing question is whether to report. This page is the 203(l) versus 203(m) fork, including when a secondary SPV can knock you out of 203(l).

This is general information, not legal advice. Eligibility is fact-specific. Confirm status with counsel before you accept a client, close a secondary, or cross $150 million.

VC adviser exemption vs private fund adviser exemption

Dodd-Frank replaced the old "fewer than 15 clients" private-adviser exemption with narrower paths. Section 203(l) of the Advisers Act exempts an adviser that solely advises venture capital funds, and directs the SEC to define "venture capital fund." Section 203(m) directs the SEC to exempt an adviser that solely advises private funds if the adviser has assets under management in the United States of less than $150 million. The Commission implemented those sections as 17 CFR 275.203(l)-1 and 275.203(m)-1, effective July 21, 2011. (SEC Release IA-3222; 17 CFR § 275.203(l)-1-1); 17 CFR § 275.203(m)-1-1))

You may check both boxes on Form ADV Item 2.B if you qualify for both. You may also register as an RIA if you are otherwise eligible. The exemptions are not mandatory. (IA-3222)

A "private fund" for this purpose is an issuer that would be an investment company under the Investment Company Act but for section 3(c)(1) or 3(c)(7). That is the Advisers Act definition the SEC used in IA-3222. Whether your vehicle is a 3(c)(1) or 3(c)(7) fund is a separate investor-count question; see 3(c)(1) vs 3(c)(7).

Rule 203(l): the VC adviser exemption

To rely on 203(l), every fund you advise must be a "venture capital fund" as defined in rule 203(l)-1 (or a grandfathered pre-2011 fund that meets paragraph (b)). There is no $150 million cap. A bona fide VC fund adviser can remain an ERA under 203(l) regardless of AUM if every client is a VC fund under the rule.

Rule 203(l)-1(a) defines a venture capital fund, in substance, as a private fund that:

1. Represents to investors and potential investors that it pursues a venture capital strategy.

2. 20% non-qualifying basket. Immediately after acquiring any asset other than qualifying investments or short-term holdings, holds no more than 20 percent of aggregate capital contributions and uncalled committed capital in assets (other than short-term holdings) that are not qualifying investments, valued at cost or fair value, consistently applied.

3. Borrowing limit. Does not borrow, issue debt, provide guarantees, or otherwise take on fund-level debt in excess of 15 percent of aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, or guarantee is for a non-renewable term of no longer than 120 calendar days — except that a guarantee of a qualifying portfolio company's obligations up to the value of the fund's investment is not subject to the 120-day limit.

4. No ordinary redemptions. Issues securities that do not give a holder a right, except in extraordinary circumstances, to withdraw, redeem, or require repurchase (pro rata distributions are allowed).

5. Not a registered investment company or BDC.

(17 CFR § 275.203(l)-1(a))

Qualifying investment is narrow. It means (i) an equity security issued by a qualifying portfolio company and acquired directly from that company, (ii) equity issued by the same company in exchange for that directly acquired equity, or (iii) equity issued by a company of which the qualifying portfolio company is a majority-owned subsidiary or predecessor, acquired in exchange for that directly acquired equity. (17 CFR § 275.203(l)-1(c)(3))

Qualifying portfolio company is, at the time of the fund's investment, not a reporting or foreign-traded company and not in a control relationship with one; does not borrow in connection with the fund's investment and distribute those proceeds to the fund; and is not itself an investment company, private fund, or commodity pool. (17 CFR § 275.203(l)-1(c)(4))

Short-term holdings (cash and cash equivalents, Treasuries with 60 days or less remaining maturity, and registered money-market funds) sit outside the 20% test. (17 CFR § 275.203(l)-1(c)(6))

SBICs and certain rural business investment companies are treated as venture capital funds for 203(l) under the opening clause of rule 203(l)-1(a), as amended after the FAST Act. (17 CFR § 275.203(l)-1(a))

When a secondary SPV breaks 203(l)

A secondary purchase — buying stock from an existing holder rather than from the company — is not a qualifying investment under (c)(3)(i). It consumes the 20% non-qualifying basket (unless it fits an exchange described in (c)(3)(ii) or (iii), which ordinary secondaries do not).

That is the operational trap for VC ERAs:

• A committed VC fund that allocates a slice of the 20% basket to employee or founder secondaries can stay inside 203(l), if the rest of the rule is met.

• A dedicated secondary SPV whose purpose is to buy existing shares will, immediately after that purchase, hold more than 20% of its capital in non-qualifying investments — usually 100%. That vehicle is not a venture capital fund under 203(l)-1.

• If that SPV is your client, you no longer "solely" advise venture capital funds. Section 203(l) drops unless another exemption applies.

Rule 203(m)-1 can pick up a secondary SPV because it does not care whether the fund is "venture capital." It cares that the client is a qualifying private fund and that private-fund assets stay under $150 million (for a U.S. adviser). Many emerging managers who start on 203(l) move a secondary vehicle onto 203(m), or register, rather than pretend the SPV is a VC fund.

Buying a fund interest on the secondary market (an LP transfer) is a different fact pattern from buying portfolio-company stock. Do not assume either is a qualifying investment. Walk both through (c)(3) with counsel.

PIPE-style purchases of already-public equity, fund-of-funds interests, and non-convertible portfolio-company debt also sit in the non-qualifying basket unless they otherwise meet the definition. The 20% test is measured immediately after each non-qualifying acquisition, against capital contributions plus uncalled commitments, using a consistent cost or fair-value method. (17 CFR § 275.203(l)-1(a)(2))

Rule 203(m): the private fund adviser exemption

For an adviser with its principal office and place of business in the United States, rule 203(m)-1 requires that the adviser:

1. Act solely as an investment adviser to one or more qualifying private funds; and

2. Manage private fund assets of less than $150 million.

(17 CFR § 275.203(m)-1(a))

A non-U.S. adviser uses a different test: no client that is a United States person except qualifying private funds, and all assets managed at a U.S. place of business solely attributable to private fund assets totaling less than $150 million. (17 CFR § 275.203(m)-1(b))

Private fund assets means RAUM attributable to a qualifying private fund, using Item 5.F of Form ADV (with specified SBIC-related exclusions). Calculate annually, in accordance with General Instruction 15 to Form ADV. (17 CFR § 275.203(m)-1(c), (d))

Qualifying private fund means a private fund that is not registered under Investment Company Act section 8 and has not elected BDC status. The adviser may treat as a private fund certain issuers that rely on Investment Company Act exclusions other than 3(c)(1) or 3(c)(7), if it treats that issuer as a private fund for all Advisers Act purposes. (17 CFR § 275.203(m)-1(d)(5))

Accept a separately managed account, a registered fund, or any client that is not a qualifying private fund, and 203(m) ends immediately. There is no 20% basket for "a little SMA activity."

Because RAUM for private funds includes uncalled commitments, dry powder counts toward the $150 million. Crossing the cap is often a first-close math problem, not a mark-to-market surprise.

Losing the exemption and the 90-day 203(m) transition

203(l). If you accept a client that is not a VC fund under the rule — including a secondary SPV that fails the 20% test — you are off 203(l) unless another exemption applies. Form ADV General Instruction 15 says that unless you qualify for another exemption, you would violate the registration requirement if you accept that non-VC-fund client before the SEC approves your registration application. You submit a final ERA report and an application for registration in the same filing. (SEC, Form ADV: General Instructions, Instruction 15)

203(m). If your annual updating amendment reports private fund assets of $150 million or more, and you have complied with ERA reporting, you have up to 90 days after that amendment to apply for SEC registration and may continue as a private-fund adviser during that window. You still cannot accept a non-private-fund client during the transition. If you have not complied with ERA reporting, that 90-day window is not available; registration must be approved before you meet or exceed the $150 million threshold. (General Instruction 15)

State law is independent. An SEC ERA may still have to register or notice-file with one or more states. An adviser that is not otherwise required to register with the SEC cannot use the SEC ERA path; the Form ADV FAQ states that an adviser must be otherwise required to register with the SEC to be eligible to file as an SEC ERA. (SEC Form ADV FAQ)

How GPs should choose

Stay on 203(l) if every vehicle is primary (or primary-plus-a-documented 20% basket), closed-end, within the 15 percent borrowing cap, and held out as venture. It scales past $150 million.

Use 203(m) if you advise buyout funds, secondaries, multi-strategy private funds, or a mix that would break the VC definition, and private-fund RAUM (including uncalled capital) stays under $150 million.

Register as an RIA if you want SMAs, expect to cross $150 million without 203(l), or want a single registration covering affiliates that cannot share ERA status. Umbrella registration is for RIAs, not ERAs.

A GP launching a first committed vehicle should map this fork in the same memo as the 3(c)(1)/3(c)(7) choice and the Form ADV draft. Allocations administers the vehicles ($9,950 one-time per SPV, $19,500 per year per fund, 0% platform carry). It does not determine 203(l) or 203(m) eligibility.

What is the difference between the VC adviser exemption and the private fund adviser exemption?

203(l) is limited to advisers that solely advise venture capital funds as defined in 17 CFR 275.203(l)-1; the exemption has no AUM cap. 203(m) is limited to advisers that solely advise qualifying private funds and, for a U.S. adviser, manage private fund assets of less than $150 million. (17 CFR §§ 275.203(l)-1, 275.203(m)-1)

Can a secondary SPV use the VC adviser exemption?

A fund whose assets are existing-share purchases generally will not meet the "qualifying investment" definition, which requires equity acquired directly from a qualifying portfolio company. Those holdings count against the 20% non-qualifying basket. A dedicated secondary SPV typically exceeds that basket and is not a 203(l)-1 venture capital fund. (17 CFR § 275.203(l)-1(c)(3))

Does 203(m) include uncalled commitments in the $150 million?

Yes. Private fund assets are RAUM under Form ADV Item 5.F, and the Form ADV instructions include uncalled commitments in a private fund's securities portfolio. The 203(m) calculation is annual. (17 CFR § 275.203(m)-1(c)–(d); Form ADV Instructions for Part 1A, Item 5.F)