Managers of emerging venture capital funds are typically exempted reporting advisers to their funds. They can loan money to the fund, but the loan must adhere to specific conditions outlined by the SEC under the Investment Advisers Act of 1940, particularly in relation to the venture capital fund exemption:
- Loan Amount and Conditions: The venture capital fund can borrow, issue debt obligations, provide guarantees, or otherwise incur leverage up to 15% of the fund's aggregate capital contributions and uncalled committed capital. However, any such borrowing or leverage must be for a non-renewable term not exceeding 120 calendar days. This means that the total amount of leverage cannot exceed 15% of the fund's total capital (including uncalled commitments), and any loan or other form of leverage must be paid back within 120 days without the possibility of renewal.
- Venture Capital Strategy: The fund must represent to its investors that it pursues a venture capital strategy, which typically involves investing in early-stage companies with significant growth potential.
- Non-Qualifying Investments: After any investment, at least 80% of the fund's assets must be qualifying investments (direct equity investments in operating companies), with no more than 20% in non-qualifying investments or short-term holdings, which would include the loan you're considering.
These conditions ensure that the fund remains compliant with the venture capital fund exemption under the Advisers Act, avoiding the need for SEC registration as an investment adviser while still being subject to certain reporting requirements.