foreign okay so in part one of this lesson we started talking about the regulations that govern Venture Capital specifically we took a look at the registration requirements with the SEC let's keep the ball rolling and talk about the second important item exemptions so same deal right back to our list here we're looking at exemptions in three key categories the fund the fund advisor and the fundraising process and before we dive into the first one let's turn back the clock for a quick second and remember something that we talked about a while back remember a few
lessons ago when we talked about how a VC fund is legally defined there are those five bullet points right and on bullet point five we said hey don't worry about this right now we're going to talk about that later well guess what it's later and we're gonna talk about it so to recap what that bullet point said if you want to be legally defined as a venture capital fund then a venture capital fund cannot be registered as an investment company under the Investment Company Act you with me I'm gonna say that again if you want
to be legally defined as a VC fund then the fund can't be registered as an investment company which is kind of like weird right the question is how do you do that how do you create a fund but not register it as an investment company and this is exactly where our fund exemptions come in remember that law we talked about a while back the Investment Company Act of 1940. well under this law there are two main ways a fund can be exempt from registering as a quote Investment Company with the SEC so let's run through
both of those exemptions they are a section 3c1 exemption and a section 3c7 exemption first up let's take a look at 3c1 when you look at a section 3c1 fund you got to think about how it applies to all types of private funds versus just Venture Capital funds so let's go big first and do all types of private funds a private fund is going to qualify for the 3c1 exemption if it meets two requirements one it doesn't offer Securities publicly AKA it's not listed on the public stock market and two it's not owned by more
than a hundred quote beneficial owners so to say that again you can't list the company publicly and you gotta have less than 100 of these things called beneficial owners so what is a beneficial owner well beneficial owners are people or institutions who literally stand to benefit from ownership in the fund which is kind of like no duh right so let's see what that means in real life if we look back at our fund structure here remember how the fund collects money from all of those investors or LPS well if the lp is an individual person
then they count as one beneficial owner but if the lp is a bigger entity or like an institution or what have you then it would count as more than one so it all just depends on the different rules that are spelled out by the SEC so real quick recap if your phone wants to seek this exemption 3c1 then the fund can't list publicly and it can't have more than 100 beneficial owners if both of these criteria are met then you might be getting into exemption territory meaning you might be able to avoid registering as a
quote Investment Company meaning you might be legally allowed to call your fund a venture capital fund you still with me you're doing great now there's another ingredient we haven't talked about yet that becomes kind of important here in order to even invest in your Fund in the first place those LPS also have to be this thing we call accredited investors so what's an accredited investor let's talk about it to understand what an accredited investor is you first got to remember investing in private companies is super risky if it's a public company like say Apple or
Google then the company has to report their financials to the public so if you're an average Joe you have access to public information that can help you make smart investment decisions but if you think about it private companies are kind of different right with private companies the financials aren't out there publicly which means it's a way riskier type of investment to make if you're an average Joe trying to invest in a private fund for example you don't have access to the fund's financials unless the fund chooses to share that info with you so at the
end of the day there's just a lot more risk involved when you invest in private companies and it can be a lot more dangerous for the average person so the SEC has Protections in place to make sure you're qualified for these more risky types of private Investments and that's what an accredited investor is accredited investors are people or entities who meet certain requirements they have a certain amount of wealth or they have professional certifications maybe they have specific investment knowledge or a certain amount of assets basically the SEC uses these requirements as different ways to
measure the sophistication of the investor so if someone decides to invest in your private fund then the question is are they qualified to make that decision intelligently if so they're defined as an accredited investor who okay stick with me we're almost done so we talked about how any private fund can seek exemption under 3c1 right but if a fund means the definition of a qualifying Venture Capital fund then it can actually rely on a special exemption that's inside of 3c1 that's a tiny bit more flexible basically here's how it works under this special exemption if
the fund is a venture capital fund then the required number of beneficial owners goes from 100 all the way to 250. so we're talking about 250 investors instead of just a hundred but there's a catch in order to still stay exempt the VC fund has to raise 10 million dollars or less look I know all of this stuff can be brutally complicated but if you're raising a fund and managing potentially millions of dollars for people it's pretty helpful to know the details of what you're doing if you take away anything from this lesson let it
be this registering with the SEC is important but it also comes with a lot of responsibilities and expenses so if you're going to be exempt from registering then there's really specific criteria that you're going to have to meet we just went through the first piece of that criteria the section 3c1 exemption for your Fund in the next lesson we're going to finish up that second part section 3c7 exemption and then go into other exemptions [Music] so take a breather shake the cobwebs out and then when you're ready hit the button below and let's keep learning
