foreign okay so if you're thinking of launching a VC fund you probably already have a pretty good idea of what Venture Capital Investments are their investments in high growth companies in exchange for an equity stake in those companies but unfortunately that's pretty much where it stops being super simple and easy to understand my name's Sam I'm on the legal team here at Carta and in this lesson we're going to dive into the details of how Venture Capital funds are legally defined so that you can understand the bigger landscape you're entering when you start a fund
you ready let's do it [Music] okay so right out of the gate here's the big thing that people tend to have a misperception about when it comes to venture capital Venture Capital funds obviously make Venture Capital Investments right but not all funds that make Venture Capital Investments are Venture Capital funds in fact there are lots of other kinds of funds like private Equity Funds and hedge funds and all these different types of funds can get in on the action and make Venture Capital Investments so the big question is what makes a venture capital fund so
unique the short answer is how they're regulated so let's take a look at what makes a VC fund a VC fund [Music] there's a specific legal definition that describes what a venture capital fund is basically there's this law called the investment advisors Act of 1940 and under this act Venture Capital fund has to meet five core requirements first it can invest more than 20 of its total capital in things called non-qualifying Investments we'll talk about what that means in a sec second get ready for some fancy gibberish a venture capital fund can only borrow or
take on other leverage up to 15 of its total capital and it has to repay any debts within 120 days again if that sounds confusing don't worry we're going to explain what that means in just a sec third a VC fund can't allow LPS to redeem their interest in the fund unless there's some sort of extraordinary circumstance fourth a VC fund has to represent to its investors and potential investors but it's pursuing a venture capital strategy or in other words if you're making VC Investments you got to tell your investors that's what you're doing and
finally a VC fund can't be registered as an investment company under the Investment Company Act okay I get it that's a whole lot of legal jargon so let's translate each one of these points into plain English to make sure you understand what you're getting into when you start a VC fund first we'll go ahead and zoom in on bullet point number one right here a VC fund cannot invest more than 20 of its capital in non-qualifying Investments all right so generally speaking when you make a direct Equity investment into a private company it counts as
what we call a qualifying venture capital investment but there are other types of Investments that don't qualify for example debt secondaries public equities fund of fund Investments and digital assets like tokens stable coins and nfts so what this first rule is basically saying is that the fund cannot invest more than 20 of its money into these other non-qualifying assets or in other words if you put all your money on bitcoin you're not a VC firm all right next up let's look at number two a VC fund can only borrow or take on other leverage up
to 15 of its total capital and it has to repay its debts within 120 days luckily this one's actually pretty simple basically a VC fund can't take on a whole lot of debt and any debt it does take on has to be super short term as in less 120 days making sense okay number three a VC fund can't allow LPS to redeem their interest in the fund unless they're extraordinary circumstances so this one's actually pretty important it means investors in the fund can't just cash out whenever they want they have to maintain their portion of
ownership in the fund through good times and bad and they can only cash out at the end of the fund's life cycle so what's that life cycle well in Venture Capital the life cycle of a fund is usually around 10 years with the option for a one or two year extension so we're talking about a pretty long-term commitment the only way an investor can get out of this commitment is under a quote extraordinary circumstance and the person who usually gets to decide what counts as an extraordinary circumstance is the GP okay still with me let's
keep rolling number four a venture capital fund has to represent to its investors and potential investors that it's pursuing a venture capital strategy this one's probably pretty self-explanatory but it's really worth noting anyway when you raise capital for your fund the LPS AKA investors have to know that you're pursuing a venture capital strategy we'll talk more about fund strategy a little later but for now just know this there should never be any surprises for your LPS seriously never okay almost done number five a venture capital fund cannot be registered as an investment company under the
Investment Company Act for now just file this one away in your brain we'll go deeper into regulatory requirements a little later on basically the big thing to know is if you keep your fund Within These narrow parameters you'll save yourself a lot of headaches and compliance down the road and there you go so if you meet all five of these criteria congratulations you have a venture capital fund and if all the funds you manage are Venture Capital funds then federal laws and regulations say you can be what's called a venture capital advisor now why does
that matter well basically there's this other law called the investment advisors act and under this act a venture capital advisor has simpler compliance requirements than other types of advisors like for instance if you have a large private Equity Fund or hedge fund you'd have to be a registered investment advisor with a whole lot more compliance requirements and restrictions so just remember Venture Capital advisor registered investment advisor not the same thing anyway we'll get into those regulations a little later on but for now one last little disclaimer obviously this is a general summary of the criteria
for qualifying as a VC fund so as with most aspects of running your fund you're going to want to check in with your own legal counsel to make sure you're staying inside the swim Lanes okay so that was an intro to venture capital next up we're going to talk about a really big thing you're going to want to understand when you start your VC fund and that's how a VC fund is structured so when you're ready hit the button down below and let's Dive In foreign
