SEC Adopts New Rule 3c-7, Setting Inflation-Adjusted Dollar Threshold for Qualifying Venture Capital Funds

The U.S. Securities and Exchange Commission (“SEC”) announced on August 21, 2024 the adoption of new Rule 3c-7, updating the dollar threshold used to distinguish investment companies, regulated by the Investment Company Act of 1940 (the “Act”), from "qualifying venture capital funds." Qualifying venture capital funds are exempt from the registration requirements otherwise applicable to investment companies under the Act.¹  With this new Rule 3c-7, the SEC has increased the dollar threshold for qualifying venture capital funds from $10 million to $12 million in aggregate capital contributions and uncalled committed capital. The dollar threshold is subject to adjustment by SEC order every five years to account for inflation. New Rule 3c-7 is expected to take effect on or before November 1, 2024.

Background

New Rule 3c-7 implements the statutory directive promulgated in Section 504 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which required the SEC to reevaluate and adjust for inflation once every five years the dollar threshold used to determine whether a firm that otherwise would be an investment company under the Act is entitled to an exemption as a qualifying venture capital fund. Congress set the dollar threshold at $10 million initially when it enacted the 2018 legislation and new Rule 3c-7 is the first time the SEC has adjusted the threshold to account for inflation.

For purposes of setting a benchmark inflation level to use in determining the appropriate dollar threshold, the SEC chose to use December 2023 as the current measurement date. Going forward, the dollar threshold will be determined and published by SEC order approximately every five years in relation to the Personal Consumption Expenditures Chain-Type Price Index (“PCE Index”).

Effective Date

New Rule 3c-7 takes effect 30 days after the final rule has been published in the Federal Register. The final rule anticipates that this will be on or before November 1, 2024. There is no compliance period or extended effective date for new Rule 3c-7. As with all funds and reliance on the exemptions from regulation set out in Section 3(c)(1) of the Act, any fund that meets the requirements for a qualifying venture capital fund based on new Rule 3c-7 can choose to rely on the exemption in its own discretion.

^{1. A "venture capital fund" is defined in 17 C.F.R. 203(I)-1. Among other requirements, a venture capital fund must represent to investors that it pursues a venture capital strategy, and must satisfy a variety of investment requirements.}