What is a "qualifying" and "non-qualifying" venture investment?

Note: the rules governing funds, investment advisors and securities transactions are complex and fact-specific. Always consult an attorney for guidance relevant to your specific facts and circumstances.

Overview

Most venture fund managers rely on the "
Venture Exemption" to exempt them from needing to register with the SEC as a "registered investment adviser".

Among other things, the venture exemption requires that, for every fund that the manager advises, no more than 20% of each fund's aggregate capital contributions and uncalled capital commitments be invested in investments that are not venture “qualifying investments”.
 
Examples of Qualifying and Non-Qualifying Investments
Common types of qualifying investments can include:
• SAFEs issued directly from a portfolio company
• Venture-style convertible notes issued directly from a portfolio company
• Equity investments directly into a portfolio 

Common types of non-qualifying investments can include:
• Purchases of stock from existing employees or investors in secondary sales
• Certain types of crypto and digital asset investments
• Most investments made into or through other funds and SPVs
 
Timing of 20% Test
The 20% test for the venture exemption is generally applied based on commitments closed into the fund at the time the relevant investment is made out of the fund. 
 
Additional Requirements
In addition to the 20% non-qualifying test, a fund or SPV must meet other requirements to qualify as a "Venture Capital Fund". These include limitations on borrowing by the fund and restrictions on investor redemptions.
 
Most fund managers who advise SPVs or funds that do not qualify as Venture Capital Funds either register as an investment adviser or rely on the private fund adviser exemption. 
 
Venture fund managers who are exempt from registration with the SEC must also register with state regulators or qualify for state-level exemptions in states where they're operating.
 
Deeper Dive
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