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Part I: Raising Capital - Key Factors of Venture Capital Fund Formation

Venture capital funds are diverse and often distinguished by their various strategies, areas of focus, and business practices.  Managers can differ significantly in their approach and involvement with the portfolio companies, with many choosing to provide substantial operational guidance, support, or shared services. Venture capital funds often focus their investment strategy on particular geographies, technological capabilities, or business models. 

Venture capital fund managers commonly concentrate on the financing stage that fits their specific expertise, such as pre-seed, accelerator, seed stage, early stage, or later stage.  There has been an ongoing trend of niche specialization in recent years, particularly among emerging fund managers.


Capital Raising and Investor Suitability

Developing a compliant and focused capital raising strategy is equally as important to a venture capital fund's success as the investment strategy.  Before launching a fund, emerging managers generally start with securing soft commitments from a handful of experienced and sophisticated anchor investors; these strategic investors will perform the early due diligence function on the fund’s manager(s), which will later help with the proof-of-trust between future prospective investors and the management team during the capital raise.  

Managers who take the time to develop and define their capital raising strategy before starting the capital raising process will have a greater chance of ensuring a prosperous capital raise than those who do not prepare and plan ahead of time for this crucial stage. 

Many first-time emerging managers face unfamiliar challenges, given they have not managed a private fund previously. Our Firm has developed a program specific to the first-time manager’s needs, giving them a step-by-step guide to aid them in planning before forming and launching their fund. This program provides managers with the tools and resources necessary to gauge their fund-launch readiness and resources to help build out their management style, investment philosophy, and capital-raising strategy. Prospective managers can learn more about this subscription-based service through the link below. 

The Prospective Manager’s Portal: Subscription-based Program

Prospective Managers: Two-Pager Program Overview

Managers must understand investor suitability obligations before allowing investment in their private fund. Investors must meet the appropriate qualification threshold to invest in a private fund. The investor suitability standard that the fund manager will be required to follow will vary from manager to manager and depends on a handful of factors. The factors include the size of the prospective fund (which impacts registration requirements), the state where the fund managers are located, federal or state RIA registration requirements, and Investment Company Act exemptions.


Investment Company Act exemptions: 3(c)(1) or 3(c)(7)

The first step in determining the appropriate investor suitability standard is deciding which exemption the fund will rely upon for exemption from the Investment Company Act to operate as a private fund. Linked below is an article that goes into more detail about investor suitability.

Understanding what Investor Standard Your Fund Will Require

Established fund managers running larger funds commonly elect to rely on Section 3(c)(7) of the Investment Company Act (known as 3(c)(1) Funds), allowing up to 2,000 investors per fund, but with the prerequisite that the investors meet the relatively high "qualified purchaser" standard, which requires individual investors to have a minimum of $5 million net worth and entities to have a net worth of $25 million.

In contrast, most emerging fund managers will elect to rely on Section 3(c)(1) of the Investment Company Act (known as "3(c)(1) funds) and will be limited to accepting no more than 99 investors per fund. 

3(c)(1) funds will be subject to the “qualified client" standard of the Investment Advisers Act, simply defined as $2.2 million net worth or $1.1 million invested with the manager for individual investors, or the accredited investor standard of $1 million net worth or $200,000 annual net income for individuals from the past three years. For both net worth thresholds, the net worth calculation excludes the investor’s primary place of residence. 

Our law firm works with managers as an extension of their management team to develop the structure, terms, and capital raising disclosure documents necessary for the fund formation and launch, setting the foundation to operate and grow the venture capital fund successfully.


If you are pursuing venture capital investment management, schedule your complimentary attorney consultation on our Contact Us page, linked here

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