Dilendorf Law Firm represents investment managers on all aspects of VC fund formation and ongoing operations.
Our team of experienced VC fund lawyers provide legal counsel in all relevant areas, including fund structure, securities laws, jurisdictional planning, fund strategy and other legal matters.
We assist emerging and established investment managers with forming traditional and tokenized VC funds for FinTech, Biotech, Web3, Healthcare and Eot industries.
Flat-fee venture capital fund formation services include:
Advising on a venture capital fund structure tailored to specific tax and business goals
Forming and registering investment advisers
Assisting clients with designing optimal tax structures for onshore and offshore VC funds
Due diligence and representation in connection with investments in porfolio companies
Preparing fund documentation (private placement memoranda, operating agreements, term sheets, subscription documents)
Preparing and processing SEC Form D and state “blue sky” filings
Providing ongoing regulatory, tax and compliance support
Facilitating introductions to fund administrators, auditors, broker dealers, tokenization platforms and ATS marketplaces.
Timeline for launching a venture capital fund:
The average timeline for structuring and launching a venture capital fund is 3-5 weeks.
It could take 6-8 weeks to launch a tokenized venture capital fund, shares of which could be traded on regulated security token marketplaces also known as alternative trading systems (ATS) operated using blockchain technologies.
Tokenized venture capital funds investing in late-stage FinTech & Web3 startups
Stand-alone Delaware hedge fund investing in digital assets
Represented client with launching a joint venture for regenerative farmland. Advised client how to pivot from the JV model and scale the business model using a tokenized real estate fund.
Opportunistic fund investing in precious stones and colored-diamonds
Advised a group of private investors in connection with setting up a qualified opportunity fund investing in startups
Advised a client regarding the process of tokenizing a $40M commercial property in the Midwest, addressed applicable securities regulations and token transfer restrictions for US and non-US investors, selected a legal structure for tokenization (LP, SPV, Trustee), guided through the process of underwriting the property interest on a smart contract and issuing legally compliant ERC-20 tokens, and advised regarding the process for verifying the accreditation status of US and non-US investors, KYC/AML checks as well as onshore/offshore banking
Represented LPs investing in FinTech, biotech and healthcare funds
Whether certain venture capital fund activities require registration of the offering of securities, broker-dealer registration, investment company registration, or investment adviser registration is a fact-specific analysis that must be conducted on a case-by-case basis.
Are interests in private venture capital funds “Securities”?
All offers, sales, and issuance of securities are governed by federal securities rules and regulations.
Under federal and state laws, securities are defined broadly to include shares of limited partnership interests and membership interests in an LLC, LLP and investment contracts.
Interests in a private venture capital fund offered and sold to investors will typically constitute securities within the meaning of federal and state laws.
As a result, venture capital funds must comply with all applicable regulations of the Securities and Exchange Commission (“SEC”) and the securities regulators in the states where a venture capital fund operates. This includes being aware of, and complying with, applicable provisions such as the registration and anti-fraud provisions of federal and state securities laws.
Are venture capital fund offerings required to be registered with the SEC Commission and the states or are exemptions from registration available?
Under the federal Securities Act of 1933 (Securities Act), all offers and sales of securities must be either (1) registered with the SEC or (2) conducted in compliance with an exemption from registration. State securities laws also require registration or an exemption from registration before securities may be offered or sold in the state.
Securities regulators interpret broadly the meaning of the term “offer.” For example, advertising a business opportunity could be considered an offer; therefore, it is prudent to assume that efforts to attract investors to a venture capital fund are offers of a security and subject to federal and state securities laws.
Offerings of venture capital fund interests may not need to be registered with the SEC or state securities regulators if an exemption from registration is available.
Federal and state securities laws contain several exemptions from registration that fund managers could rely on when launching a venture capital fund.
For example, some frequently used exemptions from registration that may be available to VC fund operators include Rule 506(c) of Regulation D. This rules provides an exemption from registration for an offering that may be conducted publicly so long as the venture capital fund takes reasonable steps to verify the accredited investor status of each purchaser.
Is the venture capital fund required to register an “Investment Company”?
Venture capital funds can also implicate the registration provisions of the Investment Company Act of 1940 (Investment Company Act) and, potentially, the Investment Advisers Act of 1940 (Advisers Act) or related provisions of state securities laws.
Depending on the facts and circumstances, VC funds may have to register as investment companies under the Investment Company Act.
However, exclusions from the definition of “investment company” under the Investment Company Act that might apply:
Private Fund Exclusions – Section 3(c)(1) and Section 3(c)(7)
Section 3(c)(1) of the Investment Company Act states, in part, that an issuer is not an investment company if its outstanding securities (other than short-term paper) are beneficially owned by not more than 100 persons.
Section 3(c)(1) – Qualifying Venture Capital Fund is a type of private fund that is excluded from the definition of investment company under Section 3(c)(1) of the Investment Company Act because it meets the following criteria:
(1) no more than 250 beneficial owners;
(2) no more than $10 million in aggregate capital contributions and uncalled capital commitments; and
(3) qualifies as a venture capital fund.
Section 3(c)(7) of the Investment Company Act states, in part, that an issuer will not be an investment company if its outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are “qualified purchasers” and it is not making and does not at that time propose to make a public offering of its securities. For purposes of this provision, the term “qualified purchaser” is defined by Section 2(a)(51) of the Investment Company Act.
Is the adviser to a venture capital fund subject to Advisers Act or comparable regulation under the State Securities Laws?
In summary, Advisers Act Rule 203(m)-1 provides that an investment adviser that serves as an adviser solely to private funds and has assets under management of less than $150 million is exempt from registering as such with the SEC.
However, an investment adviser relying on this exemption must still comply with certain SEC reporting requirements.
Tokenized Venture Capital Funds
Dilendorf Law Firm advises on all aspects of the formation, governance, and operation of tokenized venture capital funds. Tokenized venture capital funds offer a number of potential benefits as compared to traditional funds.
Access to a global pool of capital;
Increased liquidity on regulated US and global security token marketplaces aka Alternative Trading Systems;
Simplified digital management of a significant number of investors via smart contracts;
Automated and transparent governance, voting and compliance using smart contracts on the blockchain;
Tokenized fund interests are subject to limitations on resale, number of investors, investor solicitation and acceptance, tradebility on security token marketplaces in the US and foreign jurisdictions, etc.
When designing a tokenized venture captail fund structure, fund managers must take into an account account various pitfalls presented by securities regulations, AML/KYC requirements and current investment and governance restrictions. Heightened global liquidity may present additional operational complications, for example, with secondary market re-sales and maintaining capitalization tables.
We help our clients efficiently navigate the web of challenges arising throughout the formation, governance, and operation of tokenized real estate funds.