Qualifying Venture Capital Funds Inflation Adjustment

<RULE> SECURITIES AND EXCHANGE COMMISSION <CFR>17 CFR Part 270</CFR> <DEPDOC>[Release No. IC-35305; File No. S7-2024-01]</DEPDOC> <RIN>RIN 3235-AN33</RIN> <SUBJECT>Qualifying Venture Capital Funds Inflation Adjustment</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Securities and Exchange Commission. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Securities and Exchange Commission (“Commission”) is adopting a rule that adjusts for inflation the dollar threshold used in defining a “qualifying venture capital fund” under the Investment Company Act of 1940 (“Investment Company Act” or “Act”). The final rule also allows the Commission to adjust for inflation this threshold amount by order every five years and specifies how those adjustments will be determined. This rule implements the inflation adjustment requirements of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“EGRRCPA”) relating to qualifying venture capital funds. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This rule is effective September 30, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Michael Khalil, Senior Counsel, Frank Buda, Senior Special Counsel, or Brian McLaughlin Johnson, Assistant Director, Investment Company Regulation Office, at (202) 551-6792, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> The Commission is adopting new 17 CFR 270.3c-7 (“rule 3c-7”) under the Investment Company Act. <HD SOURCE="HD1">I. Introduction</HD> The Commission is adopting final rule 3c-7 to adjust for inflation the dollar threshold used in defining a “qualifying venture capital fund” under the Investment Company Act and to allow the Commission to make subsequent inflation adjustments by order according to the rule. Section 3(a) of the Investment Company Act defines the term “investment company” for purposes of the Act, and section 3(c)(1) provides certain exclusions from that definition. <SU>1</SU> <FTREF/> Section 504 of EGRRCPA amended section 3(c)(1) of the Investment Company Act by excluding “qualifying venture capital funds” from the investment company definition. <SU>2</SU> <FTREF/> Section 504 of EGRRCPA also added new Investment Company Act section 3(c)(1)(C), defining a “qualifying venture capital fund” as “a venture capital fund that has not more than $10,000,000 in aggregate capital contributions and uncalled committed capital.”  <SU>3</SU> <FTREF/> The statutory definition requires this $10,000,000 threshold “be indexed for inflation once every five years by the Commission, beginning from a measurement made by the Commission on a date selected by the Commission, rounded to the nearest $1,000,000.”  <SU>4</SU> <FTREF/> <FTNT> <SU>1</SU>   <E T="03">See</E> 15 U.S.C. 80a-3(a) and 80a-3(c)(1). </FTNT> <FTNT> <SU>2</SU>  Public Law 115-174, section 504 (May 24, 2018); 15 U.S.C. 80a-3(c)(1). In order to meet this statutory exclusion, a qualifying venture capital fund's outstanding securities cannot be beneficially owned by more than 250 persons, and the fund must not be making, or presently proposing to make, a public offering of its securities. <E T="03">Id.</E> </FTNT> <FTNT> <SU>3</SU>  Public Law 115-174, section 504 (May 24, 2018); 15 U.S.C. 80a-3(c)(1)(C)(i). For purposes of section 3(c)(1), a “venture capital fund” has the meaning given the term in 17 CFR 275.203(l)-1. 15 U.S.C. 80a-3(c)(1)(C)(ii). </FTNT> <FTNT> <SU>4</SU>  Public Law 115-174, section 504 (May 24, 2018); 15 U.S.C. 80a-3(c)(1)(C)(i). </FTNT> Accordingly, in February 2024, the Commission proposed new rule 3c-7 under the Investment Company Act to implement these requirements. <SU>5</SU> <FTREF/> The Commission proposed to use December 2023 as the current measurement date and proposed adjusting the current dollar threshold for determining what constitutes a qualifying venture capital fund under section 3(c)(1)(C) of the Act to $12,000,000. Additionally, to implement the future statutorily required inflation adjustments, the proposed rule included provisions that would allow the Commission to make future inflation adjustments by order, according to the methodology described in the rule. <FTNT> <SU>5</SU>  Qualifying Venture Capital Funds Inflation Adjustment, Investment Company Act Release No. 35129 (Feb. 14, 2024) [89 FR 12995 (Feb. 21, 2024)] (“Proposing Release”). The comment letters on the proposal are available at <E T="03">https://www.sec.gov/comments/s7-2024-01/s7202401.htm.</E> </FTNT> We received two comment letters that addressed the specifics of the proposal. <SU>6</SU> <FTREF/> Those commenters were generally supportive. <SU>7</SU> <FTREF/> They described the importance of implementing inflation adjustments for determining the financial thresholds applicable to qualifying venture capital funds and supported the proposed procedures for implementing future inflation adjustments. <FTNT> <SU>6</SU>   <E T="03">See</E> Comment Letter of Joel Wresh (Mar. 16, 2024) (“Wresh Comment Letter”); Comment Letter of Arushi Mehra (Feb. 15, 2024) (“Mehra Comment Letter”). </FTNT> <FTNT> <SU>7</SU>  Two other commenters broadly opposed the proposal but did not address the substance of the proposed rule. <E T="03">See</E> Comment Letter of Benjamin Nisly (May 15, 2024); Comment Letter of Joseph (Feb. 22, 2024). The other commenters addressed matters not relevant to the proposal. </FTNT> <HD SOURCE="HD1">II. Discussion</HD> Pursuant to section 3(c)(1)(C) of the Act and section 504 of EGRRCPA, we are adopting as proposed rule 3c-7 to update for inflation the dollar threshold for defining a “qualifying venture capital fund” under section 3(c)(1)(C) of the Act. As proposed, the final rule also provides that the Commission will make future inflation adjustments by order every five years and specifies how those adjustments will be determined. <HD SOURCE="HD2">A. Current Inflation-Adjusted Definition of Qualifying Venture Capital Fund</HD> Pursuant to EGRRCPA, final rule 3c-7(a) adjusts for inflation the dollar threshold for purposes of defining a qualifying venture capital fund under section 3(c)(1)(C) of the Investment Company Act. <SU>8</SU> <FTREF/> Substantially as proposed, final rule 3c-7(a) uses December 2023 as the current measurement date and adjusts the dollar threshold to $12,000,000 or, following November 1, 2029 ( <E T="03">i.e.,</E> approximately five years after the effective date of this rule), the dollar amount specified in the most recent order issued by the Commission in accordance with this final rule and as published in the <E T="04">Federal Register</E> . <SU>9</SU> <FTREF/> <FTNT> <SU>8</SU>  Final rule 3c-7's definition of qualifying venture capital fund is expressly limited to construing the term for purposes of section 3(c)(1) of the Act. Under 12 CFR 351.10, the term qualifying venture capital fund has a different meaning. </FTNT> <FTNT> <SU>9</SU>  The final rule differs from the proposal only in that it specifies Nov. 1, 2029, as the date after which the Commission would issue the next inflation adjustment order, rather than instructing the <E T="04">Federal Register</E> to insert the date that is five years after the effective date of the final rule. This approach is consistent with the proposal in that Nov. 1, 2029, is approximately five years after the estimated effective date of this rule and eliminates the need for the <E T="04">Federal Register</E> to have to perform the calculation. Such orders will also be available on the Commission's website. </FTNT> As proposed, this revised dollar threshold takes into account the effects of inflation by reference to the historic and current levels of the Personal Consumption Expenditures Chain-Type Price Index (“PCE Index”), <SU>10</SU> <FTREF/> which is published by the Department of Commerce. <SU>11</SU> <FTREF/> The PCE Index is often used as an indicator of inflation in the personal sector of the U.S. economy, <SU>12</SU> <FTREF/> and the Commission routinely has used the PCE Index in similar contexts in Commission rules, and it is also used in provisions of the federal securities laws. <SU>13</SU> <FTREF/> We are using the PCE Index to calculate inflation adjustments for this rulemaking because the methodology and scope of the PCE Index, which considers both urban and rural households and expenditures made on their behalf by third parties, reflects a broad sector of the U.S. economy and in light of the additional considerations discussed in the Economic Analysis. As discussed below, the scope of the PCE Index, covering all households in America, is more relevant to the affected parties of this final rule than is the scope of the CPI-U, which only reflects urban households, because persons in both rural and urban areas in America can invest in venture capital funds and can be stakeholders in firms that receive venture capital funding. <SU>14</SU> <FTREF/> Additionally, the PCE Index incorporates category weights on a quarterly basis, and incorporates multiple surveys of businesses, some of which are government mandated and carry fines for nonresponse. No commenters disagreed with the use of the PCE Index. <FTNT> <SU>10</SU>  The revised dollar threshold reflects inflation as of Dec. 2023, and is rounded to the nearest $1,000,000 as required by section 3(c)(1)(C) of the Act. The Dec. 2023 PCE Index was 121.421, and the May 2018 PCE Index was 101.941. 121.421/101.941 × $10,000,000 = $11,910,909; $11,910,909 rounded to the nearest multiple of $1,000,000 = $12,000,0000. As described in the Proposing Release, we also considered using the Consumer Price Index for all Urban Consumers ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 34k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━