A Guide to Legal and Regulatory Compliance for VCs

At a Glance

• Venture fund managers must navigate several core U.S. government regulations, including the Securities Act of 1933, the Investment Company Act of 1940, and the Investment Advisers Act of 1940.

• Most emerging managers raise capital under Regulation D exemptions (typically Rule 506(b) or Rule 506(c)), which allow private fundraising without full SEC registration.

• The Investment Company Act shapes fund structure and LP strategy through investor-count limits (for example, 100 or 250 beneficial owners under Section 3(c)(1)) and qualified purchaser requirements under Section 3(c)(7).

• Many managers rely on Exempt Reporting Adviser (ERA) status under the Advisers Act by qualifying for exemptions such as Sections 203(l) (venture capital funds) or 203(m) (private funds under $150 million AUM).

• Additional considerations include Form D filings, state Blue Sky notice filings, CFIUS issues for foreign investors, and tax structuring (potentially including QSBS).

• Sydecar’s Fund+ platform helps emerging managers operationalize these requirements with integrated workflows for formation, investor onboarding, compliance, and back-office support.

Why Legal and Regulatory Frameworks Matter

Launching and running a venture fund requires more than a clear investment thesis. Fund managers must also comply with federal and state securities laws that govern:

• How interests in the fund are offered and sold.

• How the fund itself is structured and regulated.

• How the management company and its advisory activities are supervised.

At a high level, three statutes are most relevant:

1. Securities Act of 1933 – regulates offers and sales of securities.

2. Investment Company Act of 1940 – regulates pooled investment vehicles.

3. Investment Advisers Act of 1940 – regulates investment advisers, including management companies.

Most emerging VC managers operate under exemptions to avoid full registration under these regimes, but those exemptions come with specific conditions.

Securities Act of 1933: Offering Interests in a Fund

The Securities Act of 1933 governs the offer and sale of securities, including fund interests, to investors.

Because fund interests are considered securities, an issuer (the fund) must either:

• Register the offering with the SEC, or

• Qualify for an exemption from registration.

Full registration is impractical for most venture funds, so managers generally rely on Regulation D exemptions, most commonly Rule 506(b) or Rule 506(c).

Rule 506(b)

Rule 506(b) allows an issuer to:

• Raise unlimited capital from an unlimited number of accredited investors, and

• Include up to 35 non-accredited but sophisticated investors, subject to stricter disclosure requirements.

Key points:

• The issuer must have a reasonable belief that investors are accredited or, if non-accredited, sophisticated enough to understand the risks.

• In practice, investor status is often documented through investor questionnaires and self-certification.

• Rule 506(b) prohibits general solicitation and advertising, which means:

  • No public marketing of the offering (e.g., broad social media posts about the raise).

  • No cold outreach that looks like mass solicitation.

  • The issuer typically relies on pre-existing, substantive relationships with prospective LPs.

Because including even a single non-accredited investor can require expanded disclosures to all investors (e.g., financial statements, detailed risk factors), many emerging managers limit participation to accredited investors only, even under Rule 506(b).

Rule 506(c)

Rule 506(c) is attractive to some managers because it permits general solicitation, including:

• Publicly discussing the fundraise.

• Using websites, media, and broader outbound communication to reach potential LPs.

In exchange, Rule 506(c) requires that:

• All investors are accredited.

• The issuer takes “reasonable steps” to verify accreditation status—typically more robust than self-certification.

• Verification often involves third-party letters (from attorneys, CPAs, or investment professionals) or review of financial documents such as tax returns or account statements.

Choosing between Rule 506(b) and 506(c) is a strategic decision that balances marketing flexibility against verification burdens and investor preferences.

Form D and State “Blue Sky” Filings

For Regulation D offerings, issuers typically must:

• File Form D with the SEC within 15 days of the first sale (or binding commitment).

• Disclose basic information about the issuer, the offering size, and investor types.

While securities sold under Rule 506 are considered “covered securities” and are generally exempt from many state-level registration requirements, states may still:

• Require notice filings and

• Charge associated fees (often submitted via the NASAA Electronic Filing Depository system).

Investment Company Act of 1940: Regulating the Fund

The Investment Company Act of 1940 regulates pooled investment vehicles. Venture funds generally avoid being treated as registered investment companies by relying on exemptions, most commonly:

• Section 3(c)(1)

• Section 3(c)(7)

Section 3(c)(1)

Section 3(c)(1) exempts funds that:

• Do not make a public offering of their securities, and

• Limit the number of “beneficial owners” of their securities.

Investor limits typically are:

• Up to 250 beneficial owners for funds with less than $10 million in aggregate capital contributions and uncalled commitments.

• Up to 100 beneficial owners for funds above that threshold.

Practically, this:

• Encourages higher minimum checks for larger funds (for example, a $50 million fund with a 100-investor cap implies an average commitment of at least $500,000).

• Makes small allocations from many small LPs more challenging under a single 3(c)(1) vehicle.

Entities are generally counted as one beneficial owner, unless:

• The entity was formed specifically to invest in the fund, or

• It is itself a private investment company that owns 10% or more of the voting securities of the fund (in which case look-through rules may apply).

Section 3(c)(7)

Section 3(c)(7) exempts funds whose securities are owned exclusively by qualified purchasers (and that do not make a public offering).

Qualified purchasers generally include:

• Individuals or family offices with at least $5 million in investments.

• Entities with at least $25 million in investments.

• Entities where all beneficial owners are qualified purchasers.

Key differences from 3(c)(1):

• No fixed limit on the number of investors.

• Stricter investor qualification standard (qualified purchaser vs. accredited investor).

Knowledgeable employees of the fund generally do not count toward the investor limits under 3(c)(1) or disrupt qualified purchaser status under 3(c)(7).

Parallel Funds

Managers sometimes use parallel funds to:

• Serve different investor groups (for example, a 3(c)(1) vehicle and a 3(c)(7) vehicle investing side by side), or

• Address specific tax or regulatory needs (often for non-U.S. LPs).

Parallel vehicles typically:

• Follow the same strategy and terms as the main fund.

• Invest in the same deals at the same time, with allocations split pro rata based on commitments.

Investment Advisers Act of 1940: Regulating the Manager

The Investment Advisers Act of 1940 regulates the investment adviser, usually the management company providing advisory services to the fund.

Many emerging VC managers rely on exemptions from full registration, particularly:

• Section 203(l): Venture capital fund adviser exemption

• Section 203(m): Private fund adviser exemption

Section 203(l): Venture Capital Fund Exemption

Section 203(l) exempts advisers who solely advise one or more “venture capital funds”. To qualify, a fund generally must:

• Pursue a venture capital strategy.

• Hold at least 80% of its capital in qualifying venture investments (with limited room for non-qualifying investments).

• Avoid significant leverage (for example, not borrowing more than 15% of assets).

• Issue mainly illiquid interests, redeemable only in extraordinary circumstances.

• Avoid registration as an investment company and not operate as a business development company.

Section 203(m): Private Fund Adviser Exemption

Section 203(m) exempts certain advisers to private funds with:

• Less than $150 million in assets under management in the United States, and

• Advisory activities limited solely to private funds.

This exemption is not limited to venture capital strategies and can be used by some managers whose structures or strategies do not fit the 203(l) definition.

Exempt Reporting Adviser Status and Form ADV

Advisers relying on Sections 203(l) or 203(m) typically operate as Exempt Reporting Advisers (ERAs) rather than fully registered investment advisers.

ERAs must:

• File a truncated Form ADV Part 1A with the SEC.

• File within 60 days of relying on the exemption.

• Update annually within 90 days of fiscal year-end, and amend for certain changes.

Form ADV Part 1A includes information about:

• Ownership and control of the advisory firm.

• Private funds advised.

• Employees and business practices.

• Disciplinary history, if any.

Unlike registered advisers, ERAs generally do not file Form ADV Part 2 (the “brochure”), but they may still be subject to state-level registration or notice requirements, depending on their jurisdiction.

Other Regulatory and Tax Considerations

CFIUS

The Committee on Foreign Investment in the United States (CFIUS) reviews certain investments involving foreign persons in U.S. businesses, particularly where:

• Critical technologies, critical infrastructure, or sensitive personal data are involved, or

• Foreign parties may gain control or significant information or governance rights.

CFIUS analysis can be relevant when:

• Funds have foreign GPs or LPs with enhanced rights.

• A fund’s governance or information rights could cause it to be deemed a “foreign person” for CFIUS purposes.

Managers should consider CFIUS implications when allocating board seats, information rights, or veto rights to investors with foreign ties.

Tax and QSBS

Most U.S. venture funds are taxed as partnerships and must comply with associated reporting rules (for example, Schedule K-1).

Additional tax considerations include:

• Structures to accommodate tax-sensitive LPs (for example, using blockers or feeders).

• Strategies to qualify certain investments for Qualified Small Business Stock (QSBS) treatment, which can offer meaningful tax benefits if requirements are met.

Tax planning is highly fact-specific, and managers should work with experienced tax advisors when designing fund structures.

How Sydecar’s Fund+ Helps Operationalize Compliance

Legal and regulatory compliance is foundational for any venture fund, but it can be operationally heavy for emerging managers.

Sydecar makes it simple and efficient for venture fund and syndicate managers to form SPVs and funds by automating banking, compliance, contracts, and reporting. Fund+ is designed to:

• Standardize formation and subscription workflows around common Reg D exemptions.

• Support accurate investor tracking to help managers monitor beneficial owner counts and investor qualifications.

• Integrate with back-office processes for K-1s, reporting, and ongoing admin.

By combining thoughtfully structured documents with software workflows, Sydecar helps emerging managers spend more time on investing and LP relationships and less on navigating compliance logistics. Book a demo with our team to learn more.

Key Takeaways for Emerging Managers

When planning a fund launch:

1. Clarify your fundraising exemption under the Securities Act (Rule 506(b) vs. 506(c)) and design your LP outreach accordingly.

2. Choose the right Investment Company Act exemption (3(c)(1) vs. 3(c)(7)), and understand how it affects investor counts and qualification standards.

3. Determine your Adviser Act status and whether you can rely on the 203(l) or 203(m) exemptions as an Exempt Reporting Adviser.

4. Plan for filings such as Form D, Blue Sky notices, and Form ADV, and understand when CFIUS or specific tax structures may be relevant.

5. Use infrastructure that supports compliance by design, so your operations reflect your regulatory strategy from day one.

With the right legal guidance and a platform built for emerging managers, you can launch and run a compliant venture fund while staying focused on sourcing great founders and serving your LPs.