Who’s Allowed to Be a VC?

At a Glance

• Almost anyone can launch a VC fund or SPV, but sponsors are treated as investment advisers and must either fit within SEC exemptions or register.

• Managers who only run classic VC vehicles (direct equity/equity-like investments in private companies with limited leverage) can usually rely on the venture capital adviser exemption and operate as Exempt Reporting Advisers.

• Managers who run non-VC strategies (for example, secondaries, non-convertible debt, fund-of-funds, or heavy crypto exposure) and exceed $150M in U.S. private fund AUM generally must register as full RIAs.

• Sydecar’s SPV and fund structures are designed to default to VC-friendly strategies, helping emerging managers stay within these exemptions while raising from accredited investors.

Why Are Venture Funds and SPVs Regulated?

Group investing in private markets often happens through sponsor-led structures such as SPVs and committed capital funds. In these vehicles:

• A deal sponsor (GP, manager, or syndicate lead) sources the deal, negotiates terms, and runs diligence.

• Passive co-investors evaluate the opportunity but rely heavily on the sponsor’s work and recommendations.

• The sponsor is typically compensated via carried interest, a share of profits after investors get their capital back.

From a regulatory perspective:

• The vehicle (fund or SPV) is usually a “private fund”, and

• The sponsor is treated as an investment adviser to that fund.

The Advisers Act does not limit who can try to be a VC, but it does require advisers either to register with the SEC (and often states) or to fit within specific exemptions designed for smaller or venture-focused managers.

The Venture Capital Adviser Exemption (Section 203(l))

Section 203(l) of the Advisers Act provides an exemption from SEC registration for advisers who solely advise “venture capital funds.”

Rule 203(l)-1 defines a venture capital fund using several criteria, including:

• The fund is a private fund (typically relying on 3(c)(1) or 3(c)(7) under the Investment Company Act).

• It represents itself as pursuing a venture capital strategy.

• It provides no routine redemption rights to investors (only in extraordinary circumstances).

• It holds no more than 20% of its aggregate capital contributions and uncalled commitments in non-qualifying investments, excluding cash and certain short-term holdings.

• It does not incur leverage beyond limited, short-term amounts (no more than 15% of contributions and commitments, and generally for no more than 120 days).

• It is not an investment company registered under the Investment Company Act and has not elected BDC status.

What Counts as a “Qualifying Investment”?

For purposes of this 80/20 style test, qualifying investments generally include:

• Equity securities (common or preferred stock) of a qualifying portfolio company, acquired directly from the company.

• Certain convertible instruments (for example, many SAFEs or convertible notes) that are “ultimately convertible into” common or preferred stock of the portfolio company.

• A limited category of other instruments closely tied to equity ownership in qualifying companies.

By contrast, non-qualifying investments may include:

• Secondary purchases of stock from existing shareholders.

• Non-convertible debt.

• Fund-of-funds positions or investments in other SPVs.

• Crypto assets or other non-equity instruments.

A fund can hold up to 20% of its capital contributions and uncalled commitments in these non-qualifying investments and still be treated as a “venture capital fund” if it meets the other criteria.

Exempt Reporting Adviser (ERA) Status

An adviser relying on the venture capital adviser exemption:

• Does not register as a full RIA with the SEC.

• Instead, operates as an Exempt Reporting Adviser (ERA) and files a truncated Form ADV (Part 1A only) with the SEC (and sometimes with state regulators, depending on the jurisdiction).

In addition, each fund or SPV that raises capital via Regulation D must file a Form D with the SEC and make any required state “blue sky” notice filings.

The Private Fund Adviser Exemption (Section 203(m))

Some managers do not fit cleanly within the venture capital fund definition. For example, this may be because they:

• Invest in secondaries,

• Use strategies involving non-convertible debt,

• Acquire crypto or other non-equity assets, or

• Focus on fund-of-funds or SPV-of-SPV structures.

In these cases, an adviser may instead rely on the private fund adviser exemption in Section 203(m). Under Rule 203(m)-1, a U.S.-based adviser is exempt from SEC registration if:

1. The adviser acts solely as an adviser to one or more private funds, and

2. The adviser manages less than $150 million in private fund assets in the United States (measured as “regulatory assets under management,” including uncalled commitments).

Advisers relying on 203(m):

• Also operate as ERAs at the federal level (until they cross the $150M threshold).

• May be subject to state registration or additional state-level requirements, depending on where they are based and where they market.

Once a 203(m) adviser’s U.S. private fund AUM reaches or exceeds $150M, they must generally:

• Register with the SEC as a Registered Investment Adviser (RIA), and

• Comply with the full Advisers Act regime, including policies and procedures, books and records, custody rules, and more.

(Note: SEC registration is with the SEC, not FINRA. FINRA registration is typically relevant for broker-dealers, not investment advisers.)

Investor Eligibility: Accredited Investors, Qualified Clients, and Qualified Purchasers

Separate from the adviser exemptions, managers must consider who is allowed to invest:

• Regulation D offerings (for example, Rule 506(b) or 506(c)) typically limit participation to accredited investors in practice.

• Some strategies, especially non-VC strategies relying on the 203(m) exemption, may also be constrained to “qualified clients” or “qualified purchasers” if the adviser charges performance-based compensation (such as carry) or relies on 3(c)(7) instead of 3(c)(1).

As of the latest adjustment:

• “Qualified client” thresholds for charging performance fees under Rule 205-3 are $2.2M net worth or $1.1M under management with the adviser.

For many emerging managers who want to serve a broader base of accredited investors, remaining within the venture capital fund definition (203(l)) is strategically attractive.

How Sydecar Fits Into This Landscape

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

• Default to direct equity or equity-like investments in private companies, which aligns with the venture capital adviser exemption.

• Structure SPVs and funds as private funds that are compatible with Reg D, 3(c)(1)/3(c)(7), and the 203(l)/203(m) adviser exemptions.

• Standardize documents and workflows so managers have a clearer picture of how their vehicles fit within the regulatory framework.

If you are designing your first fund or a high-volume SPV strategy and want to stay squarely within the VC exemptions, book a demo with Sydecar to see how our platform can help you launch compliant vehicles while you focus on sourcing deals and supporting founders.

Key Takeaways for Emerging Managers

If at least 80% of the capital across your SPVs or funds is used to buy equity (or equity-like) securities directly from private companies, you may be able to:

• Rely on the venture capital adviser exemption (203(l)),

• Operate as an Exempt Reporting Adviser (ERA), and

• Generally raise capital from accredited investors via Reg D, without being limited solely to qualified clients or qualified purchasers.

Once you move into non-VC strategies (secondaries, non-convertible debt, complex crypto exposure, fund-of-funds), you are often in private fund adviser (203(m)) territory, with:

• Higher likelihood of needing qualified clients or qualified purchasers in your LP base, and

• A clear registration trigger at $150M in U.S. private fund AUM.

For many emerging managers, staying within the venture capital fund definition is a deliberate strategic choice that keeps the compliance footprint lighter while they build track record.