Regulatory Considerations for Angel Fund Managers

By: Sonia Gioseffi, Partner, K&L Gates

The venture capital industry has exploded in both dollars and geography since its beginnings, as evidenced by an increase in the size of venture capital funds and the attraction of large pools of capital from institutional investors.  Despite the fact that the business model of large funds does not align neatly with investments early-stage companies, the theme of ideas in search of capital and the need for angel investing has not changed and has grown with time. This increase in angel investors is a reflection of the early days of venture capital — an industry which began with a few individuals investing in potentially promising companies.  Some angel investors have moved from deploying their personal investment capital to investing on behalf of others through a pooled fund model.  Angel funds are typically small, ranging from a few million to $100 million in assets under management.  These funds typically make pre-seed and seed stage investments that generally are less than $1.0 million.  While the model of angel investing has not changed since the beginning days of venture capital, the regulations on the fund managers have changed and have become more onerous and complex.

Many new managers to venture capital funds are not fully aware of the applicable regulatory requirements.  The Securities and Exchange Commission (“SEC”) defines an investment adviser as any person who is engaged in the business of providing investment advice for compensation.  Compensation is defined broadly by the SEC and would encompass the ability to receive management fees and carried interest.  Investment advice includes advising on the securities of private companies.  Accordingly, a manager of a venture capital fund would be deemed to be an investment adviser regardless of the size of the fund, including angel funds.  Investment advisers are subject to substantial regulatory oversight.  While the focus in the venture capital industry is on the general partner, the regulators focus on the fund’s manager, which is deemed to be an “investment adviser.”

As an investment adviser, a manager would need to register as such with the SEC or a state regulatory agency, unless an exemption applies.  Registration is pursuant to the requirements set forth in the Investment Advisers Act of 1940, as amended (the “Advisers Act”) or applicable state law.  Generally, investment advisers with at least $100 million in assets under management are subject to the requirements of the Advisers Act, while investment advisers with less than $100 million in assets under management are subject to state law of where they are located.  While state law varies, states generally track the exemptions set forth in the Advisers Act.  In most states, managers to venture capital funds are exempt from registration if they only advise “venture capital funds,” as defined by the SEC (the “VC Exemption”).  The definition of a venture capital fund tracks what the industry typically would deem to be a venture capital fund: investments need to be made in the equity securities of private companies and there are limitations on the debt that a fund may use.  To provide for flexibility, 20% of a fund’s called contributions and uncalled commitments may be invested in something other than the equity securities of private companies, such as an investment in public securities or cryptocurrency.  There is another exemption under the Advisers Act, which generally provides that investment advisers with less than $100 million in assets under management who only advise private funds are exempt from registration (the “AUM Exemption”).  This exemption is generally reflected in state law.  An investment adviser that relies on the VC Exemption or the AUM Exemption is an “Exempt Reporting Adviser.”  An Exempt Reporting Adviser may only advise funds and may not have separate accounts or investment advisory agreements with individual investors.

Regardless of whether the VC Exemption or AUM Exemption from registration is applicable, investment advisers are subject to other regulatory requirements. A key regulatory requirement for investment advisers is filing a Form ADV, which is a public document that is located on the SEC’s website.  (Note that some investment advisers with a very small amount of assets under management may not be required to file a Form ADV until their assets under management hit a certain threshold, the amount of which is dependent on state law.)  On the Form ADV, an investment adviser provides information about its operations, funds, and direct and indirect owners.

In addition to filing a Form ADV, an investment adviser should be mindful of other requirements, whether from a regulatory perspective or as a best practice. The requirements by state vary and the following is generalization of issues to consider.  First, an investment adviser should keep records regarding its advisory operations, including any filings made with a regulator and copies of its advertisements.   Investment advisers should consider adopting policies that are designed to prevent the misuse of material non-public information and to address pay-to-play and cybersecurity issues.  Investment advisers are also subject to the anti-fraud rule, which governs communication to investors and potential investors.  Finally, as an investment adviser, any manager to a venture capital fund is subject to regulatory oversight.  This means that the applicable state regulators and the SEC have the authority to conduct on-site examinations of an Exempt Reporting Adviser.  If the SEC or a state regulator finds deficiencies during an exam, they may take a variety of actions including civil penalties; require the return of the investment amount to investors regardless of investment losses; require the investment adviser to adopt policies; and in extreme cases, a lifetime ban from the securities industry and prison sentences.  In addition, a fund sponsor may need to incur expenses for legal representation to respond to any deficiencies.  Given the regulatory oversight and potential penalties for not following applicable regulatory requirements, venture capital fund sponsors should be mindful of these requirements and consider following best practices.  Sponsors should also work with legal counsel to help navigate the variety of applicable legal requirements and to understand best practices.

For additional information, please feel free to contact Sonia Gioseffi at

About the Author:

Sonia Gioseffi concentrates her practice in the investment management area, and focuses on a variety of regulatory, transactional and ongoing compliance matters involving state and federal securities laws.  She advises sponsors regarding the structuring, formation and ongoing regulatory requirements of venture capital funds, private equity funds, hedge funds, fund-of-funds and other types of private investment structures that engage in a wide variety of strategies.  She regularly works with emerging managers in helping them set up their first fund and grow their asset management firm.  Sonia enjoys counseling non-profits as to how they can create a funding mechanism for their operations through impact funds. 

Sonia also represents institutional investors looking to deploy capital to private funds and other types of alternative investments. These clients include public pension plans, universities, fund-of-funds, family offices, endowments and foundations.  She also advises these clients on structuring and negotiating alternative investments, as well advises on global regulatory issues that arise in connection with these investments.

This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm's clients.


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