Up to 249 Investors Now Allowed for Angel Capital Funds; 99 Investor Problem Change Removed

By: Mark Graffagnini, Cara Stone, LLP, ACA Public Policy Advisory Council Member

The Investment Company Act of 1940 (the “ICA”) defines an “investment company” as any issuer which “is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities.” This definition generally includes angel funds, venture capital funds and other types of private equity and hedge funds, unless an exemption applies.

Classification as an “investment company” imposes certain requirements on funds, such as registration and disclosures to investors and additional regulations. Many venture capital, angel capital and private equity funds usually claim an exemption from registration and the more burdensome regulation that accompanies registration as an investment company by claiming an exemption under Section 3(c)(1) of the ICA. Practitioners know Section 3(c)(1) as the “private fund exemption.” Parties claiming the exemption could exclusively rely on the following characteristics:

Old Law

  • The fund has fewer than 100 beneficial investors (known as the “99 Investor Problem”); and
  • The fund does not publicly fundraise (for example, by general advertising on the internet)

Angels and other investors who regularly syndicate deals complained about this 99 Investor Problem because the definition of “beneficial owners” requires that the regulatory authorities look past corporate law formalities to determine whether the 100 beneficial owner threshold had been reached.  See the following posts for more information: Feld Thoughts, ACA Blog summarizing the past issues and fight for the new law.

Effective May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act, Public Law No. 115-174, which clarified that certain types of small funds were could rely on the benefit of exemption from registration under the 1940 Act.  The 99 Investor Problem was solved by raising the limit of investors in a small fund to 250, provided that certain other requirements were met. The new law provides an exemption from investment company registration for funds that can meet certain criteria. Specifically, the rules exempt from the definition of an investment company issuers who are “are beneficially owned by not more than one hundred persons (or, in the case of a qualifying venture capital fund, 250 persons).”

New Law

  • Fund has fewer than 250 beneficial owners (maximum is 249 investors!);
  • Is a “qualifying venture capital fund”
    • Not more than $10,000,000 in aggregate capital contributions and uncalled committed capital;
    • Represents that it pursues a “venture capital strategy”;
    • Holds 80% or more assets in “qualifying investments” (equity securities of portfolio companies);
    • Does not lend or borrow in excess of 15% of assets;
    • Has limited redemption rights for investors; and
    • Is not a registered investment company; or
    • Regulated/licensed “small business investment companies”

Rules Regarding Investment Advisers Remains Unchanged

The Economic Growth, Regulatory Relief and Consumer Protection Act did not change the requirements that “investment advisers” register or become exempt reporting advisers under Dodd-Frank. In other words, if certain individuals or fund managers take compensation for managing a “qualifying venture capital fund,” then they presumably must still file certain information with the SEC on Form ADV and/or subject themselves to certain state regulatory frameworks.


The new law has the primary impacts:

  • After May 24, 2018, small, “qualifying venture capital funds” (under $10,000,000) may have up to 249 investors;
  • Angel funds wishing to claim the benefit of these higher limits must be “qualified venture capital funds;”
  • Funds that want to raise more than $10,000,000 must still limit investors to 99 investors;
  • Investment adviser registration (or exempt reporting adviser) rules are not changed.