The SEC has announced a change that will affect the venture capital market. Beginning in late September, the dollar definition for a "qualifying venture fund" will rise to $12 million from the current $10 million.

Qualified venture funds are exempt from having to register with the SEC as an investment company even though they may have up to 250 accredited investors. Furthermore, as TechCrunch writes, "the only other way a private fund can remain exempt from registering with the SEC as an investment company is if it has no more than 100 investors," which makes qualified venture funds unique.

The SEC's new rule plays out against a backdrop of a so-called VC bear market that began in 2022.

"Between 50% and 70% of VC backed startups went out of business last year," Forbes writes. "Data from Carta shows that more than half of startups founded between 2017 and 2023 that had raised more than $1 million went out of business in 2023. Even worse: startup closures in the first quarter of 2024 were much greater than each of the quarters in 2023."

But PitchBook calls out that VC funds with "emerging managers" (GPs with 3 or fewer successful fund launches) have consistently outperformed their more established peers since the late 1990s, even if their returns are more volatile.

Verdict

Clearly the SEC rule change is mostly an inflation adjustment. However, in this tight market, the start-up community will only benefit from this renewed definition and expanded pool of funds.