Ask a MoFo: Startup Regulatory Frameworks

As a founder of a startup, you may consider an equity financing opportunity with a venture capital firm (a VC), but it is important to understand some of the regulatory frameworks that apply to VCs and how they might impact the structure of your financing.

Regulatory Framework

There are two regulatory considerations you should keep in mind when negotiating with VCs: (i) VCs operate under Section 203(l) of the Advisers Act of 1940, as amended, and file as venture capital exempt reporting advisers with the SEC (the “Advisers Act Exemption”), and (ii) VCs rely on the venture capital operating company exemption (“VCOC Exemption”) under the Employee Retirement Income Security Act of 1974. The Advisers Act Exemption and VCOC Exemption have various requirements, but the key ones for founders to understand are the 80% rule and management rights requirement.

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