A venture fund that issues securities to investors would ordinarily be required to register as an investment company under the Investment Company Act of 1940. It avoids that requirement by relying on either Section 3(c)(1) or Section 3(c)(7). Section 3(c)(1) exempts a fund whose outstanding securities are beneficially owned by no more than 100 persons (with special look-through counting rules for entity investors), provided the fund does not make or propose to make a public offering. The 100-beneficial-owner limit is a hard cap — a single investor over the limit can cause the fund to lose its exemption — and requires ongoing diligent tracking of the beneficial owner count, including proper look-through analysis for LP entities such as fund of funds. Section 3(c)(7) exempts a fund whose securities are owned exclusively by "qualified purchasers" — individuals or family companies with at least $5 million in investments, or institutional entities with at least $25 million in investments. Critically, Section 3(c)(7) has no investor count cap, making it the preferred structure for large funds with institutional LP bases. Gurpreet Bal advises fund managers that the choice between 3(c)(1) and 3(c)(7) is not merely an investor count decision — it determines who can invest, shapes fund marketing, and has implications for whether the fund can accept smaller family office investors who may be accredited but not qualified purchasers.
To avoid registration of the fund interests themselves as securities under the Securities Act of 1933, venture funds rely on Regulation D, which provides safe harbor exemptions from the registration requirement. Rule 506(b) is the traditional venture fund exemption: it permits sales to an unlimited number of accredited investors and up to 35 non-accredited-but-sophisticated investors, but prohibits general solicitation or advertising. Rule 506(c), added by the JOBS Act of 2012, allows general solicitation and advertising but requires that all purchasers be accredited investors and that the issuer take reasonable steps to verify accredited status — not merely rely on LP self-certification. Gurpreet S. Bal advises most fund managers to use Rule 506(b) rather than 506(c), because the general solicitation prohibition under 506(b) is manageable for a GP with existing investor relationships, while the verification burden and legal liability associated with 506(c) general solicitation imposes operational cost that rarely justifies the marginal fundraising benefit for institutional fund raises. Both rule variants require a Form D filing with the SEC within 15 days of the first sale of fund interests, as well as state blue sky filings in each state where LP interests are sold.
The SEC's 2020 amendments to the accredited investor definition expanded eligibility beyond pure net worth and income thresholds to include individuals holding Series 7, 65, or 82 licenses, as well as "knowledgeable employees" of private funds and certain family offices. The traditional financial thresholds — $1 million net worth excluding primary residence, or $200,000 individual / $300,000 joint annual income in each of the prior two years with a reasonable expectation of the same — remain in place. For 3(c)(7) funds, the qualified purchaser threshold is more demanding: individuals must have at least $5 million in "investments" as defined under the Investment Company Act, which counts investment portfolios but excludes primary residence and business interests used in an operating trade. Institutional entities qualify as qualified purchasers at $25 million in investments. Gurpreet Bal advises fund managers to conduct thorough investor qualification diligence before accepting subscriptions, maintaining documentation of the basis for each investor's eligibility classification. A 3(c)(7) fund that inadvertently admits a non-qualified purchaser has a serious compliance problem, and curing that defect after the fact requires rescission or other remedial action that can damage investor relationships and the fund's legal standing.
Rule 144A under the Securities Act provides an exemption for resales of restricted securities to Qualified Institutional Buyers (QIBs) — entities that own and invest on a discretionary basis at least $100 million in securities. While Rule 144A is more commonly associated with debt and equity capital markets transactions than direct fund formation, it is relevant to venture funds in certain secondary transfer contexts and in structuring co-investment vehicles marketed to large institutional counterparties. The more pervasive marketing constraint for venture funds is the general solicitation prohibition under Rule 506(b). This prohibition means that fund managers cannot advertise fund interests publicly, post pitch decks on public websites, or reach out to investors with whom they have no pre-existing substantive relationship without triggering general solicitation concerns. Gurpreet S. Bal advises fund managers on the pre-existing relationship doctrine — what constitutes an adequate pre-existing relationship to support a 506(b) placement without general solicitation — and on structuring fund marketing processes that comply with both federal and state securities laws. Placement agents engaged to assist in fundraising must be registered broker-dealers, and their compensation arrangements must be disclosed to investors. Failure to use a registered placement agent when one is effectively acting as a broker is a recurring compliance risk that Gurpreet Bal specifically counsels against.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises venture funds, fund managers, founders, and investors on fund formation, venture financings, M&A, and corporate governance. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology.