Sydecar's Fund+ structure can be used to make qualifying VC investments.
With Sydecar’s Fund+, you can form a private fund to pursue a venture capital strategy. These funds are often called VC funds.
In exchange for operating a fund, advisors or fund managers may generally enjoy these benefits:
- Accept accredited investors as members of the fund
- Accept up to 249 investors in the fund (if the fund has less than $10M in commitments)
- Charge carried interest to investors
- Claim the venture capital adviser exemption under The Advisers Act of 1940 so that an advisor/fund manager will not have to register with the U.S. Securities and Exchange Commission (SEC)
A fund is considered a VC fund and enjoys all the above benefits if at least 80% of the fund's commitments are in "qualifying investments."
Examples of Qualifying vs. Non-Qualifying Investments
A qualifying investment must generally be a startup that issues shares directly to the fund (and not through any intermediary or third party). Understanding what constitutes a qualifying investment vs. a non-qualifying one is important, as there are consequences for not being considered a VC fund.
Consider these examples:
Qualifying Investment
- A fund acquires its investment through a SAFE with the startup
- A fund acquires its investment through a convertible note with the startup
- A fund acquires shares through a priced round with the startup
Non-qualifying Investment
- A fund invests in another fund
- A fund acquires shares from an employee
- A fund acquires shares through a transfer from a third party (and not from the company directly)
Implications of Losing VC Fund Status
A fund is considered a VC fund and enjoys all the above benefits if at least 80% of the fund's commitments are in "qualifying investments." However, if a fund’s commitments exceed the threshold of allowed non-qualifying investments, it might lose its status as a VC fund. This comes with consequences.
The biggest consequence is that non-VC funds cannot charge carried interest to accredited investors. Non-VC funds can only charge carried interest to qualified clients or qualified purchasers.
However, other meaningful consequences exist of a fund loses VC fund status. These include:
- Limitations on investors. Non-VC funds are generally limited to 100 investors, regardless of the fund size.
- More paperwork. Non-VC funds must complete the investee company’s subscription agreement.
- The need to meet additional legal and compliance requirements. You might have to conduct additional KYC/AML procedures, which might include identifying your investor’s name, citizenship, ownership interest, etc.
- A need to retain the counsel of an attorney to stay within the bounds of these agreements. This could translate to more expensive legal fees in an already expensive venture.
These consequences are weighty, and one reason why Sydecar has chosen to focus on VC funds before addressing the challenges and considerations of non-VC funds.