With Sydecar’s Fund+, you can execute investments that follow a venture capital strategy.
With Sydecar’s Fund+, you can form a private fund that pursues a venture capital strategy (VC fund). The advisor/fund manager of a VC fund may generally enjoy these benefits:
- Accept accredited investors as members of the fund
- 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)
- Accept up to 249 investors in the fund if the fund has less than $10M in commitments
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." Generally, a qualifying investment is a startup that issues shares directly to the fund (and not through any intermediary or third party).
Examples of Qualifying vs. Non-Qualifying Investments
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 NOT Being a VC Fund
The biggest downside is that investors in a non-VC fund generally must be qualified clients or qualified purchasers to be charged carried interest; whereas, a VC fund can charge carried interest to accredited investors as well.
Also, non-VC funds are generally limited to 100 investors, regardless of the fund size.
There are additional challenges that could arise from funds investing in other funds. These include:
- The need to complete the investee company’s subscription agreement
- The need to meet their legal and compliance requirements with additional KYC/AML procedures, which may involve 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, which translates to more expensive legal fees in an already expensive venture.
Consequently, Sydecar has chosen to focus on VC funds before addressing the challenges and considerations of non-VC funds.