Qualifying Venture Capital Funds Inflation Adjustment, 70479-70483 [2024-19229]
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Federal Register / Vol. 89, No. 169 / Friday, August 30, 2024 / Rules and Regulations
require making them effective in less
than 30 days.
Because of the close and immediate
relationship between these SIAPs,
Takeoff Minimums and ODPs, and
safety in air commerce, I find that notice
and public procedure under 5 U.S.C.
553(b) are impracticable and contrary to
the public interest and, where
applicable, under 5 U.S.C. 553(d), good
cause exists for making these SIAPs
effective in less than 30 days.
The FAA has determined that this
regulation only involves an established
body of technical regulations for which
frequent and routine amendments are
necessary to keep them operationally
current. It, therefore—(1) is not a
‘‘significant regulatory action’’ under
Executive Order 12866; (2) is not a
‘‘significant rule’’ under DOT regulatory
Policies and Procedures (44 FR 11034;
February 26, 1979); and (3) does not
warrant preparation of a regulatory
evaluation as the anticipated impact is
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Issued in Washington, DC, on August 16,
2024.
Thomas J. Nichols,
Standards Section Manager, Flight
Procedures and Airspace Group, Flight
Technologies and Procedures Division, Office
of Safety Standards, Flight Standards Service,
Aviation Safety, Federal Aviation
Administration.
Adoption of the Amendment
Accordingly, pursuant to the
authority delegated to me, 14 CFR part
97 is amended by amending Standard
Instrument Approach Procedures and
Airport
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BILLING CODE 4910–13–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 270
[Release No. IC–35305; File No. S7–2024–
01]
RIN 3235–AN33
Qualifying Venture Capital Funds
Inflation Adjustment
Securities and Exchange
Commission.
ACTION: Final rule.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’) is
adopting a rule that adjusts for inflation
the dollar threshold used in defining a
‘‘qualifying venture capital fund’’ under
the Investment Company Act of 1940
(‘‘Investment Company Act’’ or ‘‘Act’’).
The final rule also allows the
Commission to adjust for inflation this
threshold amount by order every five
years and specifies how those
adjustments will be determined. This
SUMMARY:
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List of Subjects in 14 CFR Part 97
Air Traffic Control, Airports,
Incorporation by reference, Navigation
(Air).
City
[FR Doc. 2024–19547 Filed 8–29–24; 8:45 am]
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so minimal. For the same reason, the
FAA certifies that this amendment will
not have a significant economic impact
on a substantial number of small entities
under the criteria of the Regulatory
Flexibility Act.
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FDC No.
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rule implements the inflation
adjustment requirements of the
Economic Growth, Regulatory Relief,
and Consumer Protection Act of 2018
(‘‘EGRRCPA’’) relating to qualifying
venture capital funds.
DATES: This rule is effective September
30, 2024.
FOR FURTHER INFORMATION CONTACT:
Michael Khalil, Senior Counsel, Frank
Buda, Senior Special Counsel, or Brian
McLaughlin Johnson, Assistant Director,
Investment Company Regulation Office,
at (202) 551–6792, Division of
Investment Management, Securities and
Exchange Commission, 100 F Street NE,
Washington, DC 20549–8549.
SUPPLEMENTARY INFORMATION: The
Commission is adopting new 17 CFR
270.3c–7 (‘‘rule 3c–7’’) under the
Investment Company Act.
The Commission is adopting final rule
3c–7 to adjust for inflation the dollar
threshold used in defining a ‘‘qualifying
venture capital fund’’ under the
Investment Company Act and to allow
the Commission to make subsequent
inflation adjustments by order according
to the rule.
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PART 97—STANDARD INSTRUMENT
APPROACH PROCEDURES
1. The authority citation for part 97
continues to read as follows:
■
Authority: 49 U.S.C. 106(f), 106(g), 40103,
40106, 40113, 40114, 40120, 44502, 44514,
44701, 44719, 44721–44722.
2. Part 97 is amended to read as
follows:
By amending: § 97.23 VOR, VOR/
DME, VOR or TACAN, and VOR/DME
or TACAN; § 97.25 LOC, LOC/DME,
LDA, LDA/DME, SDF, SDF/DME;
§ 97.27 NDB, NDB/DME; § 97.29 ILS,
ILS/DME, MLS, MLS/DME, MLS/RNAV;
§ 97.31 RADAR SIAPs; § 97.33 RNAV
SIAPs; and § 97.35 COPTER SIAPs,
Identified as follows:
■
* * * Effective Upon Publication
Procedure name
RNAV (GPS) RWY 17, Orig-C.
RNAV (GPS) RWY 35, Orig-B.
RNAV (GPS) RWY 29, Amdt 1.
RNAV (GPS) RWY 11, Amdt 1.
ILS Z OR LOC RWY 17, Amdt 8C.
ILS OR LOC RWY 36L, ILS RWY 36L (SA
CAT I), ILS RWY 36L (SA CAT II), Orig.
Section 3(a) of the Investment
Company Act defines the term
‘‘investment company’’ for purposes of
the Act, and section 3(c)(1) provides
certain exclusions from that definition.1
Section 504 of EGRRCPA amended
section 3(c)(1) of the Investment
Company Act by excluding ‘‘qualifying
venture capital funds’’ from the
investment company definition.2
Section 504 of EGRRCPA also added
new Investment Company Act section
3(c)(1)(C), defining a ‘‘qualifying
venture capital fund’’ as ‘‘a venture
capital fund that has not more than
$10,000,000 in aggregate capital
contributions and uncalled committed
capital.’’ 3 The statutory definition
requires this $10,000,000 threshold ‘‘be
indexed for inflation once every five
1 See
15 U.S.C. 80a–3(a) and 80a–3(c)(1).
Law 115–174, section 504 (May 24,
2018); 15 U.S.C. 80a–3(c)(1). In order to meet this
statutory exclusion, a qualifying venture capital
fund’s outstanding securities cannot be beneficially
owned by more than 250 persons, and the fund
must not be making, or presently proposing to
make, a public offering of its securities. Id.
3 Public Law 115–174, section 504 (May 24,
2018); 15 U.S.C. 80a–3(c)(1)(C)(i). For purposes of
section 3(c)(1), a ‘‘venture capital fund’’ has the
meaning given the term in 17 CFR 275.203(l)–1. 15
U.S.C. 80a–3(c)(1)(C)(ii).
2 Public
I. Introduction
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at 0901 UTC on the dates specified, as
follows:
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Federal Register / Vol. 89, No. 169 / Friday, August 30, 2024 / Rules and Regulations
years by the Commission, beginning
from a measurement made by the
Commission on a date selected by the
Commission, rounded to the nearest
$1,000,000.’’ 4
Accordingly, in February 2024, the
Commission proposed new rule 3c–7
under the Investment Company Act to
implement these requirements.5 The
Commission proposed to use December
2023 as the current measurement date
and proposed adjusting the current
dollar threshold for determining what
constitutes a qualifying venture capital
fund under section 3(c)(1)(C) of the Act
to $12,000,000. Additionally, to
implement the future statutorily
required inflation adjustments, the
proposed rule included provisions that
would allow the Commission to make
future inflation adjustments by order,
according to the methodology described
in the rule.
We received two comment letters that
addressed the specifics of the proposal.6
Those commenters were generally
supportive.7 They described the
importance of implementing inflation
adjustments for determining the
financial thresholds applicable to
qualifying venture capital funds and
supported the proposed procedures for
implementing future inflation
adjustments.
II. Discussion
Pursuant to section 3(c)(1)(C) of the
Act and section 504 of EGRRCPA, we
are adopting as proposed rule 3c–7 to
update for inflation the dollar threshold
for defining a ‘‘qualifying venture
capital fund’’ under section 3(c)(1)(C) of
the Act. As proposed, the final rule also
provides that the Commission will make
future inflation adjustments by order
every five years and specifies how those
adjustments will be determined.
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A. Current Inflation-Adjusted Definition
of Qualifying Venture Capital Fund
Pursuant to EGRRCPA, final rule 3c–
7(a) adjusts for inflation the dollar
threshold for purposes of defining a
4 Public Law 115–174, section 504 (May 24,
2018); 15 U.S.C. 80a–3(c)(1)(C)(i).
5 Qualifying Venture Capital Funds Inflation
Adjustment, Investment Company Act Release No.
35129 (Feb. 14, 2024) [89 FR 12995 (Feb. 21, 2024)]
(‘‘Proposing Release’’). The comment letters on the
proposal are available at https://www.sec.gov/
comments/s7-2024-01/s7202401.htm.
6 See Comment Letter of Joel Wresh (Mar. 16,
2024) (‘‘Wresh Comment Letter’’); Comment Letter
of Arushi Mehra (Feb. 15, 2024) (‘‘Mehra Comment
Letter’’).
7 Two other commenters broadly opposed the
proposal but did not address the substance of the
proposed rule. See Comment Letter of Benjamin
Nisly (May 15, 2024); Comment Letter of Joseph
(Feb. 22, 2024). The other commenters addressed
matters not relevant to the proposal.
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qualifying venture capital fund under
section 3(c)(1)(C) of the Investment
Company Act.8 Substantially as
proposed, final rule 3c–7(a) uses
December 2023 as the current
measurement date and adjusts the dollar
threshold to $12,000,000 or, following
November 1, 2029 (i.e., approximately
five years after the effective date of this
rule), the dollar amount specified in the
most recent order issued by the
Commission in accordance with this
final rule and as published in the
Federal Register.9
As proposed, this revised dollar
threshold takes into account the effects
of inflation by reference to the historic
and current levels of the Personal
Consumption Expenditures Chain-Type
Price Index (‘‘PCE Index’’),10 which is
published by the Department of
Commerce.11 The PCE Index is often
used as an indicator of inflation in the
personal sector of the U.S. economy,12
8 Final rule 3c–7’s definition of qualifying venture
capital fund is expressly limited to construing the
term for purposes of section 3(c)(1) of the Act.
Under 12 CFR 351.10, the term qualifying venture
capital fund has a different meaning.
9 The final rule differs from the proposal only in
that it specifies Nov. 1, 2029, as the date after which
the Commission would issue the next inflation
adjustment order, rather than instructing the
Federal Register to insert the date that is five years
after the effective date of the final rule. This
approach is consistent with the proposal in that
Nov. 1, 2029, is approximately five years after the
estimated effective date of this rule and eliminates
the need for the Federal Register to have to perform
the calculation. Such orders will also be available
on the Commission’s website.
10 The revised dollar threshold reflects inflation
as of Dec. 2023, and is rounded to the nearest
$1,000,000 as required by section 3(c)(1)(C) of the
Act. The Dec. 2023 PCE Index was 121.421, and the
May 2018 PCE Index was 101.941. 121.421/101.941
× $10,000,000 = $11,910,909; $11,910,909 rounded
to the nearest multiple of $1,000,000 =
$12,000,0000. As described in the Proposing
Release, we also considered using the Consumer
Price Index for all Urban Consumers (‘‘CPI–U’’) to
conduct this inflation adjustment. See Proposing
Release at nn.13–14. After rounding to the nearest
$1,000,000 as required by EGRRCPA, both indexes
yielded an adjusted inflation threshold of
$12,000,000, or an increase of $2,000,000. Id. at
nn.15–16. We did not receive any comments on our
proposed use of the PCE Index to conduct inflation
adjustments under proposed rule 3c–7, or on the
use of CPI–U as an alternative.
11 The values of the PCE Index are available from
the Bureau of Economic Analysis, a bureau of the
Department of Commerce. See https://www.bea.gov.
The PCE Index measures the prices that people
living in the United States, or those buying on their
behalf, pay for goods and services. The PCE Index
is known for capturing inflation (or deflation)
across a wide range of consumer expenses and
reflecting changes in consumer behavior. See
https://www.bea.gov/data/personal-consumptionexpenditures-price-index.
12 See Clinton P. McCully, Brian C. Moyer &
Kenneth J. Stewart, Comparing the Consumer Price
Index and the Personal Consumption Expenditures
Price Index, Survey of Current Bus., Nov. 2007, at
26 n.1 (PCE Index measures changes in ‘‘prices paid
for goods and services by the personal sector in the
U.S. national income and product accounts’’ and is
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and the Commission routinely has used
the PCE Index in similar contexts in
Commission rules, and it is also used in
provisions of the federal securities
laws.13 We are using the PCE Index to
calculate inflation adjustments for this
rulemaking because the methodology
and scope of the PCE Index, which
considers both urban and rural
households and expenditures made on
their behalf by third parties, reflects a
broad sector of the U.S. economy and in
light of the additional considerations
discussed in the Economic Analysis. As
discussed below, the scope of the PCE
Index, covering all households in
America, is more relevant to the affected
parties of this final rule than is the
scope of the CPI–U, which only reflects
urban households, because persons in
both rural and urban areas in America
can invest in venture capital funds and
can be stakeholders in firms that receive
venture capital funding.14 Additionally,
the PCE Index incorporates category
weights on a quarterly basis, and
incorporates multiple surveys of
businesses, some of which are
government mandated and carry fines
primarily used for macroeconomic analysis and
forecasting). See also Federal Reserve Board,
Monetary Policy Report to the Congress, at n.1 (Feb.
17, 2000), available at https://
www.federalreserve.gov/boarddocs/hh/2000/
february/ReportSection1.htm#FN1 (noting the
reasons for using the PCE Index rather than the
consumer price index).
13 See, e.g., Investment Adviser Performance
Compensation, Investment Advisers Act Release
No. 3372 (Feb. 15, 2012) [77 FR 10358, 10367 (Feb.
22, 2012)] (using the PCE Index in connection with
required inflation adjustments to the dollar
thresholds in the definition of ‘‘qualified client’’
appearing in 17 CFR 275.205–3 (‘‘rule 205–3’’)
under the Investment Advisers Act of 1940
(‘‘Advisers Act’’), and stating that the PCE Index is
widely used as a broad indicator of inflation in the
economy, and that the Commission has used it in
other contexts); Definitions of Terms and
Exemptions Relating to the ‘‘Broker’’ Exceptions for
Banks, Securities Exchange Act Release No. 56501
(Sept. 24, 2007) [72 FR 56514 (Oct. 3, 2007)] (using
PCE Index in adopting periodic inflation
adjustments to the fixed-dollar thresholds for both
‘‘institutional customers’’ and ‘‘high net worth
customers’’ under Rule 701 of Regulation R
‘‘because it is a widely used and broad indicator of
inflation in the U.S. economy’’); see also
Amendments to Form ADV, Investment Advisers
Act Release No. 3060 (July 28, 2010) [75 FR 49234
(Aug. 12, 2010)] (using PCE Index in increasing for
inflation the threshold amount for prepayment of
advisory fees that triggers an adviser’s duty to
provide clients with an audited balance sheet and
the dollar threshold triggering the exception to the
delivery of brochures to advisory clients receiving
only impersonal advice). The Dodd-Frank Act also
requires the use of the PCE Index to calculate
inflation adjustments for the cash limit protection
of each investor under the Securities Investor
Protection Act of 1970. See section 929H(a) of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, Public Law 111–203, 124
Stat. 1376 (2010), codified at 15 U.S.C. 78fff–3.
14 See infra section IV.
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for nonresponse. No commenters
disagreed with the use of the PCE Index.
B. Future Inflation Adjustments to the
Definition of Qualifying Venture Capital
Fund
As proposed, final rule 3c–7(b)
provides that the dollar threshold for
qualifying venture capital funds shall be
adjusted for inflation by order of the
Commission every five years.15 Also as
proposed, final rule 3c–7(b) specifies
the PCE Index (or any successor index
thereto) as the inflation index used to
calculate future inflation adjustment of
the dollar threshold in the rule.16 We
are using the PCE Index for these
updates for the same reasons we are
using the PCE Index for the proposed
initial adjustment.17 One commenter
supported the proposal’s establishment
of clear criteria for future inflation
adjustments.18 Another commenter
observed that the proposal’s provisions
regarding future inflation adjustments
were helpful because they would allow
for simple recalculations going forward
without the need for a burdensome rulemaking process.19
C. Effective Date
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As proposed, because the rule
implements a required inflation
adjustment to an existing statutory
exclusion from regulation, we are not
including a compliance period or
extended effective date for final rule 3c–
7.20 Reliance on section 3(c)(1) is
voluntary and a fund that newly meets
the definition of a qualifying venture
capital fund under rule 3c–7 can choose
whether to rely on the exclusion
15 Final rule 3c–7 states that the Commission will
issue an order on or about Nov. 1, 2029, and
approximately every five years thereafter, adjusting
for inflation the dollar threshold necessary to be a
qualifying venture capital fund for purposes of
section 3(c)(1) of the Act. This aspect of the final
rule differs from the proposal only in that it
specifies Nov. 1, 2029 (which is approximately five
years after the estimated effective date of the final
rule) as the date on or about which the Commission
will issue the next inflation adjustment order,
rather than instructing the Federal Register to insert
the date five years after the effective date of the rule
as that date.
16 Final rule 3c–7 provides that the dollar
threshold for qualifying venture capital funds will
be adjusted for inflation by dividing the year-end
value of the PCE Index for the calendar year
preceding the calendar year in which the order is
being issued, by the year-end value of the PCE
Index for the calendar year 2018, multiplying
$10,000,000 (i.e., the original 2018 statutory
threshold for a qualifying venture capital fund) by
that quotient, and rounding the product to the
nearest multiple of $1,000,000.
17 See supra footnotes 12–14 and accompanying
text and infra section IV.
18 See Mehra Comment Letter.
19 See Wresh Comment Letter.
20 No commenters addressed this aspect of the
proposal.
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provided by section 3(c)(1) for such
funds. Final rule 3c–7 will be effective
September 30, 2024.
III. Other Matters
Pursuant to the Congressional Review
Act,21 the Office of Information and
Regulatory Affairs has designated final
rule 3c–7 as not a ‘‘major rule’’ as
defined by U.S.C. 804(2). If any of the
provisions of this rule, or the
application thereof to any person or
circumstance, is held to be invalid, such
invalidity shall not affect other
provisions or application of such
provisions to other persons or
circumstances that can be given effect
without the invalid provision or
application.
IV. Economic Analysis
The Commission is sensitive to the
economic effects of final rule 3c–7. To
comply with the inflation adjustment
required under EGRRCPA, we are
adopting rule 3c–7 to state the current
threshold for qualifying venture capital
funds as indexed for inflation. This rule
adjusts the threshold in the definition of
the term ‘‘qualifying venture capital
fund’’ from $10,000,000 to $12,000,000
in response to inflation as measured by
the PCE Index and allows the
Commission to perform future
statutorily required inflation
adjustments using the same
methodology.
For purposes of analyzing the
economic effects of the rule, we use as
our baseline the current venture capital
fund market and the current regulatory
framework. To be excepted from
registration under section 3(c)(1) of the
Act, an issuer (including a venture
capital fund) must, among other things,
either have no more than 100 beneficial
owners, or in the case of a qualifying
venture capital fund, which currently is
defined as having no more than
$10,000,000 in aggregate capital
contributions and uncalled committed
capital, have no more than 250
beneficial owners.
An adviser to a venture capital fund
that is either registered with the
Commission or is an ‘‘exempt reporting
adviser’’ is required to file reports on
Form ADV.22 Based on this data, there
21 5
U.S.C. 801 et seq.
adviser to a venture capital fund may or
may not be required to register with the
Commission depending on its specific facts and
circumstances including the adviser’s total
regulatory assets under management, the state of its
principal office, and whether it solely manages
private funds or venture capital funds. Many of the
advisers to qualifying venture capital funds are
‘‘exempt reporting advisers.’’ See, e.g., Exemptions
for Advisers to Venture Capital Funds, Private Fund
Advisers with Less Than $150 Million in Assets
22 An
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are at least 36,819 venture capital funds,
of which at least 25,822 are qualifying
venture capital funds as of June 2024.23
Of the qualifying venture capital funds,
989 have more than 100 beneficial
owners and so could not use the section
3(c)(1) exclusion absent meeting the
current $10,000,000 asset threshold.
Increasing the asset threshold in the
definition of the term ‘‘qualifying
venture capital fund’’ will increase the
number of venture capital funds that
can be qualifying venture capital funds.
Specifically, we estimate that there are
approximately five venture capital
funds that are not currently excluded
from registration under section 3(c)(1)
but that could be defined as a qualifying
venture capital fund after the threshold
is adjusted for inflation to
$12,000,000.24
Incentives for funds to change their
behaviors to stay within the regulatory
definition of a ‘‘qualifying venture
capital fund’’ will strengthen or be
mitigated depending on the specific
circumstances of the fund. When the
threshold is increased to $12,000,000, a
fund near the current $10,000,000
threshold in aggregate capital
contributions and uncalled capital
commitments, and a number of
beneficial owners above 100 but well
below 250, will have additional room to
raise capital while remaining a
Under Management, and Foreign Private Advisers,
Investment Advisers Act Release No. 3222 (June 22,
2011) [76 FR 39645 (July 6, 2011)], at n.20 and
accompanying text. Exempt reporting advisers are
not subject to the investment adviser registration
requirements under the Advisers Act. They are,
however, subject to certain other requirements
under the Advisers Act and its rules that also apply
to registered advisers, including the requirement to
file reports on Form ADV and the Advisers Act’s
antifraud provisions. See 17 U.S.C. 80b–3(l).
23 Based on Form ADV data between July 1, 2023,
and June 30, 2024. These estimates encompass all
private funds reported on Form ADV that advisers
indicated are venture capital funds. The estimate of
qualifying venture capital funds includes only these
funds that qualify for the exclusion from the
definition of investment company under section
3(c)(1) of the Act, have no more than 250 beneficial
owners, and report gross assets of no more than
$10,000,000. These numbers somewhat
underestimate the total number of relevant funds.
First, gross assets may include assets that are not
considered aggregate capital contributions or
uncalled capital commitments. Second, with certain
exceptions, advisers with less than $25 million in
regulatory assets under management are prohibited
from registering with the Commission and must
instead register with state regulators. Some states
require these advisers to file Form ADV under state
registration, while other states do not. Accordingly,
these estimates do not capture funds managed by
advisers registered in states that do not require
filing Form ADV.
24 This estimate is based on the number of
venture capital funds reported on Form ADV
between July 1, 2023, and June 30, 2024, that have
gross asset value between $10,000,000 and
$12,000,000, between 100 and 250 beneficial
owners, and currently do not qualify for an
exception under section 3(c)(1).
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qualifying venture capital fund.
Accordingly, it will have weaker
incentives to prevent growth until its
aggregate capital contributions and
uncalled capital commitments approach
the new threshold. Funds near an
anticipated future adjusted threshold of
aggregate capital contributions and
uncalled capital commitments could
have a greater incentive to maintain a
balance below this future threshold and
maintain fewer than 250 beneficial
owners.
While the immediate impacts
described above are likely to be
meaningful for funds near the existing
and future adjusted thresholds, the
overall effect of the rule on the venture
capital fund market will be minimal.
Commenters who discussed the effects
of inflation agreed that the inflation
adjustment should maintain the scope
of funds that can be defined as a
qualifying venture capital fund, thereby
preserving the economic effects
associated with the original provision.25
Relatively few funds will be directly
impacted by the adopted change in the
asset threshold. Accordingly, the rule
will not substantively impact efficiency,
competition, or capital formation in the
near term. In addition, over time, as
future inflation adjustments are made,
the rule will preserve the costs and
benefits associated with the original
provision by maintaining a consistent
threshold standard. At the margin, the
rule may encourage market competition
by lowering barriers to entry for
emerging venture capital managers.
Specifically, it could lower compliance
costs for eligible funds by exempting
them from certain regulatory
requirements such as registration as an
investment company and make it easier
for their managers to raise smaller
amounts of capital from a larger number
of accredited investors.
Absent the periodic inflation
adjustments that the rule will
implement, the capital threshold for
qualifying venture capital funds would
have, over time, shrunk in real terms.
This could have either resulted in
higher compliance costs for these types
of funds—because these funds would be
newly required to register under the
Act—or caused the managers of these
funds to change how they operate to
avoid or mitigate these costs.26 Whether
25 See Wresh Comment Letter and Mehra
Comment Letter.
26 For example, such funds may have decided to
merge with other funds to spread out any fixed
costs from registration or stop operating these types
of funds altogether. They may have also chosen to
limit the number of investors to be under the
conventional section 3(c)(1) limit of no more than
100 beneficial owners.
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managers changed their behavior or not,
the amount of money invested in
qualifying venture capital funds would
likely have decreased, and at least some
of the capital that would otherwise have
been allocated to these funds would
likely have gone to funds that are not
excluded from the Act and thus would
have received the investor protection
benefits provided by the Act.
Because the rule will implement the
statutory inflation adjustments
mandated by EGRRCPA, the only
reasonable alternative to be considered
relates to the choice of inflation index
to be used. As discussed in the
proposal,27 two indexes were
considered—the PCE Index and CPI–U.
These measures differ because of
different scopes and different
methodologies. CPI–U reflects only
expenditures made directly by urban
households, whereas the PCE Index
considers both urban and rural
households and considers expenditures
made on their behalf by third parties,
such as employer-paid health insurance.
The scope of the PCE Index, covering all
American households, is more relevant
to the affected parties of this final rule
than is the scope of the CPI–U, which
only reflects urban households, because
all Americans, not just those in urban
areas, can invest in venture capital
funds and can be stakeholders in firms
that receive venture capital funding.
The PCE Index also better captures
substitution effects since its category
weights update quarterly whereas those
of the CPI–U update annually. Category
weights reflect the quantity of goods and
services purchased in a particular
category. As some determinants of
prices change, consumers will substitute
purchases between categories. Category
weights that change less frequently will
less accurately capture these
substitution effects. The indexes’ survey
methodologies also differ: CPI–U relies
on two voluntary consumer surveys
whereas the PCE Index incorporates
multiple surveys of businesses, some of
which are government mandated and
carry fines for nonresponse. No
commenters suggested that the CPI–U or
any other index would be a more
appropriate choice.
V. Paperwork Reduction Act
Final rule 3c–7 does not contain a
‘‘collection of information’’ requirement
within the meaning of the Paperwork
Reduction Act of 1995 (‘‘PRA’’), nor
does it create any new filing, reporting,
recordkeeping, or disclosure reporting
27 See Proposing Release at nn.13–16 and
accompanying text.
PO 00000
Frm 00034
Fmt 4700
Sfmt 4700
requirements.28 Accordingly, the PRA is
not applicable.29
VI. Regulatory Flexibility Act
Certification
The Commission certified, pursuant
to section 605(b) of the Regulatory
Flexibility Act of 1980 (‘‘RFA’’) 30 that
proposed rule 3c–7 would not, if
adopted, have a significant economic
impact on a substantial number of small
entities. The Commission included this
certification in section V of the
Proposing Release. Commenters did not
respond to the Commission’s requests
for comment regarding the
Commission’s certification, and we
continue to believe that final rule 3c–7
will not have a significant economic
impact on a substantial number of small
entities.31 As discussed in the Proposing
Release, based on a review of Form ADV
filings, we expect few small entities
would be affected by rule 3c–7’s
inflation adjustment provisions.32
Accordingly, we certify that the final
rule will not have a significant impact
on a substantial number of small
entities.
Statutory Authority
The Commission is adopting new rule
3c–7 under the authority set forth in the
Investment Company Act, particularly
sections 3 and 38 thereof [15 U.S.C. 80a
et seq.] and the Economic Growth,
Regulatory Relief, and Consumer
Protection Act of 2018, particularly
section 504 thereof [Pub. L. 115–174,
132 Stat. 1296].
List of Subjects in 17 CFR Part 270
Investment companies, Securities.
28 44
U.S.C. 3502(3).
U.S.C. 3501 et seq. The Proposing Release
requested comment on our conclusion that
proposed rule 3c–7 did not contain a ‘‘collection of
information.’’ We did not receive any comments
regarding PRA issues.
30 5 U.S.C. 605(b).
31 Generally, for purposes of the Investment
Company Act and the RFA, an investment company
is a small entity if, together with other investment
companies in the same group of related investment
companies, it has net assets of $50 million or less
as of the end of its most recent fiscal year. 17 CFR
270.0–10(a).
32 To qualify for a section 3(c)(1) exclusion, an
issuer must (among other things) have no more than
100 beneficial owners, or in the case of a qualifying
venture capital fund, no more than 250 beneficial
owners. 15 U.S.C. 80a–3(c)(1). A review of Form
ADV filings suggests that, as of June 2024, there are
approximately five venture capital funds that are
not currently relying on the exclusion in section
3(c)(1) of the Investment Company Act but that also
have between $10,0000 and $12,000,000 in
aggregate capital contributions and uncalled
committed capital, and between 100 and 250
beneficial owners, such that they could meet the
definition of a qualifying venture capital fund
under final rule 3c–7. See supra footnote 28. We do
not believe that five funds represent a ‘‘substantial
number’’ of small entities.
29 44
E:\FR\FM\30AUR1.SGM
30AUR1
Federal Register / Vol. 89, No. 169 / Friday, August 30, 2024 / Rules and Regulations
Text of Rule Amendments
For reasons set forth in the preamble,
we are amending title 17, chapter II of
the Code of Federal Regulations as
follows:
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
PART 270—RULES AND
REGULATIONS, INVESTMENT
COMPANY ACT OF 1940
[Docket No. FDA–2020–N–1395]
1. The general authority citation for
part 270 continues to read as follows:
Prohibition of Sale of Tobacco
Products to Persons Younger Than 21
Years of Age
Authority: 15 U.S.C. 80a–1 et seq., 80a–
34(d), 80a–37, 80a–39, 1681w(a)(1), 6801–
6809, 6825, and Pub. L. 111–203, sec. 939A,
124 Stat. 1376 (2010), unless otherwise
noted.
■
§ 270.3c–7 Inflation-adjusted definition of
qualifying venture capital fund.
ddrumheller on DSK120RN23PROD with RULES1
AGENCY:
Food and Drug Administration,
ACTION:
(a) Inflation-adjusted definition of
qualifying venture capital fund. For
purposes of section 3(c)(1)(C)(i) of the
Act (15 U.S.C. 80a–3(c)(1)(C)(i)), the
term qualifying venture capital fund
means a venture capital fund (as that
term is defined in 17 CFR 275.203(l)–1)
that has not more than $12,000,000 in
aggregate capital contributions and
uncalled committed capital, or,
following November 1, 2029, the dollar
amount specified in the most recent
order issued by the Commission in
accordance with paragraph (b) of this
section and as published in the Federal
Register.
(b) Future inflation adjustments.
Pursuant to section 3(c)(1)(C)(i) of the
Act (15 U.S.C. 80a–3(c)(1)(C)(i)), the
dollar amount specified in paragraph (a)
of this section shall be adjusted by order
of the Commission, issued on or about
November 1, 2029, and approximately
every five years thereafter. The adjusted
dollar amount established in such
orders shall be computed by:
(1) Dividing the year-end value of the
Personal Consumption Expenditures
Chain-Type Price Index (or any
successor index thereto), as published
by the United States Department of
Commerce, for the calendar year
preceding the calendar year in which
the order is being issued, by the yearend value of such index (or successor)
for the calendar year 2018; and
(2) Multiplying $10,000,000 times the
quotient obtained in paragraph (b)(1) of
this section and rounding the product to
the nearest multiple of $1,000,000.
Final rule.
The Food and Drug
Administration is issuing a final rule to
make conforming changes as required
by the Further Consolidated
Appropriations Act, 2020
(Appropriations Act), which established
a new Federal minimum age of sale for
tobacco products. These conforming
changes include increasing the
minimum age of sale for cigarettes,
smokeless tobacco, and covered tobacco
products from 18 to 21 years of age;
increasing the minimum age for age
verification by means of photographic
identification for cigarettes, smokeless
tobacco, and covered tobacco products
from under the age of 27 to under the
age of 30; increasing the minimum age
of individuals who may be present or
permitted to enter facilities that
maintain vending machines to sell
cigarettes, smokeless tobacco, or
covered tobacco products from 18 to 21
years of age; and increasing the
minimum age of individuals who may
be present or permitted to enter
facilities that maintain self-service
displays that sell cigarettes or smokeless
tobacco from 18 to 21 years of age.
DATES: This rule is effective September
30, 2024.
ADDRESSES: For access to the docket to
read background documents, go to
https://www.regulations.gov and insert
the docket number found in brackets in
the heading of this final rule into the
‘‘Search’’ box and follow the prompts,
and/or go to the Dockets Management
Staff, 5630 Fishers Lane, Rm. 1061,
Rockville, MD 20852, 240–402–7500.
FOR FURTHER INFORMATION CONTACT: Beth
Buckler, Center for Tobacco Products,
Food and Drug Administration,
Document Control Center, 10903 New
Hampshire Ave., Bldg. 71, Rm. G335,
Silver Spring, MD 20993–0002, 877–
287–1373, AskCTP@fda.hhs.gov.
SUPPLEMENTARY INFORMATION:
[FR Doc. 2024–19229 Filed 8–29–24; 8:45 am]
Table of Contents
BILLING CODE 8011–01–P
I. Purpose of the Regulatory Action
VerDate Sep<11>2014
19:33 Aug 29, 2024
Jkt 262001
PO 00000
II. Background
A. The Tobacco Control Act
B. The Deeming Rule and Covered Tobacco
Products
C. Further Consolidated Appropriations
Act, 2020
III. Legal Authority
IV. Description of the Final Rule
V. Economic Analysis of Impacts
A. Introduction
B. Benefits, Costs, and Transfers
VI. Paperwork Reduction Act of 1995
VII. Federalism
VIII. Consultation and Coordination With
Indian Tribal Governments
I. Purpose of the Regulatory Action
HHS.
SUMMARY:
*
*
*
*
2. Add § 270.3c–7 to read as follows:
By the Commission.
Dated: August 21, 2024.
Vanessa A. Countryman,
Secretary.
21 CFR Part 1140
RIN 0910–AI51
■
*
Food and Drug Administration
70483
Frm 00035
Fmt 4700
Sfmt 4700
The Appropriations Act, enacted on
December 20, 2019, established and
made immediately effective 1 a new
Federal minimum age for the sale of
tobacco products (Pub. L. 116–94, div.
N, tit. I, subt. F, sec. 603, 133 Stat. 2534,
3123–24). Specifically, the
Appropriations Act amended section
906(d) of the Federal Food, Drug, and
Cosmetic Act (21 U.S.C. 387f(d)) (FD&C
Act) to make it unlawful for any retailer
to sell a tobacco product to any person
younger than 21 years of age. The
Appropriations Act also directed the
Food and Drug Administration (FDA,
the Agency, or we) to issue a final rule
to amend its regulations to update the
minimum age-related requirements in
subpart B of part 1140 (21 CFR part
1140).
As required by the Appropriations
Act, FDA is issuing this final rule to
make conforming changes to its
regulations to: (1) reflect the increased
minimum age of sale for cigarettes,2
smokeless tobacco, and covered tobacco
products from 18 to 21 years of age; (2)
increase the minimum age for
verification by means of photographic
identification for cigarettes, smokeless
tobacco, and covered tobacco products
from under the age of 27 to under the
age of 30; (3) increase the minimum age
of persons who may be present or
permitted to enter at any time for
facilities that maintain vending
machines to sell cigarettes, smokeless
tobacco, or covered tobacco products
from 18 to 21 years of age; and (4)
increase the minimum age of persons
who may be present or permitted to
enter at any time for facilities that
maintain self-service displays to sell
cigarettes or smokeless tobacco from 18
to 21 years of age. This final rule
ensures FDA’s regulations align with
1 Because the Appropriations Act did not provide
a later effective date, the new provision became
effective immediately.
2 As discussed in section II.A of this document,
unless otherwise stated, the restrictions in part 1140
that are applicable to cigarettes also apply to
cigarette tobacco.
E:\FR\FM\30AUR1.SGM
30AUR1
]]>Agencies
[Federal Register Volume 89, Number 169 (Friday, August 30, 2024)]
[Rules and Regulations]
[Pages 70479-70483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-19229]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
[Release No. IC-35305; File No. S7-2024-01]
RIN 3235-AN33
Qualifying Venture Capital Funds Inflation Adjustment
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting a rule that adjusts for inflation the dollar threshold used in
defining a ``qualifying venture capital fund'' under the Investment
Company Act of 1940 (``Investment Company Act'' or ``Act''). The final
rule also allows the Commission to adjust for inflation this threshold
amount by order every five years and specifies how those adjustments
will be determined. This rule implements the inflation adjustment
requirements of the Economic Growth, Regulatory Relief, and Consumer
Protection Act of 2018 (``EGRRCPA'') relating to qualifying venture
capital funds.
DATES: This rule is effective September 30, 2024.
FOR FURTHER INFORMATION CONTACT: Michael Khalil, Senior Counsel, Frank
Buda, Senior Special Counsel, or Brian McLaughlin Johnson, Assistant
Director, Investment Company Regulation Office, at (202) 551-6792,
Division of Investment Management, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR
270.3c-7 (``rule 3c-7'') under the Investment Company Act.
I. Introduction
The Commission is adopting final rule 3c-7 to adjust for inflation
the dollar threshold used in defining a ``qualifying venture capital
fund'' under the Investment Company Act and to allow the Commission to
make subsequent inflation adjustments by order according to the rule.
Section 3(a) of the Investment Company Act defines the term
``investment company'' for purposes of the Act, and section 3(c)(1)
provides certain exclusions from that definition.\1\ Section 504 of
EGRRCPA amended section 3(c)(1) of the Investment Company Act by
excluding ``qualifying venture capital funds'' from the investment
company definition.\2\ Section 504 of EGRRCPA also added new Investment
Company Act section 3(c)(1)(C), defining a ``qualifying venture capital
fund'' as ``a venture capital fund that has not more than $10,000,000
in aggregate capital contributions and uncalled committed capital.''
\3\ The statutory definition requires this $10,000,000 threshold ``be
indexed for inflation once every five
[[Page 70480]]
years by the Commission, beginning from a measurement made by the
Commission on a date selected by the Commission, rounded to the nearest
$1,000,000.'' \4\
---------------------------------------------------------------------------
\1\ See 15 U.S.C. 80a-3(a) and 80a-3(c)(1).
\2\ Public Law 115-174, section 504 (May 24, 2018); 15 U.S.C.
80a-3(c)(1). In order to meet this statutory exclusion, a qualifying
venture capital fund's outstanding securities cannot be beneficially
owned by more than 250 persons, and the fund must not be making, or
presently proposing to make, a public offering of its securities.
Id.
\3\ Public Law 115-174, section 504 (May 24, 2018); 15 U.S.C.
80a-3(c)(1)(C)(i). For purposes of section 3(c)(1), a ``venture
capital fund'' has the meaning given the term in 17 CFR 275.203(l)-
1. 15 U.S.C. 80a-3(c)(1)(C)(ii).
\4\ Public Law 115-174, section 504 (May 24, 2018); 15 U.S.C.
80a-3(c)(1)(C)(i).
---------------------------------------------------------------------------
Accordingly, in February 2024, the Commission proposed new rule 3c-
7 under the Investment Company Act to implement these requirements.\5\
The Commission proposed to use December 2023 as the current measurement
date and proposed adjusting the current dollar threshold for
determining what constitutes a qualifying venture capital fund under
section 3(c)(1)(C) of the Act to $12,000,000. Additionally, to
implement the future statutorily required inflation adjustments, the
proposed rule included provisions that would allow the Commission to
make future inflation adjustments by order, according to the
methodology described in the rule.
---------------------------------------------------------------------------
\5\ Qualifying Venture Capital Funds Inflation Adjustment,
Investment Company Act Release No. 35129 (Feb. 14, 2024) [89 FR
12995 (Feb. 21, 2024)] (``Proposing Release''). The comment letters
on the proposal are available at https://www.sec.gov/comments/s7-2024-01/s7202401.htm.
---------------------------------------------------------------------------
We received two comment letters that addressed the specifics of the
proposal.\6\ Those commenters were generally supportive.\7\ They
described the importance of implementing inflation adjustments for
determining the financial thresholds applicable to qualifying venture
capital funds and supported the proposed procedures for implementing
future inflation adjustments.
---------------------------------------------------------------------------
\6\ See Comment Letter of Joel Wresh (Mar. 16, 2024) (``Wresh
Comment Letter''); Comment Letter of Arushi Mehra (Feb. 15, 2024)
(``Mehra Comment Letter'').
\7\ Two other commenters broadly opposed the proposal but did
not address the substance of the proposed rule. See Comment Letter
of Benjamin Nisly (May 15, 2024); Comment Letter of Joseph (Feb. 22,
2024). The other commenters addressed matters not relevant to the
proposal.
---------------------------------------------------------------------------
II. Discussion
Pursuant to section 3(c)(1)(C) of the Act and section 504 of
EGRRCPA, we are adopting as proposed rule 3c-7 to update for inflation
the dollar threshold for defining a ``qualifying venture capital fund''
under section 3(c)(1)(C) of the Act. As proposed, the final rule also
provides that the Commission will make future inflation adjustments by
order every five years and specifies how those adjustments will be
determined.
A. Current Inflation-Adjusted Definition of Qualifying Venture Capital
Fund
Pursuant to EGRRCPA, final rule 3c-7(a) adjusts for inflation the
dollar threshold for purposes of defining a qualifying venture capital
fund under section 3(c)(1)(C) of the Investment Company Act.\8\
Substantially as proposed, final rule 3c-7(a) uses December 2023 as the
current measurement date and adjusts the dollar threshold to
$12,000,000 or, following November 1, 2029 (i.e., approximately five
years after the effective date of this rule), the dollar amount
specified in the most recent order issued by the Commission in
accordance with this final rule and as published in the Federal
Register.\9\
---------------------------------------------------------------------------
\8\ Final rule 3c-7's definition of qualifying venture capital
fund is expressly limited to construing the term for purposes of
section 3(c)(1) of the Act. Under 12 CFR 351.10, the term qualifying
venture capital fund has a different meaning.
\9\ The final rule differs from the proposal only in that it
specifies Nov. 1, 2029, as the date after which the Commission would
issue the next inflation adjustment order, rather than instructing
the Federal Register to insert the date that is five years after the
effective date of the final rule. This approach is consistent with
the proposal in that Nov. 1, 2029, is approximately five years after
the estimated effective date of this rule and eliminates the need
for the Federal Register to have to perform the calculation. Such
orders will also be available on the Commission's website.
---------------------------------------------------------------------------
As proposed, this revised dollar threshold takes into account the
effects of inflation by reference to the historic and current levels of
the Personal Consumption Expenditures Chain-Type Price Index (``PCE
Index''),\10\ which is published by the Department of Commerce.\11\ The
PCE Index is often used as an indicator of inflation in the personal
sector of the U.S. economy,\12\ and the Commission routinely has used
the PCE Index in similar contexts in Commission rules, and it is also
used in provisions of the federal securities laws.\13\ We are using the
PCE Index to calculate inflation adjustments for this rulemaking
because the methodology and scope of the PCE Index, which considers
both urban and rural households and expenditures made on their behalf
by third parties, reflects a broad sector of the U.S. economy and in
light of the additional considerations discussed in the Economic
Analysis. As discussed below, the scope of the PCE Index, covering all
households in America, is more relevant to the affected parties of this
final rule than is the scope of the CPI-U, which only reflects urban
households, because persons in both rural and urban areas in America
can invest in venture capital funds and can be stakeholders in firms
that receive venture capital funding.\14\ Additionally, the PCE Index
incorporates category weights on a quarterly basis, and incorporates
multiple surveys of businesses, some of which are government mandated
and carry fines
[[Page 70481]]
for nonresponse. No commenters disagreed with the use of the PCE Index.
---------------------------------------------------------------------------
\10\ The revised dollar threshold reflects inflation as of Dec.
2023, and is rounded to the nearest $1,000,000 as required by
section 3(c)(1)(C) of the Act. The Dec. 2023 PCE Index was 121.421,
and the May 2018 PCE Index was 101.941. 121.421/101.941 x
$10,000,000 = $11,910,909; $11,910,909 rounded to the nearest
multiple of $1,000,000 = $12,000,0000. As described in the Proposing
Release, we also considered using the Consumer Price Index for all
Urban Consumers (``CPI-U'') to conduct this inflation adjustment.
See Proposing Release at nn.13-14. After rounding to the nearest
$1,000,000 as required by EGRRCPA, both indexes yielded an adjusted
inflation threshold of $12,000,000, or an increase of $2,000,000.
Id. at nn.15-16. We did not receive any comments on our proposed use
of the PCE Index to conduct inflation adjustments under proposed
rule 3c-7, or on the use of CPI-U as an alternative.
\11\ The values of the PCE Index are available from the Bureau
of Economic Analysis, a bureau of the Department of Commerce. See
https://www.bea.gov. The PCE Index measures the prices that people
living in the United States, or those buying on their behalf, pay
for goods and services. The PCE Index is known for capturing
inflation (or deflation) across a wide range of consumer expenses
and reflecting changes in consumer behavior. See https://www.bea.gov/data/personal-consumption-expenditures-price-index.
\12\ See Clinton P. McCully, Brian C. Moyer & Kenneth J.
Stewart, Comparing the Consumer Price Index and the Personal
Consumption Expenditures Price Index, Survey of Current Bus., Nov.
2007, at 26 n.1 (PCE Index measures changes in ``prices paid for
goods and services by the personal sector in the U.S. national
income and product accounts'' and is primarily used for
macroeconomic analysis and forecasting). See also Federal Reserve
Board, Monetary Policy Report to the Congress, at n.1 (Feb. 17,
2000), available at https://www.federalreserve.gov/boarddocs/hh/2000/february/ReportSection1.htm#FN1 (noting the reasons for using
the PCE Index rather than the consumer price index).
\13\ See, e.g., Investment Adviser Performance Compensation,
Investment Advisers Act Release No. 3372 (Feb. 15, 2012) [77 FR
10358, 10367 (Feb. 22, 2012)] (using the PCE Index in connection
with required inflation adjustments to the dollar thresholds in the
definition of ``qualified client'' appearing in 17 CFR 275.205-3
(``rule 205-3'') under the Investment Advisers Act of 1940
(``Advisers Act''), and stating that the PCE Index is widely used as
a broad indicator of inflation in the economy, and that the
Commission has used it in other contexts); Definitions of Terms and
Exemptions Relating to the ``Broker'' Exceptions for Banks,
Securities Exchange Act Release No. 56501 (Sept. 24, 2007) [72 FR
56514 (Oct. 3, 2007)] (using PCE Index in adopting periodic
inflation adjustments to the fixed-dollar thresholds for both
``institutional customers'' and ``high net worth customers'' under
Rule 701 of Regulation R ``because it is a widely used and broad
indicator of inflation in the U.S. economy''); see also Amendments
to Form ADV, Investment Advisers Act Release No. 3060 (July 28,
2010) [75 FR 49234 (Aug. 12, 2010)] (using PCE Index in increasing
for inflation the threshold amount for prepayment of advisory fees
that triggers an adviser's duty to provide clients with an audited
balance sheet and the dollar threshold triggering the exception to
the delivery of brochures to advisory clients receiving only
impersonal advice). The Dodd-Frank Act also requires the use of the
PCE Index to calculate inflation adjustments for the cash limit
protection of each investor under the Securities Investor Protection
Act of 1970. See section 929H(a) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010, Public Law 111-203, 124
Stat. 1376 (2010), codified at 15 U.S.C. 78fff-3.
\14\ See infra section IV.
---------------------------------------------------------------------------
B. Future Inflation Adjustments to the Definition of Qualifying Venture
Capital Fund
As proposed, final rule 3c-7(b) provides that the dollar threshold
for qualifying venture capital funds shall be adjusted for inflation by
order of the Commission every five years.\15\ Also as proposed, final
rule 3c-7(b) specifies the PCE Index (or any successor index thereto)
as the inflation index used to calculate future inflation adjustment of
the dollar threshold in the rule.\16\ We are using the PCE Index for
these updates for the same reasons we are using the PCE Index for the
proposed initial adjustment.\17\ One commenter supported the proposal's
establishment of clear criteria for future inflation adjustments.\18\
Another commenter observed that the proposal's provisions regarding
future inflation adjustments were helpful because they would allow for
simple recalculations going forward without the need for a burdensome
rule-making process.\19\
---------------------------------------------------------------------------
\15\ Final rule 3c-7 states that the Commission will issue an
order on or about Nov. 1, 2029, and approximately every five years
thereafter, adjusting for inflation the dollar threshold necessary
to be a qualifying venture capital fund for purposes of section
3(c)(1) of the Act. This aspect of the final rule differs from the
proposal only in that it specifies Nov. 1, 2029 (which is
approximately five years after the estimated effective date of the
final rule) as the date on or about which the Commission will issue
the next inflation adjustment order, rather than instructing the
Federal Register to insert the date five years after the effective
date of the rule as that date.
\16\ Final rule 3c-7 provides that the dollar threshold for
qualifying venture capital funds will be adjusted for inflation by
dividing the year-end value of the PCE Index for the calendar year
preceding the calendar year in which the order is being issued, by
the year-end value of the PCE Index for the calendar year 2018,
multiplying $10,000,000 (i.e., the original 2018 statutory threshold
for a qualifying venture capital fund) by that quotient, and
rounding the product to the nearest multiple of $1,000,000.
\17\ See supra footnotes 12-14 and accompanying text and infra
section IV.
\18\ See Mehra Comment Letter.
\19\ See Wresh Comment Letter.
---------------------------------------------------------------------------
C. Effective Date
As proposed, because the rule implements a required inflation
adjustment to an existing statutory exclusion from regulation, we are
not including a compliance period or extended effective date for final
rule 3c-7.\20\ Reliance on section 3(c)(1) is voluntary and a fund that
newly meets the definition of a qualifying venture capital fund under
rule 3c-7 can choose whether to rely on the exclusion provided by
section 3(c)(1) for such funds. Final rule 3c-7 will be effective
September 30, 2024.
---------------------------------------------------------------------------
\20\ No commenters addressed this aspect of the proposal.
---------------------------------------------------------------------------
III. Other Matters
Pursuant to the Congressional Review Act,\21\ the Office of
Information and Regulatory Affairs has designated final rule 3c-7 as
not a ``major rule'' as defined by U.S.C. 804(2). If any of the
provisions of this rule, or the application thereof to any person or
circumstance, is held to be invalid, such invalidity shall not affect
other provisions or application of such provisions to other persons or
circumstances that can be given effect without the invalid provision or
application.
---------------------------------------------------------------------------
\21\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
IV. Economic Analysis
The Commission is sensitive to the economic effects of final rule
3c-7. To comply with the inflation adjustment required under EGRRCPA,
we are adopting rule 3c-7 to state the current threshold for qualifying
venture capital funds as indexed for inflation. This rule adjusts the
threshold in the definition of the term ``qualifying venture capital
fund'' from $10,000,000 to $12,000,000 in response to inflation as
measured by the PCE Index and allows the Commission to perform future
statutorily required inflation adjustments using the same methodology.
For purposes of analyzing the economic effects of the rule, we use
as our baseline the current venture capital fund market and the current
regulatory framework. To be excepted from registration under section
3(c)(1) of the Act, an issuer (including a venture capital fund) must,
among other things, either have no more than 100 beneficial owners, or
in the case of a qualifying venture capital fund, which currently is
defined as having no more than $10,000,000 in aggregate capital
contributions and uncalled committed capital, have no more than 250
beneficial owners.
An adviser to a venture capital fund that is either registered with
the Commission or is an ``exempt reporting adviser'' is required to
file reports on Form ADV.\22\ Based on this data, there are at least
36,819 venture capital funds, of which at least 25,822 are qualifying
venture capital funds as of June 2024.\23\ Of the qualifying venture
capital funds, 989 have more than 100 beneficial owners and so could
not use the section 3(c)(1) exclusion absent meeting the current
$10,000,000 asset threshold. Increasing the asset threshold in the
definition of the term ``qualifying venture capital fund'' will
increase the number of venture capital funds that can be qualifying
venture capital funds. Specifically, we estimate that there are
approximately five venture capital funds that are not currently
excluded from registration under section 3(c)(1) but that could be
defined as a qualifying venture capital fund after the threshold is
adjusted for inflation to $12,000,000.\24\
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\22\ An adviser to a venture capital fund may or may not be
required to register with the Commission depending on its specific
facts and circumstances including the adviser's total regulatory
assets under management, the state of its principal office, and
whether it solely manages private funds or venture capital funds.
Many of the advisers to qualifying venture capital funds are
``exempt reporting advisers.'' See, e.g., Exemptions for Advisers to
Venture Capital Funds, Private Fund Advisers with Less Than $150
Million in Assets Under Management, and Foreign Private Advisers,
Investment Advisers Act Release No. 3222 (June 22, 2011) [76 FR
39645 (July 6, 2011)], at n.20 and accompanying text. Exempt
reporting advisers are not subject to the investment adviser
registration requirements under the Advisers Act. They are, however,
subject to certain other requirements under the Advisers Act and its
rules that also apply to registered advisers, including the
requirement to file reports on Form ADV and the Advisers Act's
antifraud provisions. See 17 U.S.C. 80b-3(l).
\23\ Based on Form ADV data between July 1, 2023, and June 30,
2024. These estimates encompass all private funds reported on Form
ADV that advisers indicated are venture capital funds. The estimate
of qualifying venture capital funds includes only these funds that
qualify for the exclusion from the definition of investment company
under section 3(c)(1) of the Act, have no more than 250 beneficial
owners, and report gross assets of no more than $10,000,000. These
numbers somewhat underestimate the total number of relevant funds.
First, gross assets may include assets that are not considered
aggregate capital contributions or uncalled capital commitments.
Second, with certain exceptions, advisers with less than $25 million
in regulatory assets under management are prohibited from
registering with the Commission and must instead register with state
regulators. Some states require these advisers to file Form ADV
under state registration, while other states do not. Accordingly,
these estimates do not capture funds managed by advisers registered
in states that do not require filing Form ADV.
\24\ This estimate is based on the number of venture capital
funds reported on Form ADV between July 1, 2023, and June 30, 2024,
that have gross asset value between $10,000,000 and $12,000,000,
between 100 and 250 beneficial owners, and currently do not qualify
for an exception under section 3(c)(1).
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Incentives for funds to change their behaviors to stay within the
regulatory definition of a ``qualifying venture capital fund'' will
strengthen or be mitigated depending on the specific circumstances of
the fund. When the threshold is increased to $12,000,000, a fund near
the current $10,000,000 threshold in aggregate capital contributions
and uncalled capital commitments, and a number of beneficial owners
above 100 but well below 250, will have additional room to raise
capital while remaining a
[[Page 70482]]
qualifying venture capital fund. Accordingly, it will have weaker
incentives to prevent growth until its aggregate capital contributions
and uncalled capital commitments approach the new threshold. Funds near
an anticipated future adjusted threshold of aggregate capital
contributions and uncalled capital commitments could have a greater
incentive to maintain a balance below this future threshold and
maintain fewer than 250 beneficial owners.
While the immediate impacts described above are likely to be
meaningful for funds near the existing and future adjusted thresholds,
the overall effect of the rule on the venture capital fund market will
be minimal. Commenters who discussed the effects of inflation agreed
that the inflation adjustment should maintain the scope of funds that
can be defined as a qualifying venture capital fund, thereby preserving
the economic effects associated with the original provision.\25\
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\25\ See Wresh Comment Letter and Mehra Comment Letter.
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Relatively few funds will be directly impacted by the adopted
change in the asset threshold. Accordingly, the rule will not
substantively impact efficiency, competition, or capital formation in
the near term. In addition, over time, as future inflation adjustments
are made, the rule will preserve the costs and benefits associated with
the original provision by maintaining a consistent threshold standard.
At the margin, the rule may encourage market competition by lowering
barriers to entry for emerging venture capital managers. Specifically,
it could lower compliance costs for eligible funds by exempting them
from certain regulatory requirements such as registration as an
investment company and make it easier for their managers to raise
smaller amounts of capital from a larger number of accredited
investors.
Absent the periodic inflation adjustments that the rule will
implement, the capital threshold for qualifying venture capital funds
would have, over time, shrunk in real terms. This could have either
resulted in higher compliance costs for these types of funds--because
these funds would be newly required to register under the Act--or
caused the managers of these funds to change how they operate to avoid
or mitigate these costs.\26\ Whether managers changed their behavior or
not, the amount of money invested in qualifying venture capital funds
would likely have decreased, and at least some of the capital that
would otherwise have been allocated to these funds would likely have
gone to funds that are not excluded from the Act and thus would have
received the investor protection benefits provided by the Act.
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\26\ For example, such funds may have decided to merge with
other funds to spread out any fixed costs from registration or stop
operating these types of funds altogether. They may have also chosen
to limit the number of investors to be under the conventional
section 3(c)(1) limit of no more than 100 beneficial owners.
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Because the rule will implement the statutory inflation adjustments
mandated by EGRRCPA, the only reasonable alternative to be considered
relates to the choice of inflation index to be used. As discussed in
the proposal,\27\ two indexes were considered--the PCE Index and CPI-U.
These measures differ because of different scopes and different
methodologies. CPI-U reflects only expenditures made directly by urban
households, whereas the PCE Index considers both urban and rural
households and considers expenditures made on their behalf by third
parties, such as employer-paid health insurance. The scope of the PCE
Index, covering all American households, is more relevant to the
affected parties of this final rule than is the scope of the CPI-U,
which only reflects urban households, because all Americans, not just
those in urban areas, can invest in venture capital funds and can be
stakeholders in firms that receive venture capital funding. The PCE
Index also better captures substitution effects since its category
weights update quarterly whereas those of the CPI-U update annually.
Category weights reflect the quantity of goods and services purchased
in a particular category. As some determinants of prices change,
consumers will substitute purchases between categories. Category
weights that change less frequently will less accurately capture these
substitution effects. The indexes' survey methodologies also differ:
CPI-U relies on two voluntary consumer surveys whereas the PCE Index
incorporates multiple surveys of businesses, some of which are
government mandated and carry fines for nonresponse. No commenters
suggested that the CPI-U or any other index would be a more appropriate
choice.
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\27\ See Proposing Release at nn.13-16 and accompanying text.
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V. Paperwork Reduction Act
Final rule 3c-7 does not contain a ``collection of information''
requirement within the meaning of the Paperwork Reduction Act of 1995
(``PRA''), nor does it create any new filing, reporting, recordkeeping,
or disclosure reporting requirements.\28\ Accordingly, the PRA is not
applicable.\29\
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\28\ 44 U.S.C. 3502(3).
\29\ 44 U.S.C. 3501 et seq. The Proposing Release requested
comment on our conclusion that proposed rule 3c-7 did not contain a
``collection of information.'' We did not receive any comments
regarding PRA issues.
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VI. Regulatory Flexibility Act Certification
The Commission certified, pursuant to section 605(b) of the
Regulatory Flexibility Act of 1980 (``RFA'') \30\ that proposed rule
3c-7 would not, if adopted, have a significant economic impact on a
substantial number of small entities. The Commission included this
certification in section V of the Proposing Release. Commenters did not
respond to the Commission's requests for comment regarding the
Commission's certification, and we continue to believe that final rule
3c-7 will not have a significant economic impact on a substantial
number of small entities.\31\ As discussed in the Proposing Release,
based on a review of Form ADV filings, we expect few small entities
would be affected by rule 3c-7's inflation adjustment provisions.\32\
Accordingly, we certify that the final rule will not have a significant
impact on a substantial number of small entities.
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\30\ 5 U.S.C. 605(b).
\31\ Generally, for purposes of the Investment Company Act and
the RFA, an investment company is a small entity if, together with
other investment companies in the same group of related investment
companies, it has net assets of $50 million or less as of the end of
its most recent fiscal year. 17 CFR 270.0-10(a).
\32\ To qualify for a section 3(c)(1) exclusion, an issuer must
(among other things) have no more than 100 beneficial owners, or in
the case of a qualifying venture capital fund, no more than 250
beneficial owners. 15 U.S.C. 80a-3(c)(1). A review of Form ADV
filings suggests that, as of June 2024, there are approximately five
venture capital funds that are not currently relying on the
exclusion in section 3(c)(1) of the Investment Company Act but that
also have between $10,0000 and $12,000,000 in aggregate capital
contributions and uncalled committed capital, and between 100 and
250 beneficial owners, such that they could meet the definition of a
qualifying venture capital fund under final rule 3c-7. See supra
footnote 28. We do not believe that five funds represent a
``substantial number'' of small entities.
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Statutory Authority
The Commission is adopting new rule 3c-7 under the authority set
forth in the Investment Company Act, particularly sections 3 and 38
thereof [15 U.S.C. 80a et seq.] and the Economic Growth, Regulatory
Relief, and Consumer Protection Act of 2018, particularly section 504
thereof [Pub. L. 115-174, 132 Stat. 1296].
List of Subjects in 17 CFR Part 270
Investment companies, Securities.
[[Page 70483]]
Text of Rule Amendments
For reasons set forth in the preamble, we are amending title 17,
chapter II of the Code of Federal Regulations as follows:
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
0
1. The general authority citation for part 270 continues to read as
follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
1681w(a)(1), 6801-6809, 6825, and Pub. L. 111-203, sec. 939A, 124
Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
2. Add Sec. 270.3c-7 to read as follows:
Sec. 270.3c-7 Inflation-adjusted definition of qualifying venture
capital fund.
(a) Inflation-adjusted definition of qualifying venture capital
fund. For purposes of section 3(c)(1)(C)(i) of the Act (15 U.S.C. 80a-
3(c)(1)(C)(i)), the term qualifying venture capital fund means a
venture capital fund (as that term is defined in 17 CFR 275.203(l)-1)
that has not more than $12,000,000 in aggregate capital contributions
and uncalled committed capital, or, following November 1, 2029, the
dollar amount specified in the most recent order issued by the
Commission in accordance with paragraph (b) of this section and as
published in the Federal Register.
(b) Future inflation adjustments. Pursuant to section 3(c)(1)(C)(i)
of the Act (15 U.S.C. 80a-3(c)(1)(C)(i)), the dollar amount specified
in paragraph (a) of this section shall be adjusted by order of the
Commission, issued on or about November 1, 2029, and approximately
every five years thereafter. The adjusted dollar amount established in
such orders shall be computed by:
(1) Dividing the year-end value of the Personal Consumption
Expenditures Chain-Type Price Index (or any successor index thereto),
as published by the United States Department of Commerce, for the
calendar year preceding the calendar year in which the order is being
issued, by the year-end value of such index (or successor) for the
calendar year 2018; and
(2) Multiplying $10,000,000 times the quotient obtained in
paragraph (b)(1) of this section and rounding the product to the
nearest multiple of $1,000,000.
By the Commission.
Dated: August 21, 2024.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-19229 Filed 8-29-24; 8:45 am]
BILLING CODE 8011-01-P
