[Federal Register Volume 89, Number 35 (Wednesday, February 21, 2024)]
[Proposed Rules]
[Pages 12995-13000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-03436]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR PART 270

[Release No. IC-35129; File No. S7-2024-01]
RIN 3235-AN33


Qualifying Venture Capital Funds Inflation Adjustment

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: To implement the requirements of the Economic Growth,

[[Page 12996]]

Regulatory Relief, and Consumer Protection Act of 2018 (``EGRRCPA''), 
the Securities and Exchange Commission (``Commission'') is proposing a 
rule that would adjust 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 
proposed rule also would allow the Commission to adjust for inflation 
this threshold amount by order every five years and specify how those 
adjustments would be determined.

DATES: Comments should be submitted on or before March 22, 2024.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/2024/02/qvcf-inflation-adjustment); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#ddafa8b1b8f0beb2b0b0b8b3a9ae9daeb8bef3bab2ab"><span class="__cf_email__" data-cfemail="4331362f266e202c2e2e262d3730033026206d242c35">[email protected]</span></a>. Please include 
File Number S7-2024-01 on the subject line.

Paper Comments

    <bullet> Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-2024-01. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method of submission. The Commission will post all 
comments on the Commission's website (https://www.sec.gov/rules/2024/02/qvcf-inflation-adjustment). Comments are also available for website 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE, Washington, DC 20549, on official business days between the 
hours of 10 a.m. and 3 p.m. Operating conditions may limit access to 
the Commission's public reference room. Do not include personal 
identifiable information in submissions; you should submit only 
information that you wish to make available publicly. We may redact in 
part or withhold entirely from publication submitted material that is 
obscene or subject to copyright protection.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.
    A summary of the proposal of not more than 100 words is posted on 
the Commission's website (https://www.sec.gov/rules/2024/02/qvcf-inflation-adjustment).

FOR FURTHER INFORMATION CONTACT: Michael Khalil, Senior Counsel, Brad 
Gude, Branch Chief, 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:

I. Introduction

    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 the 
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 
(``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 5 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\
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    \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)(i).
    \4\ Id.
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II. Discussion

    Pursuant to section 3(c)(1)(C) of the Act and section 504 of 
EGRRCPA, we are proposing a new rule under the Investment Company Act, 
17 CFR 270.3c-7 (``rule 3c-7''), that would update for inflation the 
dollar threshold for defining a qualifying venture capital fund under 
section 3(c)(1)(C) of the Act. Proposed rule 3c-7 would also provide 
that the Commission will subsequently issue orders every five years 
making future inflation adjustments to the definition of qualifying 
venture capital fund and specify how those adjustments would be 
determined.

A. Current Inflation-Adjusted Definition of Qualifying Venture Capital 
Fund

    Proposed rule 3c-7(a) would state the current inflation-adjusted 
dollar threshold for purposes of defining a qualifying venture capital 
fund under section 3(c)(1)(C) of the Investment Company Act.\5\ 
Pursuant to EGRRCPA,\6\ proposed rule 3c-7(a) would use December 2023 
as the current measurement date and adjust the current dollar threshold 
for determining a qualifying venture capital fund under section 
3(c)(1)(C) of the Act to $12,000,000 or, following a date five years 
after the effective date of any final rule, the dollar amount specified 
in the most recent order issued by the Commission in accordance with 
the proposed rule and as published in the Federal Register.\7\
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    \5\ Proposed 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.
    \6\ Public Law 115-174, section 504 (May 24, 2018); 15 U.S.C. 
80a-3(c)(1) (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'' and requiring 
the Commission to adjust this dollar threshold for inflation once 
every 5 years, beginning from a measurement made by the Commission 
on a date selected by the Commission, rounded to the nearest 
$1,000,000).
    \7\ Such orders would also be available on the Commission's 
website.
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    This revised dollar threshold would take 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''),\8\ which is published by the Department of Commerce.\9\ The 
PCE Index is often used as an indicator of

[[Page 12997]]

inflation in the personal sector of the U.S. economy.\10\ Additionally, 
the Commission routinely has used the PCE Index in similar contexts in 
Commission rules and provisions of the federal securities laws.\11\
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    \8\ The revised dollar threshold would reflect 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.
    \9\ 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.
    \10\ 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).
    \11\ See, e.g., Investment Adviser Performance Compensation, 
Investment Advisers Act Release No. 3372 (Feb. 15, 2012) [77 FR 
10358, 10367 (Feb. 22, 2012)] (stating that the Commission had 
proposed and was adopting the PCE Index in relation to the 
definition of ``qualified clients'' because it is widely used as a 
broad indicator of inflation in the economy, and because the 
Commission has used it in other provisions of the federal securities 
laws); 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 Act, 
15 U.S.C. 78fff-3.
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    We are proposing to use 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.\12\
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    \12\ See infra section III.
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    We also considered other inflation adjustment calculations. For 
example, the Commission has been required by statute to use the 
Consumer Price Index for all Urban Consumers (``CPI-U'') \13\ to 
conduct certain inflation adjustments.\14\ We calculated the rate of 
inflation between May 2018 and December 2023 using both PCE Index and 
CPI-U. While these indexes yielded slightly different rates of 
inflation for the measured time period,\15\ 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.\16\
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    \13\ The CPI-U is the statistical metric developed by the U.S. 
Bureau of Labor Statistics to monitor the change in the price of a 
set list of products. The CPI-U represents changes in prices of all 
goods and services purchased for consumption by urban households. 
See Consumer Price Index available at https://www.bls.gov/cpi (last 
visited Feb. 7, 2024, 12:51 p.m.).
    \14\ See, e.g., Inflation Adjustments and Other Technical 
Amendments Under Titles I and III of the Jobs Act, Securities Act 
Release No. 10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)] 
(citing the Jumpstart Our Business Startups Act (``JOBS Act''), 
Public Law 112-106, 126 Stat. 306 (2012); Crowdfunding, Securities 
Act Release No. 9974 (Oct. 30, 2015) [80 FR 71387 (Nov. 16, 2015)] 
(citing the JOBS Act); 17 CFR 201.1001 (Adjustment of civil monetary 
penalties); Adjustments to Civil Monetary Penalty Amounts, 
Investment Company Act Release No. 22310 (Nov. 1, 1996) [61 FR 57773 
(Nov. 8, 1996)] (citing the Debt Collection Improvement Act of 1996 
(Pub. L. 104-134)).
    \15\ Inflation as measured by PCE Index was 19.11%, while 
inflation as measured by CPI-U was 23.15%. See footnote 8 (showing 
PCE Index calculation). The May 2018 PCE Index was 101.941 and the 
Dec. 2023 PCE Index was 121.421 ((121.421/101.941-1) x 100 = 
19.11%). The May 2018 CPI-U was 250.792 and the Dec. 2023 CPI-U was 
308.850 ((308.850/250.792-1) x 100 = 23.15%).
    \16\ Before conducting the mandated rounding to the nearest 
million, inflation as calculated according to the PCE Index would 
have resulted in an increase of $1.911 million (i.e., a new 
$11,911,000 threshold), while inflation as calculated according to 
CPI-U would have resulted in an increase of $2.315 million (i.e., a 
new $12,315,000 threshold).
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    Notwithstanding that the PCE Index and CPI-U yield the same 
inflation adjustment for this time-period after the rounding required 
by EGRRCPA, we are proposing to use the PCE Index to calculate 
inflation adjustments for this rulemaking because the PCE Index 
reflects a broader scope of the U.S. economy and in light of the 
additional considerations discussed below in the Economic Analysis.

B. Future Inflation Adjustments to the Definition of Qualifying Venture 
Capital Fund

    Proposed rule 3c-7(b) would provide a mechanism for future 
inflation adjustments. Specifically, the Commission would issue an 
order every five years adjusting for inflation the dollar threshold for 
qualifying venture capital funds for purposes of section 3(c)(1) of the 
Act.\17\ Proposed rule 3c-7(b) would also specify 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.\18\ We 
are proposing to use the PCE Index for these updates for the same 
reasons we are proposing to use the PCE Index for the proposed initial 
adjustment.\19\
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    \17\ Proposed rule 3c-7 would provide that the Commission will 
issue an order effective on or about five years after the effective 
date of the rule, 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.
    \18\ Proposed rule 3c-7 would provide that the dollar threshold 
for qualifying venture capital funds will be adjusted for inflation 
by (i) 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, 
(ii) multiplying $10,000,000 (i.e., the original 2018 statutory 
threshold for a qualifying venture capital fund) by that quotient, 
and (iii) rounding the product to the nearest multiple of 
$1,000,000.
    \19\ See supra footnotes 8-12 and accompanying text and infra 
section III.
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    We request comment on proposed rule 3c-7.
    (1) Is the proposed use of the PCE Index as a measure of inflation 
appropriate? Is there another index (such as the CPI-U) or other 
measure that would be more appropriate, and if so, why?
    (2) The proposed rule would establish the original $10,000,000 
threshold stated in EGRRCPA as the baseline for all future inflation 
adjustments, as a consistent denominator for all future calculations. 
Should we instead establish each future adjustment of the dollar amount 
as a new baseline for the next calculation of the threshold amount? If 
we were to adopt that approach, because EGRRCPA's amendments to section 
3(c)(1)(C) of the Act requires that the revised threshold be rounded to 
the nearest $1,000,000, could the establishment of a new baseline at 
the rounded amount, each time the threshold is adjusted, result in the 
underestimation or overestimation of the effects of inflation in 
subsequent periods?

C. Effective Date

    Because the rule would implement a required inflation adjustment to 
an existing statutory exclusion from regulation, we are not proposing a 
compliance period or extended effective date. Reliance on section 
3(c)(1) is voluntary and a fund that newly met the definition of a 
qualifying venture capital fund under rule 3c-7 could choose whether to 
rely on the exclusion provided by section 3(c)(1) for such funds.
    (3) Do commenters see a benefit to including a compliance period or 
extended effective date for this proposed rule? If so, please describe.

III. Economic Analysis

    The Commission is sensitive to the economic effects that could 
result from proposed rule 3c-7. To comply with the inflation adjustment 
required under

[[Page 12998]]

EGRRCPA, we are proposing rule 3c-7 to state the current threshold for 
qualifying venture capital funds as indexed for inflation. This 
proposed rule would allow the Commission to adjust the current 
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 to perform future statutorily required 
inflation adjustments using the same methodology.
    For purposes of analyzing the economic effects of the proposed 
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), an issuer (including a venture capital fund) 
must, among other things, either have not 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.\20\ Based on this data, there are at least 
23,759 venture capital funds, of which at least 14,822 are qualifying 
venture capital funds as of December 2022.\21\ Of the qualifying 
venture capital funds, 653 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 three 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 if the threshold were 
adjusted for inflation to $12,000,000 as proposed.\22\
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    \20\ 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).
    \21\ Based on Form ADV data between Jan. 1, 2022 and Dec. 31, 
2022. 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, with certain exceptions. 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.
    \22\ This estimate is based on the number of venture capital 
funds reported on Form ADV between Jan. 1, 2022 and Dec. 31, 2022, 
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'' would 
also strengthen or be mitigated depending on the specific circumstances 
of the fund. If 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, would have additional room to raise 
capital while remaining a qualifying venture capital fund. Accordingly, 
it would 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 proposed rule on the venture capital fund 
market would be minimal; 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.
    Relatively few funds would be directly impacted by the proposed 
change in the asset threshold. Accordingly, the proposed rule would not 
substantively impact efficiency, competition, or capital formation in 
the near term. In addition, over time, as future inflation adjustments 
are made, the proposed rule would preserve the costs and benefits 
associated with the original provision by maintaining a consistent 
threshold standard. At the margin, the proposed 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 proposed rule 
would implement, the capital threshold for qualifying venture capital 
funds would, over time, shrink in real terms. This would either result 
in higher compliance costs for these types of funds--because these 
funds would be newly required to register under the Act--or cause the 
managers of these funds to change their strategies. For example, such 
funds may decide to merge with other funds to spread out any fixed 
costs from registration or stop operating these types of funds 
altogether. They may also choose to limit the number of investors to be 
under the conventional section 3(c)(1) limit of no more than 100 
beneficial owners. Either of these shifts could limit the types of 
funds available for investment, especially to accredited investors with 
relatively fewer assets. For example, funds that merge or choose to 
rely on the conventional section 3(c)(1) limit could become more likely 
to seek larger investments from relatively fewer beneficial owners. It 
could also impact smaller firms' ability to raise capital since these 
firms disproportionately raise capital from smaller funds.\23\ Whether 
managers changed their behavior or not, the number of qualifying 
venture capital funds would decrease absent the periodic inflation 
adjustment. At least some of the capital that would otherwise be 
allocated to these funds would likely go to funds that are not excluded 
from the Act and thus would

[[Page 12999]]

receive the investor protection benefits provided by the Act.
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    \23\ See, e.g., Mark Humphery-Jenner, Private Equity Fund Size, 
Investment Size, and Value Creation, 16 Rev. Fin. 799 (2012). In 
Table IV, the authors find a correlation between the natural 
logarithm of private equity fund size and the natural logarithm of 
investment size of 0.56.
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    Because the proposed rule would 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 above, 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 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. The scope of the PCE Index, covering 
all American households, is more relevant to the affected parties of 
this proposed rule than is the scope of the CPI-U, which only reflects 
urban households.
    We request comment on all aspects of the economic analysis of 
proposed rule 3c-7. To the extent possible, we request that commenters 
provide supporting data and analysis. In particular, we ask commenters 
to consider the following questions:
    (4) The proposed rule would require that the PCE Index or its 
successor index be used to perform future inflation adjustments. Are 
there additional factors beyond those discussed in this release that 
should be considered regarding which index to use for these 
adjustments?
    (5) We estimate that three of the funds reported on Form ADV would 
be directly impacted by the proposed change in threshold. This is the 
number of reported venture capital funds 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). Does this estimate capture the likely number of directly 
affected funds? How could this estimate be improved?
    (6) Are the costs and benefits of the proposed rule accurately 
characterized?
    (7) Are the effects on competition, efficiency, and capital 
formation arising from the proposed rule accurately characterized?

IV. Paperwork Reduction Act

    Proposed rule 3c-7 does not contain a ``collection of information'' 
requirement within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'') nor would it create any new filing, reporting, recordkeeping, 
or disclosure reporting requirements.\24\ Accordingly, the PRA is not 
applicable and we are not submitting the proposed rule to the Office of 
Management and Budget for review under the PRA.\25\ We request comment 
on whether our conclusion that there is no collection of information is 
correct.
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    \24\ 44 U.S.C. 3502(3).
    \25\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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V. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act of 1980 (``RFA'') requires the 
Commission, when issuing a rulemaking proposal, to prepare and make 
available for public comment an initial regulatory flexibility analysis 
(``IRFA'') that describes the impact of the proposed rule on small 
entities,\26\ unless the Commission certifies that the rule, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities.\27\ Pursuant to 5 U.S.C. 605(b), we hereby 
certify that proposed new rule 3c-7 under the Investment Company Act 
would not, if adopted, have a significant economic impact on a 
substantial number of small entities. We are proposing new rule 3c-7 
pursuant to 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 [Pub. L. 115-174, 132 Stat. 1296]. 
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.\28\
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    \26\ 5 U.S.C. 603(a).
    \27\ 5 U.S.C. 605(b).
    \28\ 17 CFR 270.0-10(a).
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    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.\29\ Based on Form ADV filings, as of December 2022, there were 
at least 14,822 funds that had met the definition of a qualifying 
venture capital fund.\30\ Of those funds, approximately 653 had between 
100 and 250 beneficial owners, such that they would have had to rely on 
meeting the definition of a qualifying venture capital fund in order to 
qualify for a section 3(c)(1) exclusion. A review of Form ADV filings 
also suggest that there are approximately three venture capital funds 
that are not currently relying on the exclusion in section 3(c)(1) but 
that 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 proposed rule 3c-7.\31\ We do not 
believe that three out of 653 total venture capital funds with between 
100 and 250 beneficial owners represent a ``substantial number'' of 
small entities. For these reasons, the Commission believes that 
proposed rule 3c-7 would not, if adopted, have a significant economic 
impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 80a-3(c)(1).
    \30\ See supra footnote 21.
    \31\ See supra footnote 22.
---------------------------------------------------------------------------

    The Commission encourages written comments on the certification. We 
solicit comment as to whether the proposed rule could have an effect on 
small entities that has not been considered. We ask that commenters 
describe the nature of any impact on small entities and provide 
empirical data to support the extent of the impact.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\32\ the Commission must advise OMB whether a 
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule 
is considered ``major'' where, if adopted, it results in or is likely 
to result in:
---------------------------------------------------------------------------

    \32\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    <bullet> An annual effect on the economy of $100 million or more;
    <bullet> A major increase in costs or prices for consumers or 
individual industries; or
    <bullet> Significant adverse effects on competition, investment, or 
innovation.
    We request comment on whether our proposal would be a ``major 
rule'' for

[[Page 13000]]

purposes of SBREFA. We solicit comment and empirical data on:
    <bullet> The potential effect on the U.S. economy on an annual 
basis;
    <bullet> Any potential increase in costs or prices for consumers or 
individual industries; and
    <bullet> Any potential effect on competition, investment, or 
innovation.
    Commenters are requested to provide empirical data and other 
factual support for their views to the extent possible.

Statutory Authority

    The new rule contained in this release is being proposed 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 [115 Pub. L. 174, 132 Stat. 1296].

List of Subjects in 17 CFR Part 270

    Investment companies, Securities.

    For reasons set forth in the preamble, we are proposing to amend 
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, in 
part, as follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *
0
2. Section 270.3c-7 is added 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(1)-1 or 
any successor regulation) that has not more than $12,000,000 in 
aggregate capital contributions and uncalled committed capital, or, 
following [DATE FIVE YEARS AFTER EFFECTIVE DATE OF FINAL RULE], 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 [DATE FIVE YEARS AFTER EFFECTIVE DATE OF 
FINAL RULE] 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: February 14, 2024.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-03436 Filed 2-20-24; 8:45 am]
BILLING CODE 8011-01-P


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