Venture capital compliance requirements

Key compliance obligations for VC firms

Let’s look at some of the key compliance requirements for starting and managing a venture capital firm or fund.

SEC registration and reporting

Most venture capital funds in the US are typically “private funds,” which means they don’t need to register with the Securities and Exchange Commission (SEC) as ‘investment companies”.. 

What’s more, many VC firms are classified as Exempt Reporting Advisers (ERAs) under the Dodd-Frank Act, and as such, they are not required to register with the SEC as investment advisers. 

However, VC firms are still subject to certain obligations. This includes completing specific sections of Form ADV Part 1A, such as information about their business, ownership, and any sanctions they or their personnel have faced. 

In addition, VC firms that qualify as ERAs are required to regularly update their Form ADV to ensure the SEC has accurate and timely information. This includes 2 key obligations.

• ERAs must file an update to Form ADV at least once annually, within 90 days of the end of their fiscal year.
• In addition to the annual filing, firms must promptly amend Form ADV whenever there are material changes to the information previously disclosed, such as changes or updates in ownership, business structure, or disciplinary history.

Fundraising and marketing

Most VC firms raise capital from investors through “exempt offerings,” which essentially allows them to sell securities without registering with the SEC.The most commonly used exemption is Regulation D, particularly Rule 506(b) and Rule 506(c).

Rule 506(b) allows VC firms to raise an unlimited amount of money from accredited investors and up to 35 non-accredited investors. However, this rule forbids general solicitation, meaning that firms cannot publicly advertise their offerings or use broad marketing tactics. All fundraising efforts must be done privately, typically through existing relationships or direct outreach.  

Rule 506(c) offers a different approach by permitting general solicitation and public advertising, opening up the possibility of reaching a wider pool of potential investors. However, this flexibility comes with a significant condition: all purchasers of the fund’s interests must be accredited investors, and the venture capital fund must undertake reasonable measures to confirm each investor’s accredited status.

Regardless of whether a venture capital fund uses Rule 506(b) or 506(c), a critical compliance requirement under Regulation D is the timely filing of Form D with the SEC. This brief notice, which provides basic details about the offering, including the amount being raised and the type of investors targeted, must be submitted within 15 days after the first sale of securities.

In addition to the aforementioned SEC regulations, venture capital funds must also be mindful of state-level securities laws, often referred to as “blue sky laws,” in each state where they solicit investors. These state regulations may impose additional requirements that firms must meet alongside the federal rules of Regulation D. 

It’s crucial to consult legal counsel to ensure compliance with state requirements.

Anti-Money Laundering (AML) and Know Your Customer (KYC) Requirements

Previously, many venture capital firms, particularly those that qualified as ERAs, were not required to follow comprehensive Anti-Money Laundering (AML) regulations in the same way as banks or broker-dealers under the Bank Secrecy Act (BSA). 

While the SEC could take enforcement actions related to misleading statements about voluntary AML procedures, there was no direct mandate under the BSA for these VC firms to establish full-fledged AML programs.

However, a significant regulatory shift is on the horizon with a final rule issued by the Financial Crimes Enforcement Network (FinCEN) on August 28, 2024.

This new rule amends the BSA regulations to include certain SEC-registered investment advisers (RIAs) and ERAs within the definition of “financial institution” under the BSA. This means that a significant portion of venture capital fund managers will now be directly subject to AML obligations.

Specifically, from January 1, 2026,  VC firms must establish formal AML compliance programs that include procedures for identifying and reporting suspicious activities, conducting risk assessments, and maintaining thorough records. Additionally, firms must implement Know Your Customer (KYC) protocols to verify the identity of their investors and assess the source of their funds.

Environmental, social, and governance (ESG) considerations

Although Environmental, Social, and Governance (ESG) reporting isn’t yet a formal compliance requirement for many venture capital firms, it has rapidly become a significant area of focus for both regulators and investors. 

In regions like the EU, regulations such as the Sustainable Finance Disclosure Regulation (SFDR) are already pushing firms to disclose how they integrate ESG factors. Though these regulations are currently more applicable to larger firms, they signal a shift that may expand to all VC firms over time.

In the U.S., the SEC has adopted rules for public companies to disclose climate-related risks. Similar frameworks could eventually extend to private funds, including venture capital firms. 

What’s more, LPs are increasingly demanding greater ESG data reporting from firms, with some even willing to pay more for it. For example, according to a report by PwC Luxembourg, two-thirds of surveyed LPs indicated a willingness to pay higher management fees if it leads to significant improvements in ESG data reporting by their GPs.

Additionally, nearly 45% of respondents said they would consider a fee increase of 5% to 9% if it resulted in more comprehensive and higher-quality ESG reporting practices.

Proactively adopting ESG policies and reporting frameworks can prepare VCs for future regulatory changes and at the same time help gain a competitive edge in the market by demonstrating to investors that they are forward-thinking, transparent, and responsible in their approach to managing investments.

Strategic importance of compliance

Builds trust and credibility:

A strong compliance record signals to investors and portfolio companies that the VC firm operates ethically and with integrity. This fosters trust and enhances the firm’s reputation, which is crucial for attracting and retaining both investors and promising startups.  

Prevents legal and financial penalties:

Non-compliance can lead to significant fines, legal battles, and even the loss of licenses to operate. A sturdy compliance program minimizes these risks.  

Protects against financial crime:

Implementing strong KYC and AML procedures, as mandated by regulations, safeguards the firm and its investors from financial crimes and reputational damage.

Challenges of managing compliance internally

High resource demands:

Effectively managing compliance internally demands significant time and personnel. For smaller venture capital firms, this can stretch resources thin and lead to oversight gaps where certain regulatory requirements are missed or misunderstood.

Constantly changing regulations:

The regulatory environment for venture capital is complex and frequently shifting, with new rules, reporting standards, and jurisdictional requirements. Keeping pace with these changes internally is difficult, especially for firms operating across multiple regions. This increases the likelihood of inadvertent noncompliance.

Insufficient internal expertise:

Compliance requires deep knowledge of specialized areas, such as financial regulations, anti-money laundering policies, and evolving trends like ESG disclosures. Many firms, particularly smaller ones, lack professionals with expertise in these areas. This lack of sufficient in-house expertise could lead to misinterpretations of regulatory requirements and thus non-compliance.

Rising operational costs:

Maintaining compliance internally can be expensive. Firms may need to invest in additional staff, ongoing training, continuous monitoring, and internal audits.  For smaller firms, these added costs can divert resources away from other important business activities, such as deal sourcing and portfolio management.

How Alter Domus supports venture capital compliance

Alter Domus provides specialized compliance services that help venture capital firms meet regulatory requirements effortlessly. Key areas of support include:

Regulatory filings:

Assistance with the preparation and submission of crucial filings such as Form ADV, Form D, and other jurisdictional reporting obligations.

Ongoing monitoring and support:

Continuous monitoring of regulatory changes and updates relevant to VC firms, proactive communication of these changes, and ongoing support in adapting compliance programs accordingly.

AML and KYC support:

Assistance with creating, implementing, and maintaining KYC and AML programs.

ESG reporting support:

Assistance with ESG data collection, aligning with relevant ESG frameworks, and preparing ESG disclosures to meet the expectations of limited partners and comply with any relevant regulations.

Audit support:

Assistance with audit preparation, including organizing required documents, coordinating with auditors, and addressing audit-related questions or issues.

Final thoughts: Venture capital compliance requirements

Compliance management is a critical function in venture capital firms. Besides helping firms meet legal requirements, it builds investor trusts, reduces risk exposure, and contributes to long-term operational stability.

However, for firms with lean teams, staying on top of compliance can be time-consuming and complex. This is where specialized support, like that provided by a fund administrator like Alter Domus, can make a big difference.

Alter Domus takes care of your compliance requirements and operations, including regulatory filings, AML/KYC implementation, and ESG reporting, so you and your team can focus on your core business of finding and nurturing high-potential startups without having to worry about meeting your regulatory obligations.

Explore Alter Domus administration and governance solutions or reach out to our team today to learn more about how we can support your firm’s compliance strategy today.