On July 24, 2025, the U.S House Committee on Financial Services (the “Committee”) announced that it passed two bipartisan pieces of legislation, the Developing and Empowering our Aspiring Leaders Act of 2025 (the “DEAL Act”) and the Improving Capital Allocation for Newcomers Act of 2025 (the “ICAN Act”, and together with the DEAL Act, the “Acts”) out of Committee 50-2. While the Acts have a long way to go to become law, they have positive implications for venture capital fundraising and liquidity solutions if they eventually become law.
The DEAL Act
The DEAL Act would direct the Securities and Exchange Commission (the “SEC”) to revise the venture capital fund adviser exemption1 in the Investment Advisers Act of 1940, as amended (the “Advisers Act”) by broadening the definition of “qualifying investment”2 to include:
- an equity security issued by a qualified portfolio company that is acquired in a secondary transaction, in addition to those acquired by primary issuance, and
- an investment in another venture capital fund.
The ICAN Act
The ICAN Act would amend §3(c)(1) of the Investment Company Act of 1940, as amended (the “Company Act”) to increase:
- the beneficial owner limit for qualifying venture capital funds from 250 persons to 2,000 persons, and
- the aggregate capital limit for qualifying venture capital funds from $10M to $150M.3
Why does this matter for VC fundraising?
The broadening of the venture capital fund adviser exemption under the DEAL Act could potentially benefit emerging venture capital managers by reducing the administrative and regulatory burden of establishing new venture capital funds of funds. Emerging venture capital managers frequently are the source of relatively higher investment returns in the sector, but many smaller investors would find it difficult to directly create a diversified portfolio. Venture capital funds of funds are one potential solution.
Further, the loosening of §3(c)(1) restrictions under the ICAN Act could make venture capital managers (particularly emerging venture capital managers), much less dependent on large institutional investors to raise meaningfully sized funds.
The combination of the Acts’ provisions may, by extension, also make it possible for non-qualified purchaser accredited investors to access diversified venture capital portfolios by pooling a larger number of relatively smaller investments into a venture capital fund of funds. Venture capital funds are experiencing an AI-driven renaissance following a recent plateau, and increased investor accessibility may facilitate both the growth of existing firms and the continued creation of new ones.
Why does this matter for VC liquidity solutions?
As exits have slowed and liquidity pressure from limited partners has increased, continuation funds have gained popularity in the venture capital industry, but their use has been generally confined to the largest venture capital managers. There are several reasons for this phenomenon – complexity, limited partner alignment, and relative cost, for example – but the single most important reason is regulation.
While some larger venture capital managers have registered with the SEC as investment advisers, the vast majority of venture capital managers rely on the venture capital adviser exemption. Reliance on this exemption requires managers to advise only venture capital funds, and applicable SEC rules effectively require venture capital funds to hold at least 80% of their aggregate capital contributions and uncalled committed capital in qualifying portfolio company equity securities that such funds acquired via primary issuance (or certain similar transaction). A continuation fund, which acquires such equity securities on a secondary basis from an existing venture capital fund, would run afoul of this requirement. Accordingly, under current law, a venture capital manager intending to launch a continuation fund generally must register as an investment adviser.
While complexity will likely ease and costs will likely come down as continuation funds become more commonplace in the venture capital industry, the regulatory burden of registration with the SEC is likely an insurmountable obstacle in the eyes of most small to mid-sized venture capital managers. By broadening the definition of qualified investment for purposes of the venture capital adviser exemption to include secondary transaction, the DEAL Act could effectively eliminate the most significant hurdle to broader adoption of continuation funds in the venture capital industry.4 This, in turn, could broaden the liquidity options available to venture capital investors in a manner similar to what has occurred in the private equity industry.
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Like all legislation, the Acts face a long and unsure path to becoming law, and their ultimate passage in their current or any amended form is far from certain. But if ultimately adopted, the Acts could significantly benefit the venture capital fundraising and liquidity environment. We will continue to monitor their legislative progression.
1 The venture capital adviser exemption exempts managers who exclusively advise venture capital funds from certain registration and other obligations as an adviser with the SEC.
2 Currently, a “qualifying investment” under the Advisers Act Rule 203(l)-1(c)(3) is largely limited to an equity security of a qualifying portfolio company that has been acquired directly in a primary issuance, significantly constraining the ability to make secondary acquisitions.
3 The Committee also passed the Small Business Investor Capital Act (the “SBIC Act”), which would index the Advisers Act’s $150M assets under management threshold for the private fund adviser exemption to inflation, retroactively from 2010. If the SBIC Act moves forward, it will be interesting to see if the ICAN Act’s $150M capital limit for venture capital fund advisers will be indexed to inflation, as well.
4 As presently drafted, the DEAL Act adds a predominance requirement for primary issuances or other venture capital funds, but if the legislation progresses through Congress, one envisions its amendment via lobbying given the general utility of secondary transactions in the venture capital sector.
