On July 22, 2025, two new bills – the Developing and Empowering Our Aspiring Leaders Act of 2025 (DEAL Act) and the Improving Capital Allocation for Newcomers Act of 2025 (ICAN Act)1 – advanced out of the US House Financial Services Committee with strong bipartisan support. If enacted, these bills promise to reshape the exemptions that venture capital fund managers rely on. The DEAL Act would loosen the venture capital adviser exemption (VC exemption), which many fund managers rely on to be exempt from registration under the Investment Advisers Act of 1940. The ICAN Act would loosen the “3(c)(1) exemption” that many venture capital funds rely on to be exempt from registration under the Investment Company Act of 1940.
(For a review of the securities laws exemptions discussed in this post, please see our previous post “Securities Laws Fundamentals for Venture Capital Fund Managers.”)
DEAL Act: Modernizing the definition of qualifying investments
The DEAL Act focuses on the definition of “qualifying investment,” which is central to the VC exemption. To rely on the VC exemption, a fund manager must ensure that each fund it manages invests at least 80% of its aggregate capital commitments in qualifying investments. Qualifying investments generally refer to equity securities (including securities convertible to equity) acquired directly from qualifying portfolio companies (at a high level, these typically refer to private operating companies). Securities acquired in a secondary transaction or investments in other venture capital funds are not qualifying investments and must therefore go in the “20% nonqualifying basket.”
The DEAL Act would make two key changes:
- Broader definition of qualifying investments: The definition of qualifying investments would be revised to include securities acquired in secondary transactions and investments in other venture capital funds.
- New portfolio composition requirement: At least 51% of a fund’s aggregate capital commitments would need to be equity securities acquired directly from qualifying portfolio companies, and no more than 49% could be invested in other venture capital funds or in securities acquired in secondary transactions.
Notably, the DEAL Act would not remove or replace the 20% nonqualifying basket. So, while secondaries and fund of funds investments would not fill up the nonqualifying basket, other nonqualifying investments such as crypto, debt and public company shares would still be limited to the 20% nonqualifying basket.
ICAN Act: Expanding the pool for venture capital funds
The ICAN Act proposes targeted amendments to Section 3(c)(1) of the Investment Company Act, which exempts private funds that have no more than 100 beneficial owners. (The other exemption that private funds commonly rely on is the 3(c)(7) exemption, which requires investors to be qualified purchasers (generally, individuals with $5 million in investments or entities with $25 million in investments)). While the 3(c)(1) exemption generally does not have a dollar cap, it does provide an option for venture capital funds to exceed the 100-beneficial-owner limit – allowing up to 250 beneficial owners – if they limit aggregate commitments to $12 million. Given the relatively low cap on aggregate commitments, however, most venture capital funds do not exceed the 100-beneficial-owner limit.
The ICAN Act would raise the thresholds in Section 3(c)(1) for venture capital funds:
- Increased investor limit: The maximum number of permitted beneficial owners would be raised from 250 to 500.
- Raised asset cap: The threshold for aggregate commitments would be raised from $12 million to $50 million.
Notably, the ICAN Act would not remove or replace the 100-beneficial-owner limit, meaning that a venture capital fund would be able to continue relying on the 3(c)(1) exemption without any cap on aggregate commitments by limiting the number of beneficial owners to 100.
Next steps
The DEAL Act and ICAN Act passed the House Financial Services Committee 50 to 2, indicating strong bipartisan support. If they pass the full House and Senate and are signed into law, the US Securities and Exchange Commission (SEC) will need to revise the VC exemption within 180 days to implement the DEAL Act. The amendments to the 3(c)(1) exemption will not require immediate rulemaking, although the ICAN Act does mandate that a study be conducted five years after enactment. This study would assess the impact of the new thresholds on the geographic and socioeconomic distribution of capital, the diversity of founders, and other key metrics. Based on the findings and public feedback, the SEC may further adjust the thresholds – potentially increasing the investor cap up to 750 or reducing it to no lower than 250 and raising the asset cap up to $100 million or reducing it to no lower than $10 million.
Takeaway
Venture capital fund managers could see some exciting changes in the future, although it is worth noting that prior versions of these changes were introduced by lawmakers as early as April 2023. A newfound momentum in the US Congress could see these bills through. If so, it would lead to greater flexibility for venture capital firms in their fundraising, portfolio construction and investments in a broader range of startups.
- HR 4429 and HR 4431, respectively ↩︎
The authors
