INVEST Act Clears House, Pending Senate Approval
On December 11th, the U.S. House of Representatives approved the Incentivizing New Ventures and Economic Strength Through Capital Formation Act (the "INVEST Act"), potentially leading to significant changes in the venture capital and startup industries. The INVEST Act builds on the JOBS Act of 2012 and would continue Congress's efforts to modernize private capital markets and expand access to early-stage investment. While the bill passed in the House 302-123, it awaits Senate approval. The INVEST Act proposes several targeted reforms that would create a meaningful impact on venture capital funds, startup companies, and investors.
While the JOBS Act of 2012 expanded exemptions for private offerings and spurred venture capital growth, the INVEST Act aims to modernize and refine these regulations as the next step. The INVEST Act is aimed at reducing regulatory friction, improving coordination at the SEC, and broadening access to capital beyond traditional venture hubs like the coasts, thereby moving investments to the Midwest and other regions that lack investor capital growth.
The INVEST Act introduces several key structural changes that could affect VC firms, startups, and investors broadly:
SEC Capital Formation Infrastructure: The INVEST Act seeks to establish an Office of Small Business within the SEC's three divisions: the Division of Corporation Finance, the Division of Investment Management, and the Division of Trading & Markets. Congress believes this addition would coordinate capital formation matters, centralize small business and startup engagement, and improve regulatory consistency across divisions. Boards and funds would find more predictable regulatory interactions and more straightforward capital-raising guidelines.
Crowdfunding Threshold Expansion: The exemptive offering threshold that triggers accountant review for equity crowdfunding campaigns under Section 4(a)(6) of the Securities Act of 1933 would increase from $100,000 to $250,000, and the SEC would be granted discretion to raise it to $400,000. The raising of the threshold is intended to reduce compliance costs for early-stage issuers and to make crowdfunding more viable as a bridge or supplement to VC financing, thereby allowing early-stage companies to access more capital with fewer barriers.
Investment Adviser Act Threshold Adjustment: The Act would raise the exemption threshold for certain advisers to recognize that inflation and fund size growth have effectively lowered the real value of the current threshold, disproportionately burdening smaller advisers with the trigger for complete registration requirements. The exemption threshold will increase to $175 million from $150 million and be indexed for inflation, ensuring it adjusts over time instead of becoming outdated. This increase could potentially reduce registration and compliance burdens for smaller or emerging managers and allow VC funds to scale further before triggering registration.
Expansion of the Venture Capital Fund Definition: The Act would increase the benchmark for qualifying as a Venture Capital fund from $10 million to $50 million in fund-level assets. This benchmark is the VC fund's asset size, not the total AUM across all funds. This increase will give emerging managers more room to scale a fund without triggering additional regulatory obligations. The investor cap is also set to expand from 250 to 500 investors.
Expansion of Investor Participation Criteria: The Act seeks to broaden participation in private markets and provide Americans with more investment options. The Act proposes refining specific investor qualifications and participation thresholds to modernize the framework and move away from an exclusive focus on an individual's net worth. If enacted, these provisions could increase the pool of eligible investors participating in private offerings, particularly in venture funds and early-stage capital raises.
From a founder and board perspective, the proposed changes could reduce barriers and increase investment opportunities. There could be greater availability of early-stage capital and reduced friction in alternative fundraising patterns. These changes might also promote greater involvement from emerging and regional VC funds, particularly beyond traditional coastal areas. For boards, this could mean increased financing options and a more varied investor base.
For VC firms and fund managers, the INVEST Act could ease some common industry barriers. The Act streamlines the process for venture capital funds to invest directly in other venture capital funds, up to 49% of their assets. The House emphasized the potential to expand capital access for funds operating in the Midwest, the South, and other historically undercapitalized regions.
The Act signals broader market and policy considerations, suggesting continued bipartisan focus on capital formation reform. The Act would reinforce the trend toward broader investor participation, decentralization of the startup ecosystem, and incremental modernization rather than wholesale reform. The final Senate action and potential SEC implementation will determine the practical impact.
The INVEST Act signifies a considered yet potentially impactful progression in the United States' capital formation policy, advantageous to venture capital firms, startup enterprises, and investors. We at Peters Kussmaul Crosier are diligently observing the advancement of the INVEST Act and associated capital formation initiatives. Our firm routinely provides counsel to venture capital funds, startup organizations, and boards of directors on regulatory strategies, fund formation, and financing transactions, and we will maintain this commitment by providing updates as developments occur.