SEC Must Redefine VC Funds: Secondary Market Purchases Count, But Only Up to 49% Cap

The “Developing and Empowering our Aspiring Leaders Act of 2025” sounds like it’s about youth programs, but it’s actually a highly technical bill aimed squarely at the world of venture capital (VC) funds. Essentially, this legislation directs the Securities and Exchange Commission (SEC) to update key regulatory definitions within 180 days.

The Fine Print on Flexibility

For a private fund to qualify as a VC fund under SEC rules, it has to meet certain criteria, mainly related to what kind of investments it holds. This bill expands the definition of a “qualifying investment” (SEC. 1). Previously, VC funds mainly focused on buying equity directly from private companies. This new rule says that two new things now count: first, buying equity in a qualifying portfolio company in a secondary purchase (meaning buying shares from an existing investor, not the company itself); and second, investing in another venture capital fund. This is a big deal because it gives VC funds more flexibility on how they structure their portfolios and still maintain their regulatory status, which often comes with lighter reporting burdens.

The New 49% Rule: A Structural Constraint

But here’s the catch—and it’s a big one that affects the fund’s strategy. While the bill expands what counts as a qualifying investment, it immediately slaps a concentration limit on those new types of investments (SEC. 2). To keep its VC fund status, a fund cannot hold more than 49% of its total capital (contributions and uncalled commitments) in either secondary market qualifying investments or investments in other VC funds. Think of it like this: the government is saying, “Yes, you can buy that used car (secondary purchase) or invest in your friend’s car collection (other VC funds), but those two things combined can’t make up more than 49% of your total budget.”

This 49% cap is designed to prevent a VC fund from becoming primarily a “fund of funds” or a vehicle for trading existing private equity shares. It ensures that the majority of the fund’s capital—at least 51%—must still go toward primary investments or other traditional qualifying assets. For funds that rely heavily on complex structures or secondary liquidity, this is a significant operational constraint. They will have to re-evaluate their investment strategies to ensure they stay on the right side of the 49% line.

Why This Matters to the Economy

While this legislation seems far removed from your daily life, these rules affect the flow of capital to startups. By allowing secondary purchases to count, the bill could increase liquidity in the private market—making it easier for early employees or investors in a startup to cash out some of their equity before the company goes public. This is good for those individuals. However, the 49% limit acts as a brake. It prevents too much VC money from chasing existing assets rather than funding new innovation. It’s a classic regulatory balancing act: offering flexibility with one hand while imposing a risk-management constraint with the other.

Finally, the bill requires funds to consistently value these secondary investments using either their original cost or fair value. While consistency is good, the choice between cost and fair value can significantly impact reported returns and asset allocation, giving fund managers a potential area of discretion that regulators will need to watch closely.