SEC Must Redefine Venture Capital Funds: New Rules Cap ‘Fund-of-Funds’ Holdings at 49%

The Developing and Empowering our Aspiring Leaders Act of 2025 is kicking off with some serious financial housekeeping, specifically targeting how the Securities and Exchange Commission (SEC) defines a “Venture Capital Fund” (VC Fund). This isn't about new taxes or direct consumer costs, but it’s a big deal for the finance world, and the changes ripple out to affect who gets funded and how.

The SEC’s 180-Day Homework Assignment

Section 2 of this bill mandates that the SEC rewrite its rulebook within 180 days. The goal is to update the definition of a “qualifying investment” for VC Funds. Currently, VC funds are generally expected to invest directly in startups. This bill acknowledges a growing market reality by explicitly expanding the definition of a qualifying investment to include two key areas: secondary acquisitions and investments in other VC funds (often called 'fund-of-funds').

In plain English, this means a VC fund can now clearly count money spent buying shares from an existing investor in a startup (a secondary acquisition) as a legitimate venture capital activity. This is helpful because the secondary market for private company shares has grown huge, and the rules need to catch up. For a busy founder, this means the pool of potential buyers for early investors' shares just got officially wider, potentially offering quicker liquidity for those who took a risk on them early on.

The 49% Guardrail: Keeping VC Funds Focused

While the bill expands what a VC fund can invest in, it also sets a strict new limit on how much they can put into those specific areas. The bill introduces a new requirement: immediately after acquiring any asset, the VC fund cannot hold more than 49 percent of its total capital (both capital contributions and uncalled committed capital) in other VC funds or in those secondary acquisitions.

This 49% cap is the bill’s way of saying, “You can do these things, but you can’t make them your main job.” The SEC’s original intent for VC funds was to channel money directly into new, growing companies. This new rule acts as a structural guardrail, ensuring that these funds remain primarily focused on direct investment (the core 51% or more) rather than becoming sophisticated holding companies or just investing in other people’s funds. If you’re a compliance officer at a VC firm, this 49% threshold is now your new nightmare, requiring constant monitoring of portfolio percentages to ensure you don't breach the limit, which could force immediate, potentially disruptive portfolio adjustments.

The Fine Print on Valuation

Finally, the bill addresses consistency, requiring that funds value these secondary acquisitions at their cost or fair value and apply that chosen valuation method consistently. While this sounds like boring accounting jargon, it’s important. Consistency in valuation is essential for preventing manipulation and giving investors an accurate picture of the fund’s health. However, the bill still leaves some wiggle room, as determining the “fair value” of a private company’s shares is notoriously subjective. The scrutiny will be on the SEC to provide clear guidance so that funds don't interpret “consistent” valuation in a way that just happens to make their books look better.