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Creating an RIA On-Ramp for Emerging Venture Fund Advisers

May 9, 2025

Issue: The Investment Advisers Act of 1940 and SEC rules mandate independent audits of client funds for Registered Investment Advisers (RIAs). Upon triggering full registration, advisers face retroactive audit requirements for pre-existing, illiquid funds—unplanned costs.

Why This Matters

Emerging VC managers typically launch under ERA status without budgeting for mandatory audits. When they transition to RIA status:

  • Retroactive Audits – Audits on funds already invested in illiquid holdings are onerous and complex.
  • Financial Strain – Unexpected annual audit fees per fund create significant cash-flow pressures.
  • Investor Harm – Forced secondary sales can dilute returns and disadvantage limited partners.

The Proposed Solution: Grandfathering Mechanism

A targeted grandfathering mechanism would allow funds established before full registration to bypass immediate retroactive audits. This approach would:

  • Ease Transition – Offer a phased compliance timeline, giving advisers time to prepare.
  • Reduce Costs – Eliminate sudden audit fees on legacy funds, preserving capital for investment.
  • Encourage Compliance – Lower upfront burdens and boost willingness to register.

By smoothing the path to RIA status, advisers can devote resources to funding innovation rather than audits.

Benefits

  1. Investor Protection – Preserves rigorous audit standards for new funds while avoiding unnecessary reviews of legacy portfolios.
  2. Supporting Innovation – Lowers barriers for diverse, early-stage fund managers, strengthening the venture ecosystem.
  3. Market Efficiency – Prevents asset misallocation and forced liquidations, promoting orderly transitions and optimal fund performance.

Maintaining Regulatory Protections

Under this proposal, only pre-registration funds would be grandfathered. All new and future funds would continue to comply with the Investment Advisers Act's custody, audit, and reporting requirements—ensuring ongoing transparency and governance.

Call to Action

We urge the SEC to adopt a clear grandfathering policy within its RIA on-ramp framework. By balancing robust investor safeguards with the financial realities of emerging venture advisers, the Commission can protect investors and empower the next generation of fund managers.

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