H.R. 4431 — Improving Capital Allocation for Newcomers Act of 2025

This section expands the exemption from registration as investment companies under sec. 3(c)(1) of the Investment Company Act of 1940 for qualifying venture capital funds by (1) increasing the maximum number of beneficial owners to 500 persons (from 250); and (2) raising the capital accounts limit to $50 million (from $10 million), measured from the date of enactment of the Improving Capital Allocation for Newcomers Act of 2025 (previously, from a date selected by the Securities and Exchange Commission).

This section requires the Advocate for Small Business Capital Formation, in consultation with the Investor Advocate, to conduct a study beginning 5 years after enactment on the effects of amendments made by section 2 (i.e., changes to venture capital fund exemptions under section 3(c)(1) of the Investment Company Act of 1940) on portfolio businesses and startups, including trends in (1) geographic distribution of capital; (2) socio-economic characteristics of founders or controlling persons; (3) veteran status of founders or controlling persons; (4) industry sector, size, and stage of development; and (5) other relevant metrics. The Advocates may obtain SEC data, request Commission assistance, and contract with third parties for the study, after which the Advocate for Small Business Capital Formation must issue a report to Congress and publish it on the SEC website, followed by a 180-day public comment period. The SEC, in consultation with the Advocates and only if the report demonstrates increased geographic distribution of capital, socio-economic diversity of founders or controlling persons, or veteran founders or controlling persons, may issue rules during the 180 days after public comments end to (1) adjust the 500-person threshold preceding section 3(c)(1)(A) of the Investment Company Act of 1940 to between 250 and 750 persons; and (2) adjust the $50 million figure in section 3(c)(1)(C)(i) to between $10 million and $100 million. (Thus, these venture capital fund exemptions—which allow funds with limited investors and qualified purchasers to avoid investment company registration—may be fine-tuned based on empirical effects.) Such rules do not affect section 2's inflation indexing requirement for the dollar amount in section 3(c)(1)(C)(i).