The '40 Act is infamous as being extremely restrictive and is one of the primary reasons Venture Capital is confined to relatively few very wealthy individuals and institutions; a "Cartel of Capital." The VC's wish to avoid the '40 Act and thus have few investors.

SBIC's (Small Business Investment Companies) with more than 100 owners come under the '40 Act. That is the primary reason there are very few (less than 10) publicly owned SBIC's in the United States.

Congress, in its last session, passed laws providing for two types of closed-end and single state funds that are exempt from the '40 Act.

The first category is that of economic, business and industrial development companies. They must be regulated under state law. Eighty percent (80%) of the funds must come from persons residing in the state and only accredited investors may invest (unless the SEC changes the rules, which Congress said it could). California has a regulatory law that is very burdensome. A move, involving, amongst others, the California Capital Access Forum (your author is Chair of that non-profit), is on to have a new law enacted to provide a more usable regulatory scheme. Stay tuned.

The second category that is exempt from the '40 Act is simply Congress authorizing the SEC to exempt by rule or order closed-end funds that are intrastate in their source of funds with a maximum of $10 million or "such other amount as the SEC may prescribe by rule, regulation or order." There are no prescribed standards as to investors or type of investments. One applies to the SEC for an exemption.

This is a promising opening for raising funds to finance small business. It should catch on.