37:38 Lena: Alright Miles, we've covered a lot of theory and potential pitfalls. Let's get practical. If I'm a fund manager who's decided I need VCOC compliance, what's my step-by-step implementation plan?
37:52 Miles: Great question. Let's start at the very beginning—during fund formation. The first decision is whether you're going to rely on VCOC status, the 25% test, or try to maintain both as backup options. This affects how you structure your fund documents and what representations you make to investors.
38:11 Lena: What should go into the fund documents?
38:14 Miles: Your limited partnership agreement should include language about your intention to qualify as a VCOC and your authority to take actions necessary to maintain that status. You'll also want provisions allowing you to reject capital contributions from ERISA investors until you've made your first qualifying investment.
38:31 Lena: And what about investor commitments? How do you handle the timing issues we discussed?
38:36 Miles: Many funds include specific language in their subscription documents requiring ERISA investors to acknowledge that their capital won't be called until the fund qualifies as a VCOC. Some funds also negotiate the right to excuse ERISA investors from participating in investments that might jeopardize VCOC status.
38:53 Lena: Okay, so the fund is structured. What's next?
38:57 Miles: Then you need to establish your operational procedures. This includes setting up systems to track which investments have management rights, monitor your compliance with the 50% test, and document your exercise of management rights.
39:09 Lena: What does that tracking system typically look like?
39:11 Miles: Most funds maintain a VCOC compliance spreadsheet or database that shows each investment, its cost basis, whether it has management rights, and the current calculation for the 50% test. This gets updated whenever you make new investments, receive distributions, or write down investments.
39:28 Lena: And you need to pick your annual valuation period?
4:05 Miles: Right. Many funds choose the last 90 days of their fiscal year because it aligns with their regular financial reporting. Whatever you choose, make sure it's documented and that your team knows when the testing periods are.
39:41 Lena: Now let's talk about the investment process itself. What changes when you need VCOC compliance?
39:47 Miles: The biggest change is that management rights become a standard part of every investment negotiation. Your term sheet should include a requirement that the company execute a management rights letter, and your closing checklist should include VCOC compliance as a standard item.
40:01 Lena: What's the typical negotiation process for management rights letters?
40:04 Miles: In most cases, there's barely any negotiation because these letters have become so standard. You send the company a one or two-page management rights letter along with your other investment documents, and it gets executed at closing along with everything else.
40:16 Lena: But what if a company pushes back?
40:18 Miles: That's rare, but if it happens, you need to decide whether the investment is important enough to potentially jeopardize your VCOC status. Remember, you can have up to 50% of your assets in non-qualifying investments, so you do have some flexibility.
40:30 Lena: How do you handle the very first investment, given all the timing constraints?
40:34 Miles: This is where careful planning is crucial. Many funds will specifically choose their first investment to be a company where VCOC compliance is straightforward—clear operating company status, willing to sign a management rights letter, and preferably a deal where you're leading or co-leading so you have control over the process.
40:49 Lena: What about the capital call timing?
40:51 Miles: For the first investment, you typically want to close the investment and call ERISA capital on the same day. Some funds will actually fund the initial investment with non-ERISA capital or borrowed money, then immediately call and repay once they've achieved VCOC status.
41:03 Lena: That sounds like it requires careful coordination.
41:06 Miles: It does. You need to make sure your fund administrator, your legal team, and your investors are all aligned on the timing. Some funds do a "paper closing" where all the documents are signed but funding happens later, but that can create other complications.
41:17 Lena: What about ongoing compliance? What's the regular routine?
41:21 Miles: Most funds review their VCOC compliance quarterly as part of their regular financial reporting. You're checking that you still meet the 50% test, documenting any management rights activities, and making sure you're on track for your annual compliance requirements.
41:33 Lena: How do you document the exercise of management rights?
41:36 Miles: The key is to maintain records showing meaningful engagement with portfolio companies. This might include meeting minutes from quarterly business reviews, correspondence about strategic decisions, or documentation of your involvement in hiring key executives or approving major capital expenditures.
41:49 Lena: What about reporting to investors?
41:51 Miles: Many funds include a brief VCOC compliance update in their quarterly investor reports, and ERISA investors often require annual certifications confirming continued compliance. Some funds also provide VCOC opinions from counsel at the time of the first investment.
42:03 Lena: Are there any technology solutions that help with this?
42:05 Miles: There are some specialized fund administration platforms that include VCOC compliance tracking, but many funds still use customized spreadsheets or databases. The key is having a system that's updated regularly and can quickly generate compliance reports when needed.
42:17 Lena: What's the most important thing for funds to remember about VCOC compliance?
42:21 Miles: I'd say it's that VCOC compliance needs to be built into your standard operating procedures from day one. It can't be an afterthought. The requirements around timing, documentation, and ongoing monitoring mean that it needs to be part of your regular investment and portfolio management processes.
42:34 Lena: And if a fund realizes they've made a mistake?
42:37 Miles: Unfortunately, many VCOC mistakes can't be fixed retroactively. If you've lost VCOC status, your main option is usually to fall back on the 25% test. That's why many sophisticated funds try to maintain both compliance strategies as backup options.
42:49 Lena: So the key message is really about building these requirements into your standard processes?
0:54 Miles: Exactly. VCOC compliance works best when it's just part of how you do business, not a separate compliance exercise that you have to remember to do on top of everything else.