There’s been a flurry of activity in the wake of Treasury Secretary Timothy Geithner’s proposal to treat venture capital firms the same as hedge funds, by making them register as investment advisors with the SEC (see my original post).
The National Venture Capital Assn. response seems to be taking three forms: Reject new regulations, eliminate new requirements for smaller VC firms and limit additional information required by the SEC.
Last week, Rep. Paul Kanjorski (D-Pa.) introduced the Private Fund Investment Advisers Registration Act (PDF), which would simply exempt VC firms from any additional regulation and remove the requirement for registering as investment advisors with the SEC.
As you might expect, the NVCA is very supportive of this measure.
“This proposal recognizes that venture capital firms do not pose systematic financial risk and that requiring them to register under the Advisors Act would place an undue burden on the venture industry and the entrepreneur community. The venture capital industry supports a level of transparency which gives policy makers ongoing comfort in assessing risk,” president Mark Heesen said in an Oct. 1 press release.
This makes sense on two levels: VC LPs are typically highly sophisticated investors, the magnitude of assets under management is small, VCs typically don’t use debt as leverage and VCs have a long time horizon.
On June 16, 2009, Sen. Jack Reed (D-R.I.) introduced the Private Fund Transparency Act of 2009 (PDF), which proposes to exempt VC firms (and hedge funds) with $30 million or less of assets under management from needing to register with the SEC.
Sounds good, right? Well, based on a quick look at my admittedly incomplete database of VC funds, there are only 22 of 252 total funds that are under $30 million. Furthermore, the vast majority of VC firms will be over Reed’s threshold because they have raised multiple funds which in aggregate are more than $30 million. Admittedly, there is some bias in my database toward larger firms and larger funds, but I still think that a $30 million cutoff is probably too low to have a significant effect on the VC industry. According to NVCA data, the average VC fund in 2008 was $144 million.
On Sept. 23, 2009, Trevor Loy (a GP at Flywheel Ventures) testified before a congressional committee. Loy said VC firms are required to disclose to the SEC the fund name, principal place of business, year and jurisdiction of organization, form of legal entity, size and terms of the offering (total dollar amount being offered, date of first sale of the fund’s securities, intended duration of the fund’s private offering, minimum investment, and the total number of accredited and non-accredited investors). These are the so-called “Regulation D” disclosures.
Loy went on to propose that requiring VC firms to file an annual form with additional information should be sufficient to provide adequate transparency to the SEC. He suggested that this form could include information relating to the use of leverage, assets under management, trading positions and counterparty obligations.
Of course, most of these data are irrelevant for VC firms, although VC firms will have trading positions if a portfolio company has recently IPO’d. I’ll try to keep on top of this evolving situation, so come back for future updates.