With the financial reform bill set to eliminate the 15
client rule exemption for registration under the Investment Advisers Act, the
only remaining exemption for fund companies with over $150 million in assets
under management will be for venture capital. The Congressional conference decided to not include the
Senate's exemption for private equity.
The bill would leave it up to the Securities and Exchange
Commission to define "venture capital." So what do you think that definition
Wikipedia provides a nice overview, but lacks much in the
way of a definition for regulators.
Venture capital is provided as seed funding to early-stage, high-potential, growth companies and more often after
the seed funding round as growth funding round in the interest of generating a
return through an eventual realization event such as an IPO or trade sale of the company. Venture capital
investments are generally made in cash in exchange for shares in the invested
Next I turned to a trade group's definition of venture
capital. So I went to the website for the National Venture Capital Association. I had a hard time
finding a comprehensive definition. Although I'm sure that they are working on
some proposals for the SEC. Here are some tidbits:
Venture capitalists invest mostly in young, private
companies that have great potential for innovation and growth.
Venture capitalists are long-term investors who take a very
active role in their portfolio companies. When a venture capitalist makes an
investment he/she does not expect a return on that investment for 7-10 years,
Venture capital is a subset of the larger private equity
asset class. The private equity asset class includes venture capital, buyouts,
and mezzanine investment activity. Venture capital focuses on investing in
private, young, fast growing companies. Buyout and mezzanine investing focuses
on investing in more mature companies. Venture capitalists also invest cash for
equity. Other private equity investors tend to use debt as part of their
Venture capital is more like a different business model for
investing than a legally definable industry. Since the SEC is going to come up
with a definition, that means that there will be a legal definition.
That also means that the SEC definition will most likely
affect the types of investments by venture capital firms, the nature of their
capital investment, and the exit strategy from their investments.
Here are some guesses:
They are just guesses. But the industry should be very
worried about the eventual definition. The SEC has expressed a desire to
regulate all private investment funds so I would expect their eventual definition
to be very narrow.
I'm sure that the venture capital industry views the
exemption as a victory. But the exemption could end up being a heavy weight
around their necks. They may need to change their operating approach and
investing style to stay within the boundaries of the definition and the
In the end, it may just be easier to register and regain the
flexibility for a wider variety of investment approaches.
commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.