That was one of the topics for the Securities and Exchange Commission Open Meeting on November 19.
In Shapiro’s opening remarks, it was clear that the SEC wants all private funds to register. Even thought venture capital funds are exempt from registration, they will need to supply information to the SEC.
The key in defining “venture capital” will be the lack of leverage in the funds and the non-public status of their investments.
They will not have to disclose the full panoply of information that is required by Part 2 of Form ADV. So they will not have to disclose compensation and conflict information.
The SEC has only been able to examine 10% of registered investment advisers each year.
They made it clear that private fund advisers will not be excluded from the “systemically important” label under Dodd-Frank. Big advisers will need to keep an eye on this rulemaking, scheduled to be released in January.
Then on to the specifics.
There are proposed changes to Form ADV to reflect the new thresholds for registration and some other changes. private funds will need to disclose key gatekeepers such as auditors and third-party marketers.
They will also include information for the venture capital funds that have to report, but not register. These exempt-reporting advisers will still be using Form-ADV. They will need to disclose information about ownership, fund structures, and disciplinary activity.
As for venture capital funds, it seemed clear that they struggled trying to come up with a definition of a “venture capital fund.” The definition in the proposed rule will include these limitations:
- must get 80% of the shares directly from the company
- investments must be in a private company
- provide significant management assistance to the company
- only borrow a portion of their fund’s capital
- limited redemption rights to limited partners
- self-label as a venture capital fund
They will allow a grandfathering for venture capital funds, giving them some time to restructure to fall under the definition. That should be a relief for fund wondering how they can meet the July 21, 2011 deadline and not take a hit on their illiquid investments.
Commissioner Casey did not like the approach of the rule on venture capital funds and Form ADV. She noted that the statute is ambiguous on the reporting requirements and thinks the rule is putting too much of a burden on venture capital funds.
(I missed Commissioner Walter’s remarks.)
Commissioner Aguilar focused on the valuation and leverage discussions for funds. He seemed to really be interested in having such a big database of information about private fund advisers.
Commissioner Paredes focused on the insertion of the venture capital exemption outside of the Section 203 exemptions. To him that means they are subject to much more oversight and subject to examination. He is concerned about the distraction of the fund mangers from growing small companies. He seemed skeptical that the regulatory oversight will help investors. He was concerned about the requirement of “providing managerial assistance” and how that may affect a VC investor that does not get a board seat. He realizes that the SEC is stuck with the statutory framework enacted by Congress. (I guess that’s the problem with getting an exemption tacked on to the bill instead of a thoughtful reworking of the regulatory framework.)
As usual with the SEC, the actual text of the rules was not released as part of the meeting and we will have to wait to see the details. Of course, these are just proposed rules so there will be an opportunity to comment and the SEC may make some changes to the rules based on the comments.
- Chairman Mary L. Schapiro Opening Statement at the SEC Open Meeting: Item 4 — Proposed Regulation SBSR
- Chairman Mary L. Schapiro Opening Statement at the SEC Open Meeting: Item 3 — Security-Based Swap Data Repository Registration, Duties, and Core Principles
- Chairman Mary L. Schapiro Opening Statement at the SEC Open Meeting – Items 1 and 2 – Proposals to Implement Investment Adviser Provisions of the Dodd-Frank Act
- Commissioner Luis A. Aguilar Statement at SEC Open Meeting — Combating the Lack of Transparency in the Security-Based Swaps Market