Congress, or at least the the House Financial Services Committee, is proposing some relief for private equity funds. The Committee approved the Small Business Capital Access and Job Preservation Act, along with three other pieces of legislation.
The bill would exempt private equity fund managers from the registration and reporting requirements of the Investment Adviser Act. The big hurdle in the bill for the exemption is that the fund has not borrowed a principal amount in excess of twice its invested capital commitments.
That’s a terrible standard. In the early days of a fund, it may draw down on its subscription line of credit for fees and expenses before it invests its first dollar in a transaction. That means the fund will have borrowed more than twice its “invested” capital. Many private equity funds would not be able to pass this test. Dropping the word “invested” would make the exemption useful.
The other big hurdle missing in the bill is the definition of private equity. The bill leaves it up to the Securities and Exchange Commission to define a private equity fund for purposes of the bill. The bill gives the SEC 6 months to craft the definition.
The bill is notable, but I suspect it has little chance of becoming law.
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