New bill would exempt VCs from US registration

Under the terms of a proposal from House Representative Paul Kanjorski, funds deemed by the SEC to be ‘venture capital funds’ would be exempt from registering as investment advisers, but would still have to submit more detailed information to regulators.

Representative Paul Kanjorski, chairman of the House Financial Services Capital Markets Subcommittee, yesterday proposed an amendment to the Private Fund Investment Advisers Registration Act which would exempt venture capital funds from having to register with the Securities and Exchange Commission.

The bill would insert language into the Act that instructs the SEC to “identify and define the term ‘venture capital fund’ and…provide an adviser to such a fund an exemption from the registration requirements under this section.”

Coming up with a bright line distinction between private equity and venture capital could be tricky. The SEC would likely focus on characteristics such as length of investment horizon and whether the fund uses leverage, said Mark Heesen, president of the National Venture Capital Association.

Venture capital funds would still have to maintain such records that the SEC deems necessary, and provide the SEC with annual reports, but they would not have to go through the expensive process of registering as an investment adviser.

“This proposal recognises that venture capital firms do not pose systemic financial risk and that requiring them to register under the Advisers Act would place an undue burden on the venture industry and the entrepreneurial community,” Heesen said in a statement. “The venture capital industry supports a level of transparency which gives policy makers ongoing comfort in assessing risk.”

The bill also suggests that the SEC have the power to classify persons and matters within its jurisdiction based on size, scope, business model, compensation scheme, or the potential to create systemic risk – allowing the SEC to prescribe different requirements for different classes.

Also included is a subsection that would allow the SEC to “ascribe different meanings to terms (including the term ‘client’) used in different sections of this title as the Commission determines necessary to effect the purposes of this title.”  

In 2006, Phil Goldstein of hedge fund Bulldog Investors sued to block the SEC from redefining the word “client” to mean individual limited partners rather than funds under management in an effort to force more hedge funds to breach the 14-client threshold that triggers a registration requirement.
NVCA Chairman Terry McGuire is scheduled to testify before the House Financial Services Capital Markets Subcommittee on Tuesday.