SEC defines venture capital

At the behest of Congress, the US Securities and Exchange Commission provided clarity on what constitutes a venture capital fund.

According to the SEC, funds which represent themselves to investors as being venture capital-focused only deal in growth equity, provide a “significant degree of managerial assistance” or control over portfolio companies and do not offer redemption rights. Those types of funds will be exempt from the proposed rules which require private equity funds to register with the SEC as investment advisors.

The new rules also require reporting on fund size and type, as well as information about the fund's auditors, prime brokers, marketers, administrators and custodians.

The Dodd-Frank bill raises the threshold required for a private equity firm to register with the SEC from $25 million to $100 million. The change will result in more firms registering with state securities authorities as opposed to the SEC.

In addition to venture capital firms, exemptions will be made for private equity firms with less than $150 million in assets under management and certain foreign advisors located outside of the US. However, the SEC will reserve the right to require exempted funds based in the US to still undergo basic reporting requirements.

“While we are not required to have these rules in place until the one year anniversary of enactment of the act in July, we felt it was important to issue our proposals relatively early,” said SEC Chairman Mary Schapiro, in a recent speech discussing the proposals. The SEC hopes “to finalize these rules in advance of the one year deadline to give clarity to advisors seeking to determine their registration status before next July”, Schapiro added.

The SEC will begin a 45-day public comment period following the proposed rule's publication in the Federal Register.