Obama’s Financial Regulation and the Venture Capital Industry
In June, the Obama administration unveiled the long-awaited financial regulatory overhaul plan that is meant to reduce systemic risk in the financial markets. In its current form, the plan states:
“All advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) whose assets under management exceed some modest threshold should be required to register with the SEC under the Investment Advisers Act. The advisers should be required to report information on the funds they manage that is sufficient to assess whether any fund poses a threat to financial stability.” 1
By forcing funds to register with the SEC, the administration is hoping to gain a better understanding of the actions these large and often complicated fund managers take and the associated risks.
While some will welcome the change, on the whole, the alternative investment industry has been bracing itself for this impending regulation for several months. And many in the venture capital (VC) sector are fighting against being included in the same overarching reform as hedge fund and private equity fund managers.
The National Venture Capital Association (NVCA) released a statement stating some of the reasons why VC fund managers should not be included in the government’s overhaul:
“The National Venture Capital Association understands the need for these important reforms for investment managers that could pose significant systemic risk to the stability of our financial system. However, we strongly assert that the venture capital industry does not pose such risks and therefore should not be swept into regulation intended for other investment vehicles. The venture capital industry operates in the private market, building companies. It does not utilize leverage on a significant scale nor does it trade stocks or derivatives in the financial markets.” 2
Essentially, it is the NVCA’s position that it is unjustified to put VC fund managers in the same risk category as hedge fund managers. VC funds make long-term investments in companies and do not use the complicated and potentially risky investment strategies that hedge fund managers may employ. In addition, the costs and burdens that registration will place on VC firms, especially smaller ones that do not have the capacity to handle the increased costs and staffing requirements of SEC registration, is potentially detrimental to the entire VC industry.
While the proposal is still being revised, it appears that taking a broad brush to a complicated and specific problem may unfairly burden a sector that in reality poses very little risk in comparison to other alternative investment vehicles.
1 Financial Regulatory Reform: A New Foundation, Department of the Treasury, http://online.wsj.com/public/resources/documents/finregfinal06172009.pdf.
2 ” Venture Capital Industry Does Not Pose Systemic Risk to Financial Stability,” NCVA, http://www.nvca.org/index.php?
option=com_docman&task=doc_download&gid=461&Itemid=93.