VC Regulation
Last year the Office of Information & Regulatory Affairs, a division of the OMB, noted that they were considering making a recommendation to the SEC that the Commission adopt rules that would address “lack of transparency, conflicts of interest, and certain other matters involving private fund advisers.” The SEC filed a proposed rule in March that would, under the Investment Advisers Act of 1940, require registered investment advisers to private funds to provide transparency to their investors regarding the full cost of investing in such funds and said funds performance, along with the requirement that private fund advisers obtain an annual audited financial statement for each fund it advises.
The rule specifies that all private fund advisers, including those that are not registered with the Commission, be prohibited from engaging in certain sales practices, conflicts of interest, and compensation schemes that are contrary to the public interest and the protection of investors, such as providing preferential treatment to certain investors in a private fund, unless the adviser discloses such treatment to other current and prospective investors.
The comment period ended in April and was re-opened in May for another month, with a final action date of April of this year. It seems the collapse of FTX (defunct) has renewed interest in the potential rules, as the SEC has opened investigations into what due diligence was done by FTX investors before the collapse, and the consider increase in capital that has flowed into the VC space over the last few years, although we suspect the SCE’s real focus is to protect pension investors and less on high-net worth investors. Industry organizations are heartily against the proposed rules, citing the Congressional standing that private funds should not be faced with “the type of granular and intrusive regulatory requirements that generally apply to retail-level investment companies”, and while VC’s generally seem to have accepted the idea of greater regulation as the industry has developed, the cost of compliance will burden VC returns a bit, and the idea of an audit will likely set a more careful and documented review of investment candidates. That said, it would also allow public view of VC track records and expenses, which would be beneficial to the public overall and would likely lessen the potential for issues such as those that led to demise of FTX…maybe…
The rule specifies that all private fund advisers, including those that are not registered with the Commission, be prohibited from engaging in certain sales practices, conflicts of interest, and compensation schemes that are contrary to the public interest and the protection of investors, such as providing preferential treatment to certain investors in a private fund, unless the adviser discloses such treatment to other current and prospective investors.
The comment period ended in April and was re-opened in May for another month, with a final action date of April of this year. It seems the collapse of FTX (defunct) has renewed interest in the potential rules, as the SEC has opened investigations into what due diligence was done by FTX investors before the collapse, and the consider increase in capital that has flowed into the VC space over the last few years, although we suspect the SCE’s real focus is to protect pension investors and less on high-net worth investors. Industry organizations are heartily against the proposed rules, citing the Congressional standing that private funds should not be faced with “the type of granular and intrusive regulatory requirements that generally apply to retail-level investment companies”, and while VC’s generally seem to have accepted the idea of greater regulation as the industry has developed, the cost of compliance will burden VC returns a bit, and the idea of an audit will likely set a more careful and documented review of investment candidates. That said, it would also allow public view of VC track records and expenses, which would be beneficial to the public overall and would likely lessen the potential for issues such as those that led to demise of FTX…maybe…
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