NVCA: ‘cautiously optimistic’ on SEC registration exemption

The US Securities and Exchange Commission on 22 June issued its final ruling on the definition of venture capital for the purposes of exemption from SEC registration.

The National Venture Capital Association (NVCA), which has lobbied hard for the exemption, is “cautiously optimistic’ on the agency’s definition of venture capital, according to Mark Heeson, president of NVCA.

“NVCA specifically advocated for this exemption as Congress was crafting what would become the Dodd Frank Act,” said Heeson. “Agreeing that venture capital investment did not pose a systemic financial risk, lawmakers instructed the SEC to define a venture fund and those funds that fall within the definition would not have to register as an investment advisor.”

The SEC’s first attempt at defining venture capital came late last year.

In November 2010, the SEC ruled that 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 will be considered venture capital. 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 NVCA responded with a detailed comment letter and encouraged members to do the same.  “The focus of our comments was to expand the definition so that the majority of NVCA member firms would be covered under the definition,” said Heeson.

“Specifically we requested that funds be permitted to engage in activities which fall outside the definition of venture up to 15 percent of the total fund dollars,” he said. “We also requested certain investment activities be permitted under the exemption requirements.”

The SEC will allow for a 20 percent of committed capital basket of investment activity outside the ruling. “In this regard, we are pleased to see that the SEC recognised the need for flexibility in defining venture capital,” said Heeson.

Meanwhile, the NVCA is awaiting clarification on reporting requirements that have been mandated by Dodd-Frank.

“We also appreciated the comments from certain commissioners who expressed concern that the reporting requirements for all venture funds could become onerous over time,” said Heeson. “It is our hope that this reality will not come to pass.”

The SEC is expected to issue further information on reporting guidelines over the summer.