Section 619 of the Dodd-Frank Act, commonly referred to as the "Volcker Rule," strictly limits banking entities' ability to sponsor and invest in hedge funds and private equity funds.
The Rule's fundamental goals were fairly simple. Congress wanted to stop banks from engaging in highly risky activities. At the same time, it did not want to stifle other types of activities, such as venture capital investing, that are not risky and are critical to our nation's economic health.
The rule refers repeatedly to investments in hedge funds and private equity funds. However, because of the way a definition was drafted, venture investments are at risk of also being swept up in the rule.
The regulatory agencies implementing the Volcker Rule are now trying to decide how to treat venture capital funds. They've acknowledged they have the discretion to regulate venture differently. But so far, they haven't said they will use this authority to preserve the flow of capital to startups.
Venture investment is critical to America's technology start-ups. Banking entities account for about 7% of the total capital invested in venture capital funds and are the sixth largest investor class within the sector. If you do the math, banning banks from sponsoring and investing in venture funds could mean a loss of approximately $1-2 billion annually in venture investment nationally. This is a significant loss of private sector investment in high-growth, job-creating businesses in the innovation sector – at a time when we need that investment most. We should not artificially restrict this much-needed source of funding for technology innovation in the United States, especially when such investment poses no risk to the safety and soundness of the banking system and bank investments in venture funds are well suited to other, traditional forms of bank regulation.
Supporters: There is broad based support for this perspective. Senator Boxer agrees that the legislators never intended the Volcker Rule to include Venture Capital investments, and she is on the Congressional record saying so, along with Senator Dodd, who co-authored the bill. Respected trade associations such as the Silicon Valley Leadership Group and the National Venture Capital Association as well as a host of venture capital firms agree that the Volcker rule should not include venture investments. In addition, members of Congress from across the country have weighed in at different stages of the debate to express this view as well and we are grateful for their leadership on this issue. Now is the time for them to reinforce this view with regulators before the rule is finalized.
The regulators at the FDIC, OCC, and SEC have asked how they should treat venture capital funds under the Volcker Rule, and are seeking the public's input on this issue until February 13th. The legislative intent is clear -- don't strangle venture investment in start ups. This is critical for our nation's long term growth and economic stability. The regulators have a green light to do the right thing and we hope they will.
Facts and Stats:
Venture investing is crucial to economic growth and job creation.
- Every year, venture investments equal about 0.1-0.2 percent of U.S. GDP. Yet venture-backed companies generate about 11% of U.S. private sector jobs and about 20% of U.S. GDP. And they've been delivering this kind of out-sized return on investment throughout the past decade.
- Venture-backed companies are a bright spot in today's bleak economy. In 2010, venture-backed companies employed 11.9 million people and generated $3.1 trillion in revenues. In fact, they actually increased their percentage shares of U.S. jobs and U.S. revenues during the 2008-2010 downturn.
- Venture-backed companies create high-tech, high-growth industries – industries that will help us solve our health care and energy challenges.
- Venture-backed companies create long- term, sustained growth. For every dollar of venture capital invested over the past 40 years, venture-backed companies generated $6.27 of revenue in 2010 alone.
- Innovation is a national treasure … not a regional interest. There are meaningful clusters of venture investing throughout the United States. And the companies these investors fund drive growth and increase productivity across the country, from individual households to small businesses to large corporations. While venture is sometimes seen as synonymous with Silicon Valley, over the past 40 years venture funds have invested significantly more dollars outside Silicon Valley than in it.
Banks are an important source of venture capital funds.
- The research firm Preqin estimated in 2010 that banking entities accounted for at least 7% of the total capital invested in venture funds, and were the sixth largest investor class in the sector.
- At a rough order of magnitude, that means that preventing banks from investing in venture could depress U.S. GDP by roughly $1-2 billion annually over the long term.
- Now would be a particularly bad time to artificially restrict the flow of capital through venture funds into startups. Year to date, 2011 venture fundraising is only $12.2 billion – well below the $20-30 billion annually we've seen through most of the past decade, and below what funds need to sustain current investing levels. Companies in capital intensive sectors that are critical to our economy's long term health – such as health care and energy – will likely be among the hardest hit.
- Of note: Banks can't invest in funds at all. The question is all about bank holding companies and other banking entities.