I just returned from SVB's Leadership Summit for venture
capital and private equity CFOs, where I had the opportunity to facilitate
several discussions about new regulations affecting the venture capital and
private equity arenas. We were "fortunate" enough to be meeting the day after
the SEC announced their new rules defining venture capital funds. This definition will determine which fund managers will have to
begin registering with the SEC next spring – venture capital funds won't have
to take this step, while private equity funds will.
As you can imagine, the conversation was fairly intense
as we all grappled to understand the new ruling and what it means for all of us
within the innovation ecosystem. In a nutshell, the new rule defines
"venture capital fund" for the purposes of the exemption as a private fund that
(1) invests no more than 20 percent of capital commitments in non-qualifying
investments, (2) does not borrow or incur leverage, (3) does not offer its investors
redemption or other similar liquidity rights except in extraordinary
circumstances, (4) represents itself a pursing a venture capital
strategy, and (5) is not registered under the Investment Company Act and has
not elected to be treated as a business development company.
Overall, I thought the SEC did a really good job
listening to the feedback SVB, the NVCA, and many others provided. Their
final rules incorporated a number of changes that make a lot of sense. We
were heartened, for example, to see that the final rules provide flexibility to
let venture funds and their portfolio companies use debt in ways that are
consistent with the venture model (as opposed to buyout financing), and
recognize the difference between a venture fund staying with a company once it
goes public and a private equity fund buying shares in an existing, public
company.
I'm proud to believe that SVB played a part in the SEC's
decision, by filing comments and providing our perspectives to the
policymakers. We did this as part of our broader effort to engage on public
policy issues that we believe will meaningfully affect the innovation ecosystem
and the ability of our clients to succeed.
We'll continue to work with our private equity clients as
they work to comply with the new custody rules. More broadly, we'll
continue to work to educate policymakers about the effect policies, laws and
regulations have on the innovation sector, and why this sector is so critical
to the United States' long term economic growth and competitiveness. But
for today, it's great to see that when we all step forward, we can work
together to move things in a positive direction.