Tag Archives: venture capital

House Committee Votes for Hedge Fund Registration

Bart Mallon, Esq. (http://www.hedgefundlawblog.com)

Private Equity Funds Not Excluded

Today the House Financial Services Committee voted to require hedge fund managers to register with the Securities and Exchange Commission. While private equity firms are also required to register under the proposed bill, managers to venture capital funds are excluded from this registration requirement.

The bill will next be presented to the House of Representatives and if it passes there it will move onto the Senate and eventually to President Obama to sign into law. The name of the bill is the Private Fund Investment Advisers Registration Act of 2009. For the full text please see H.R. 3818.

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For Immediate Release: October 27, 2009

Committee Approves Private Advisor Registration Bill with Bipartisan Support

Washington, DC – Today, the House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act, introduced by Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The Committee passed H.R. 3818 with extensive bipartisan support by a vote of 67-1. Tomorrow, the Committee is expected to vote on Chairman Kanjorski’s H.R. 3817, the Investor Protection Act and H.R. 3890, the Accountability and Transparency in Rating Agencies Act.

“The Private Fund Investment Advisers Registration Act, which passed today with wide-ranging bipartisanship support, will force many more financial providers to register with the Securities and Exchange Commission,” said Chairman Kanjorski. “The past year has shown that the deregulation or in many cases, lack of regulation, of financial firms is an idea of the past. Advisors to financial firms must receive government oversight and we must understand the assets of financial firms, including for hedge funds, private equity firms, and other private pools of capital. Under this legislation, private investment funds would become subject to more scrutiny by the SEC and take more responsibility for their actions. I look forward to moving this legislation to the House floor for a vote.”

A summary of H.R. 3818 follows:

Everyone Registers. Sunlight is the best disinfectant. By mandating the registration of private advisers to private pools of capital regulators will better understand exactly how those entities operate and whether their actions pose a threat to the financial system as a whole.
Better Regulatory Information. New recordkeeping and disclosure requirements for private advisers will give regulators the information needed to evaluate both individual firms and entire market segments that have until this time largely escaped any meaningful regulation, without posing undue burdens on those industries.
Level the Playing Field. The advisers to hedge funds, private equity firms, single-family offices, and other private pools of capital will have to obey some basic ground rules in order to continue to play in our capital markets. Regulators will have authority to examine the records of these previously secretive investment advisers.

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Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog and can be reached directly at 415-868-5345.

Proposed Hedge Fund Registration Bill Now Excludes VC Funds

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Venture Capital Funds May Not Have to Register with Hedge Funds

While hedge funds have reluctantly resigned to the likely fate of SEC registration (see MFA Supports Registration), the venture capital community has been fighting hard to remain unregistered. On this front, the VC community enjoyed a victory last week as Congressman Paul E. Kanjorski (D-PA) proposed an amendment to the Obama administration’s Private Fund Investment Advisers Registration Act of 2009 (“PFIARA”). The new proposed bill provides an exemption from registration for certain managers to “venture capital funds” as that term will be defined by the SEC. The following section provides the full wording of the new exemption and I end this posts with some of my thoughts on this exemption.

Venture Capital Fund Registration Exemption

The following section has replaced the previous section 6 (which now becomes section 7). Besides this change the PFIARA remains the same.

SEC. 6. EXEMPTION OF AND REPORTING BY VENTURE CAPITAL FUND ADVISERS.

Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3) is amended by adding at the end the following new subsection:

‘‘(l) EXEMPTION OF AND REPORTING BY VENTURE CAPITAL FUND ADVISERS.—The Commission shall identify and define the term ‘venture capital fund’ and shall provide an adviser to such a fund an exemption from the registration requirements under this section. The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.’’.

Discussion of the Exemption

From a political perspective, I am actually pretty surprised that this was added to the bill. First, I find it interesting that a bill named the “Private Fund” registration act (not “Hedge Fund” registration act) would then exempt certain private funds. Second, it is curious that the drafter left it to the SEC to create a definition of “venture capital fund” – it will be interesting to see how the SEC interprets this Congressional mandate. Finally, it is also curious that VC funds are specifically exempted and potentially not private equity funds. Generally VC funds are regarded as a type of private equity fund – presumably the SEC could fix this by creating a very broad definition for “venture capital funds” which would also include private equity. Unfortunately this puts the SEC in a difficult position as they will now have to deal with the politics of creating definitions.

We will keep you up to date on this and other bills. Please also remember that this current version of the bill is subject to future change.

For the full proposed bill, please see: Hedge Fund Registration Bill – No VC Registration

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10/1/09: Kanjorski Releases Financial Reform Drafts on Investor Protection, Private Advisor Registration

Capital Markets Chairman Addresses Key Pieces of Financial Regulatory Reform Through Comprehensive Bills and Administration Input

WASHINGTON – Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today released discussion drafts of three pieces of legislation aimed at tackling key parts of reforming the regulatory structure of the U.S. financial services industry. The draft bills include the Investor Protection Act, the Private Fund Investment Advisers Registration Act, and the Federal Insurance Office Act.

Chairman Kanjorski introduced bipartisan legislation earlier this year and in the last Congress to create a federal insurance office, which was backed by the Obama Administration and included in its proposals for financial services regulatory reform. Congresswoman Judy Biggert (R-IL), Ranking Member of the House Financial Services Subcommittee on Oversight and Investigations, joined as an original co-sponsor of the 2009 bill when it was first introduced. Chairman Kanjorski also worked to revise and significantly enhance the Investor Protection Act and the Private Fund Investment Advisers Registration Act proposed by the Obama Administration this summer.

“Today, we take another step forward in overhauling the regulatory structure of the financial services industry,” said Chairman Kanjorski. “With these three bills we will address many of the shortcomings and loopholes laid bare by the current financial crisis. The Investor Protection Act will better protect investors and increase the funding and enforcement powers of the U.S. Securities and Exchange Commission. We must ensure that investor confidence continues to increase for the betterment of our financial system.

“Additionally, we need to ensure that everyone who swims in our capital markets has an annual pool pass. The Private Fund Investment Advisers Registration Act will force many more financial providers to register with the SEC. Many financial firms skirt government oversight and get away like bandits, but now the advisers to hedge funds, private equity firms, and other private pools of capital would become subject to more scrutiny by the SEC.

“Finally, bipartisan legislation which I first introduced in the last Congress to create a federal insurance office to fill a gap in the federal government’s knowledge base on financial activities. For several years, including in this Congress, I have worked to advance bipartisan legislation to address this issue, and I am pleased that the Administration also understands the need for this office and welcome the refinements they suggested to my bill.”

Summaries of the three legislative discussion drafts follow:

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Private Fund Investment Advisers Registration Act

Everyone Registers. Sunlight is the best disinfectant. By mandating the registration of private advisers to hedge funds and other private pools of capital, regulators will better understand exactly how those entities operate and whether their actions pose a threat to the financial system as a whole.

Better Regulatory Information. New recordkeeping and disclosure requirements for private advisers will give regulators the information needed to evaluate both individual firms and entire market segments that have until this time largely escaped any meaningful regulation, without posing undue burdens on those industries.

Level the Playing Field. The advisers to hedge funds, private equity firms, single-family offices, and other private pools of capital will have to obey some basic ground rules in order to continue to play in our capital markets. Regulators will have authority to examine the records of these previously secretive investment advisers.

http://kanjorski.house.gov/index.php?option=com_content&task=view&id=1627&Itemid=1

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THE NATIONAL VENTURE CAPITAL ASSOCIATION APPLAUDS VENTURE CAPITAL EXEMPTION LANGUAGE IN DRAFT OF PRIVATE FUND INVESTMENT ADVISERS REGISTRATION ACT

Washington D.C., October 1, 2009 —

The following statement is attributed to Mark G. Heesen, president of the National Venture Capital Association:

“The National Venture Capital Association (NVCA) applauds the Private Fund Investment Advisers Registration Act proposal announced today by Representative Paul Kanjorski (DPA), Chairman of the House Financial Services Capital Markets Subcommittee. We are extremely appreciative of the work done in drafting this legislation by the Subcommittee and Members of the full Committee under the leadership of Chairman Barney Frank (DMA). This proposal recognizes that venture capital firms do not pose systemic financial risk and that requiring them to register under the Advisers Act would place an undue burden on the venture industry and the entrepreneurial community. The venture capital industry supports a level of transparency which gives policy makers ongoing comfort in assessing risk. The NVCA is committed to working with Congress, the SEC and the Administration on the most effective implementation of this proposal.

We look forward to sharing specific thoughts with Members of the Committee on Tuesday, October 6 when NVCA Chairman Terry McGuire is scheduled to testify at the hearing, “Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, and Creating a National Insurance Office.” The National Venture Capital Association (NVCA) represents more than 400 venture capital firms in the United States. NVCA’s mission is to foster greater understanding of the importance of venture capital to the U.S. economy and support entrepreneurial activity and innovation. According to a 2009 Global Insight study, venture-backed companies accounted for 12.1 million jobs and $2.9 trillion in revenue in the United States in 2006.

The NVCA represents the public policy interests of the venture capital community, strives to maintain high professional standards, provides reliable industry data, sponsors professional development, and facilitates interaction among its members. For more information about the NVCA, please visit www.nvca.org.

http://www.house.gov/apps/list/press/financialsvcs_dem/discussion_draft_of_the_private_fund_investment_advisors_registration_act.pdf

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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs hedge fund law blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. Cole-Frieman & Mallon LLP helps hedge fund managers to register as investment advisors with the SEC or the state securities divisions. If you are a hedge fund manager who is looking to start a hedge fund or register as an investment advisor, please contact us or call Mr. Mallon directly at 415-296-8510. Other related hedge fund law articles include:

Obama Moves Forward with Hedge Fund Registration Legislation

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Bart Mallon, Esq.
http://www.hedgefundlawblog.com

Treasury Announces New “Private Fund Investment Advisers Registration Act of 2009”

After much discussion in the press over the last 8 to 10 months abut the possibility for hedge fund registration, the Treasury today announced the Obama Administration’s bill which requires managers to “private funds” to register with the SEC. This registration requirement would apply to managers of all funds relying on the Section 3(c)(1) or Section 3(c)(7) which includes managers to private equity and venture capital funds. Additionally, all registered managers would need to provide the SEC with certain reports on the funds which they manage.

The Treasury release is below and can be found here. We will post the text of the new act shortly. [Update: we have just published the text of the Private Fund Investment Advisers Registration Act of 2009.]

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Fact Sheet: Administration’s Regulatory Reform Agenda Moves Forward: Legislation for the Registration of Hedge Funds Delivered to Capitol Hill

Continuing its push to establish new rules of the road and make the financial system more fair across the board, the Administration today delivered proposed legislation to Capitol Hill to require all advisers to hedge funds and other private pools of capital, including private equity and venture capital funds, to register with the Securities and Exchange Commission (SEC). In recent years, the United States has seen explosive growth in a variety of privately-owned investment funds, including hedge funds, private equity funds, and venture capital funds. At various points in the financial crisis, de-leveraging by such funds contributed to the strain on financial markets. Because these funds were not required to register with regulators, the government lacked the reliable, comprehensive data necessary to monitor funds’ activity and assess potential risks in the market. The Administration’s legislation would help protect investors from fraud and abuse, provide increased transparency, and provide the information necessary to assess whether risks in the aggregate or risks in any particular fund pose a threat to our overall financial stability.

Protect Investors From Fraud And Abuse

Require Advisers To Private Investment Funds to Register With The SEC. Although some advisers to hedge funds and other private investment funds are required to register with the Commodity Futures Trading Commission (CFTC), and some register voluntarily with the SEC, current law generally does not require private fund advisers to register with any federal financial regulator. The Administration’s legislation would, for the first time, require that all investment advisers with more than $30 million of assets under management to register with the SEC. Once registered with the SEC, investment advisers to private funds will be subject to important requirements such as:

Substantial regulatory reporting requirements with respect to the assets, leverage, and off-balance sheet exposure of their advised private funds
Disclosure requirements to investors, creditors, and counterparties of their advised private funds
Strong conflict-of-interest and anti-fraud prohibitions
Robust SEC examination and enforcement authority and recordkeeping requirements
Requirements to establish a comprehensive compliance program

Require Increased Disclosure Requirements. The Administration’s legislation would require that all investment funds advised by an SEC-registered investment adviser be subject to recordkeeping requirements; requirements with respect to disclosures to investors, creditors, and counterparties; and regulatory reporting requirements.

Protect Financial System From Systemic Risk

Monitor Hedge Funds For Potential Systemic Risk. Under the Administration’s legislation, the regulatory requirements mentioned above would include confidential reporting of amount of assets under management, borrowings, off-balance sheet exposures, counterparty credit risk exposures, trading and investment positions, and other important information relevant to determining potential systemic risk and potential threats to our overall financial stability. The legislation would require the SEC to conduct regular examinations of such funds to monitor compliance with these requirements and assess potential risk. In addition, the SEC would share the disclosure reports received from funds with the Federal Reserve and the Financial Services Oversight Council. This information would help determine whether systemic risk is building up among hedge funds and other private pools of capital, and could be used if any of the funds or fund families are so large, highly leveraged, and interconnected that they pose a threat to our overall financial stability and should therefore be supervised and regulated as Tier 1 Financial Holding Companies.

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Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. Mallon P.C. helps hedge fund managers to register as investment advisors with the SEC or the state securities divisions. If you are a hedge fund manager who is looking to start a hedge fund or register as an investment advisor, please contact us or call Mr. Mallon directly at 415-296-8510. Other related hedge fund law articles include:

Tech Royalty Starts New Venture Capital Fund

Obama’s New Hedge Fund Regulation Plan

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Draft Speaks of IA Registration for Hedge Fund Managers

As you have probably heard by now, Obama will be presenting his plan for an overhaul of the financial system later today. I have reviewed a copy of Obama’s Financial Regulation Proposal Draft and have reprinted some of the important aspects of the proposal below. In general the most immediate impact for hedge fund managers is that they will be required to register with the SEC as investment advisors. In addition to hedge fund managers, private equity fund managers and VC fund managers will also need to register.

While we understand that these are just proposals, Congress too is excited to get on the registration bandwagon although I think it unlikely for us to see any regulation passed before the end of this year. Even so, hedge fund managers may want to start thinking about how they are going to register as investment advisors and what plans they will need to be putting in place (or plan to put in place in the future).

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The plan’s main goals are:

Promote robust supervision and regulation of financial firms.
Establish comprehensive supervision and regulation of financial markets.
Propose comprehensive regulation of all OTC derivatives.
Protect customers and investors from financial abuse.
Raise international regulatory standards and improve international cooperation.

Other Points Addressed

Regarding Hedge Funds

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 financial information on the funds they manageme that is sufficient to assess whether any fund poses a threat to fiancnail stability.

Harmonize Futures and Securities Regulation

The CFTC and the SEC should make recommendations to Congress for changes to statutes and regulations that would harmonize regulation of futures and securities.

Strengthen Investor Protection

The SEC should be given new toold to increase fairness for investors by establishing a fiduciary duty for broker-dealers offering investment advice and harmonizing the regulation of investment advisers and broker-dealers.

Expand the Scope of Regulation

We urge national authorities to implement by the end of 2009 the G-20 commitment to require hedge funds or their managers to register and disclose appropriate information necessary to assess the systemic risk they pose individually or collectively.

Specifical goals with regard to Hedge Funds

Data collection
SEC should conduct regular, periodic examinations of hedge funds
Reporting AUM and other fund metrics to the SEC
SEC would have ability to assess whether the fund or fund family is so large, highly leveraged , or interconnected that it poses a threat to fiancial stability

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Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

What is a private equity fund?

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Question: What is a private equity fund? What is the difference between a private equity fund and a hedge fund?

Answer: For many people who are not familiar with the alternative investment industry, hedge funds and private equity funds look like the same thing. The distinction is not necessarily in the legal structure (which is similar), but in the investment style. The GAO’s hedge fund and pension report, which I discussed recently, provided a great definition for private equity funds:

Like hedge funds, there is no legal or commonly accepted definition of private equity funds, but the term generally includes privately managed pools of capital that invest in companies, many of which are not listed on a stock exchange. Although there are some similarities in the structure of hedge funds and private equity funds, the investment strategies employed are different. Unlike many hedge funds, private equity funds typically make longer-term investments in private companies and seek to obtain financial returns not through particular trading strategies and techniques, but through long-term appreciation based on corporate stewardship, improved operating processes and financial restructuring of those companies, which may involve a merger or acquisition of companies. Private equity is generally considered to involve a substantially higher degree of risk than traditional investments, such as stocks and bonds, for a higher return.

While strategies of private equity funds vary, most funds target either venture capital or buy-out opportunities. Venture capital funds invest in young companies often developing a new product or technology. Private equity fund managers may provide expertise to a fledgling company to help it advance toward a position suitable for an initial public offering. Buyout funds generally invest in larger established companies in order to add value, in part, by increasing efficiencies and, in some cases, consolidating resources by merging complementary businesses or technologies. For both venture capital and buy-out strategies, investors hope to profit when the company is eventually sold, either when offered to the public or when sold to another investor or company. Each private equity fund generally focuses on only one type of investment opportunity, usually specializing in either venture capital or buyout and often
specializing further in terms of industry or geographical area. (Other less common types of private equity include mezzanine financing, in which investors provide a final round of financing to help carry the company through its initial public offering, and distressed debt investments, in which firms buy companies that have filed for bankruptcy or may do so and then typically liquidate the company.)

Investment in private equity has grown considerably over recent decades. According to a venture capital industry organization, the amount of capital raised by private equity funds grew from just over $2 billion in 1980 to about $207 billion in 2007; while the number of private equity funds grew from 56 to 432 funds over the same time period.

As with hedge funds, private equity funds operate as privately managed investment pools and have generally not been subject to Securities and Exchange Commission (SEC) examinations. Pension plans typically invest in private equity through limited partnerships in which the general partner develops an investment strategy and limited partners provide the large majority of the capital. After creating a new fund and raising capital from the limited partners, the general partner begins to invest in companies that will make up the fund portfolio. Limited partners have both limited control over the underlying investments and also limited liability for potential debts incurred by the general partners through the fund.