Thursday, June 23, 2011


Last night, the Securities and Exchange Commission finally published its long-awaited rules for a venture capital exemption from registration under the Dodd-Frank financial overhaul.
The 208-page document, which you can find below, clears up some questions we had yesterday after the SEC’s meeting to approve the new rules, namely around secondary stock purchases and investments in publicly traded companies.
If you don’t want to read through the verbiage, here’s a snapshot of some of the more important items:
-A venture capital fund, the SEC said, must invest in qualifying investments, which are generally defined as equity securities in privately held companies; cannot borrow or provide leverage of more than 15% of its fund size and for not more than 120 days; cannot offer redemption or liquidity rights to investors; must present itself in marketing as a venture capital fund; and cannot be registered under the Investment Company Act or be registered as a business development company.
-The rules will allow venture funds a “basket” of 20% of committed capital to invest however they please — essentially anything that the SEC doesn’t define as being an “equity security.”
-The SEC is keeping is purposely keeping its definition of “equity security” broad to make room for typical venture-style investments such as warrants, convertible debt and bridge funding. Venture-backed companies can also obtain loans for working capital or expansion needs, and raise a debt/equity offering, without affecting a venture fund’s eligibility.
-Secondary stock purchases count toward that 20% non-qualifying basket. This is a bigger deal these days as venture firms look to help employees and founders cash out of some of their stock. Some venture firms, however, appear to be spending a large share of their funds buying into high-flying Web companies through the secondary market, so a question is whether these big firms will simply register rather than jumping through all these hoops.
-Private investments in public equities, or PIPEs, are also treated as non-qualifying investments. However, if a fund holds stock in a portfolio company after an IPO, it won’t count against the basket allocation. This is especially a victory for venture investors in biotech companies, which typically need extra funding after their public offerings.
-A grandfather provision was included, exempting existing funds that originally marketed themselves as pursuing a venture strategy and sold securities before Dec. 31, 2010 and will not sell securities after July 21, 2011.
There are still some outstanding questions, such as how venture affiliates of big private equity firms are treated, so once we have more clarity we’ll update this post.