From a venture capital industry perspective, there is much to be discussed regarding yesterday's mid-term elections. From defeating Prop 23 in California to a Republican-controlled House of Representatives, voters across the country have spoken and the implications will be significant for venture capital firms and our portfolio companies. We have published a detailed analysis of the election results
and what it means for public policies that matter to our industry. While our outlook varies issue by issue, the NVCA feels very well positioned after this election to advocate effectively for policies that foster innovation and encourage entrepreneurship.
Today the European Parliament and Council announced an agreement on the Alternative Investment Fund Managers (AIFM) Directive. This agreement is scheduled for a vote by the Parliament on November 10th. Our colleagues at the British Private Equity and Venture Capital Association (BVCA) and the European Private Equity and Venture Capital (EVCA) both issued statements expressing continued concern with the directive. We at NVCA are currently reviewing the directive in its entirety to fully understand the potential impact on US venture funds. Once that process is complete, we will communicate our understanding of implications for our members that either have European limited partners, seek to raise funds in Europe, or plan to invest in European companies.
The BVCA and EVCA statements follow:
BVCA STATEMENT ON THE AIFM DIRECTIVE
Commenting on the agreement between representatives of the EU Council of Ministers and the European Parliament on the AIFM Directive today, Simon Walker, Chief Executive of the BVCA, said:
"At the outset of this process a faction in the European Parliament explicitly sought to place a regulatory ball and chain on private equity and venture capital with the objective of all but destroying it, regardless of the consequences for employment and pension funds across the EU. As late as this summer it looked as if they might have found enough key allies within the member states of the EU to succeed in this misguided ambition. The Directive agreed today, however, which presumably will be approved by the European Parliament next month, is, in a number of respects, a major improvement on what it might have been. In a series of sensitive areas, radicals within the Parliament have been obliged to trade substance for symbolism. This is because the sector has made its case with vigour. The prospect of a genuine EU “passport” is also a truly encouraging one.
This remains, though, a defective Directive. The EU has taken a hostile interest in the wrong industry at the wrong time and for the wrong reasons. No serious analyst has concluded that private equity (let alone venture capital) caused the economic crisis or served to enhance it. These regulations will needlessly increase costs and disproportionately impose burdens. This is especially disturbing in the case of larger venture capital houses, a set of institutions which it is the stated aim of the European Union that it wants to foster. There are many sections in this text which are ambiguous, inconsistent or incoherent. This means that the detailed procedure for translating this Directive into national law becomes unusually important. The BVCA along with the EVCA will dedicate much of the next two years to a forensic involvement in the critical implementation phase of this exercise.
Europe is still at risk of actively discouraging this sort of investment at precisely the moment when it needs to ensure a collective economic recovery. This would be an act of folly akin to a drowning man waving away a rescue boat because he did not like the colour of it. Private equity and venture capital stand ready to play a powerful and positive role in Europe’s economic future. The question remains whether the EU wants this to occur.”
EVCA STATEMENT THE AIFM DIRECTIVE
This morning, the European Parliament and Council reached an agreement on the Alternative Investment Fund Managers’ Directive. The text will be subject to a full Parliamentary vote on November 10th.
Commenting on the agreement, Uli Fricke, chairwoman of the European Private Equity and Venture Capital Association, said:
“Europe’s private equity and venture capital is a relatively young industry, and yet it has become an important contributor to investment into EU companies and innovation, and to corporate governance best-practice. As such, we will embrace the responsibilities and opportunities that being regulated entails.
The AIFM Directive that will be voted on next month is an imperfect legislation. It will impose unnecessary cost for our investors and ultimately Europe’s pensioners, as well as unfair burden on companies we invest in to help them grow.
Most worryingly, there is no light-touch opt-in for small funds envisaged in this Directive. This will have a damaging knock-on impact for financing of innovative SMEs. The European Commission should urgently address this disproportionate burden that jeopardizes a European recovery based on innovation and knowledge.”
We are relieved to have reached some legal certainty, which is particularly important for our long-term fund investors. We will now work constructively to ensure that the implementation of these and other relevant initiatives, such as Solvency II, do not inhibit SMEs and innovative companies’ access to capital or the promotion of long term investment within the EU.”
Commenting on the legislative process around the AIFM Directive, Ms Fricke said:
“This process was flawed in its failure to fully account for differences between vastly different types of fund manager. Imposing rules intended to cover short term securities trading on private equity, venture capital and other closed-ended funds investing in the real economy has proved illogical. We call on policy makers and regulators, both at EU and national level, to acknowledge the importance of drawing such distinctions in implementing the Directive.”
Since the September 8th launch of the Medical Innovation and Competitiveness (MedIC) Coalition, we have attracted a solid group of 37 VC firms and 39 portfolio companies as charter members. With this foundation in place, we are moving forward adding new members each day to our collective voice.
On November 18-19, the MedIC Advisory Board is planning a Washington, D.C. fly-in. Meetings are scheduled with White House and HHS officials to discuss the importance of bringing medical innovation to the forefront of the healthcare reform implementation and the need to appoint a medical innovation advocate within the Administration. We will also be meeting with the leaders of the key health related trade groups to discuss ways to partner on innovation issues in the next Congress.
Membership to MedIC remains open to all NVCA members investing in life sciences and their portfolio companies. Please contact me (kslone at nvca (dot) org) for more information.
Many California cleantech venture capitalists along with NVCA have been active on the "No on Prop 23" campaign. However, the impact of Prop 23 goes far beyond the CleanTech arena and reaches every venture capital firm across the country. In the following letter to NVCA members which was sent today, Alan Salzman, CEO and managing partner of VantagePoint Venture Partners, articulates what many venture capitalists believe to be the consequences if Prop 23 passes. It's critical that venture capitalists understand what is on the line here and respond accordingly.
Dear NVCA Member:
I am writing to enlist your efforts to ensure a "NO" vote on this November's Proposition 23 ballot initiative in California. If passed, Proposition 23 would effectively overturn the state’s landmark clean-energy legislation, Assembly Bill 32.
Voting NO on Proposition 23 means California can continue to implement the progressive measures authorized under AB 32 which address a clean-energy future. This November, a vote against Proposition 23 represents a vote for jobs and innovation.
As business leaders, investors and entrepreneurs committed to the fiscal and environmental benefits of CleanTech innovation, we have a clear interest in the outcome of California’s November elections. State and legislative policies that are committed to innovation, to building our economy, to creating jobs, and to encouraging private investment are essential elements in California’s success. Proposition 23 is not aligned with these goals and, if passed, will sabotage California’s position as a global leader in CleanTech innovation. That is why both candidates for Governor of California, the Silicon Valley Leadership Group, TechNet, the NVCA and technology leaders across the state and country are all aligned in opposition to Proposition 23.
We should be clear about the stakes. Thanks in part to California’s progressive clean-energy policies, over half a million new CleanTech jobs have been created in the state. Seven of America’s 10 largest CleanTech companies are based in Californiaand the CleanTech sector is one of the few bright spots – and job creators – in an otherwise severely-challenged state economy. Since the adoption of AB 32 in 2006, over $11 billion has been invested in CaliforniaCleanTech companies, including over $2 billion in 2009.
But the vote over proposition 23 is not simply about whether Californiawill remain at the forefront of CleanTech innovation. The proponents of Proposition 23, principally out-of-state oil refiners, are seeking to affect policy across the United States. They believe that if they can circumvent California's CleanTech efforts, they will severely handicap the state which is leading the country toward a clean-energy future. This would effectively stall our efforts as a nation.
As technology investors we know that innovation and progress waits for no one. If we put our efforts on hold and allow our policies to be neutered, global leadership, and the benefits that come with it, will simply shift to other countries where CleanTech is not only encouraged, but embraced by government support and forward-thinking policy.
If Proposition 23 passes, Californiarisks losing billions of investment dollars and thousands of jobs to other regions around the globe. CleanTech is a tremendous opportunity for California and we need to preserve our commitment to the jobs and prosperity that it brings.
I hope you will join in the effort to preserve California's future by donating to the NO on Proposition 23 campaign, adding your name to the various NO on Proposition 23 initiatives, and using your considerable influence to help defeat Proposition 23.
Thank you for considering this vital issue and for your support in sending the clear message that we will not stand by idly and allow California's, and our country's, economic future to be jeopardized.
Alan E. Salzman
CEO and Managing Partner
VantagePoint Venture Partners
Written by Jennifer Connell Dowling
While carried interest and financial reform have been our primary focus at NVCA these days, there are numerous pieces of legislation that we have been working on that remained outstanding as Congress recessed for elections. Here is an overview and what to expect when they return:
Small Business Innovative Research (SBIR) Grants
The Senate and House both passed legislation to reauthorize the SBIR program and make changes to the eligibility rules so that venture-backed companies could qualify for these grants. The NVCA supported the House bill as it allowed majority venture-backed companies to participate in the program and clarified the affiliation rules whereas the Senate fell short of that. Unfortunately, both houses have been unsuccessful in reaching a compromise. As a result, Congress passed several three-month extensions to keep the program running.
With little expected to be completed during the lame duck session, Congress will have to start the legislative progress from scratch in the 112th Congress. There is the chance that the SBA could decide to make eligibility changes through the proposed rule making process, but that scenario is not probable. So once again we have to be patient and wait to see what develops.
Despite the progress Senator Leahy made reaching a compromise on the two most controversial issues in the patent reform debate (damages and the post grant review process), it appears that S. 515 will be left behind in the 111th Congress. Senator Leahy and the 25 other Senators will put pressure on Senator Reid to bring S. 515 to a floor vote in the lame duck session but will likely be unsuccessful as there are still several Senators that have concerns about S. 515.
The House has not taken any major action on the Leahy compromise, as members there do not support S. 515, including the compromise on damages and post grant review. Given these challenges, it is unclear if Senator Leahy will have the appetite to push overall patent reform in the next Congress. Thus, most political insiders believe that comprehensive patent reform is off the radar screen for a while.
There seems to be very little appetite and certainly even less time remaining in the 111th Congress to address comprehensive immigration reform. Congress and the Administration are unwilling to separate legal immigration from illegal immigration reform, which makes our position more difficult. There was a push in February 2010 to move the Start-Up Visa/Founder Visa issue when Senators John Kerry and Richard Lugar introduced their Start-Up visa bill. Then in early March, Rep. Jared Polis hosted several VCs and entrepreneurs at a Congressional briefing on the start-up visa. The matter received widespread support from the VC community, but unfortunately, has not seen any legislative action since then.
In late September, Sens. Robert Menendez and Patrick Leahy introduced comprehensive legislation to overhaul the nation's immigration laws. The bill was largely viewed as a placeholder to help spur consideration of an overhaul of immigration laws and policy when the new Congress convenes in January.
With climate change legislation failing to pass in the 111th Congress, both Democrats and Republicans agree that this effort is off the table for the foreseeable future. Energy and Natural Resources Chairman Bingaman has publicly asserted that it will be at least 2 years, if not more, before any bills have the opportunity to be considered, regardless of how the elections turn out. With the Republicans gaining additional seats in the House, passage of energy reform dims considerably. With likely Republican gains in the Senate, climate legislation there will also become increasingly difficult.
In absence of federal climate change legislation, it will be important to watch the California Prop 23 ballot which proposes to repeal AB 32. This ballot initiative will be a bellwether for the future of climate change legislation in the country. NVCA is supporting “Vote No on Prop 23” and is closely monitoring this situation.
During the lame duck session, there may be some attempt by Majority Leader Reid to get a smaller energy-only bill passed. This would be the BP oil spill bill that he tried to pass a few weeks ago. Alternatively, there may be an attempt to pass a Renewable Electricity Standard (RES). NVCA has been lobbying the White House to make sure that if there is an energy bill considered during the lame duck session the RES, the establishment of a Clean Energy Deployment Administration (CEDA), and changes to the DOE Loan Guarantee Program should be included in that effort.
These issues as well as carried interest will be tracked and developments will be posted here at NVCAccess when Congress returns in November.
Written by Jennifer Connell Dowling
As those in the venture capital community who followed the financial reform legislative process know, the Dodd-Frank Act exempted venture capital firms from mandatory SEC registration. Congress then directed the SEC to define venture capital so that the appropriate firms would receive this exemption. Not a simple task, here is an update as to where we find ourselves in that process:
The SEC is now developing a draft definition of venture capital, a process that is expected to result in a formal Notice of Proposed Rulemaking by the end of the quarter. The NVCA has met with several SEC commissioners and members of the Investment Management Division to offer insight on the nature of venture investment and to offer preliminary observations on what might constitute a sensible definition of a venture capital.
We have spent considerable time in our meetings educating the SEC on why venture capital does not require additional investor protection and does not pose systemic financial risk. Specifically:
- Investors in venture capital are already sophisticated qualified purchasers or accredited investors.
- Investment in venture capital is for a fixed offering period and long term in nature.
- Over time, venture investors hold a minority ownership in most of their portfolio companies.
- There are significant limits on redemption for limited partners.
- Venture capitalists purchase originally issued securities that are not publicly traded.
- Only a fraction of any one firm’s portfolio is in public securities such as PIPEs.
- Venture investment does not employ long term debt at the fund level.
- VC firms themselves are not publicly traded entities.
We plan to meet with all of the commissioners this month and continue this dialogue. When the Notice of Proposed Rulemaking is issued, a formal time period in which the SEC will solicit public comments will be announced. NVCA intends to comment during this time and will ask members to weigh in as well.
Defining venture capital has never been easy. Yet we believe there is an approach which will encompass the right set of investors. The SEC has in the past been reticent to broadly define venture but we hope with a Congressional directive, they will take our guidance into account. We will keep you up to date as developments occur.