Yesterday, Senator Dodd introduced a discussion draft for his Restoring American Financial Stability Act of 2010.  A summary of the lengthy bill can be found here.  The following is the NVCA’s initial reaction to sections of the legislation that impact venture capital:

SEC Registration – As expected, the bill will exempt venture capital firms from registering with the SEC as investment advisers.  We are pleased that this position has remained in tact and believe it evidences an understanding that venture capital investment does not pose financial systemic risk.  Under the proposed bill, the SEC will define what constitutes a venture capital firm and we look forward to assisting, as needed, in this process.

Accredited Investor Rules – The bill proposes that the SEC raise the dollar threshold which qualifies accredited investors, but does not specify by how much.  The bill also puts forth that there be an adjustment every 5 years.  More importantly, however, the bill recommends that a further study be conducted to better understand the appropriate threshold for accredited investors.  This study will take a year’s time.  We are encouraged by the Senate’s willingness to properly explore this issue so that the correct levels can be established.

GAO Study on Private Equity SRO – The bill calls for a study on the feasibility of creating a self regulatory organization to oversee private funds, private equity and venture capital.  Similar to the study on accredited investors, this would be conducted by the GAO with a report due to Senate Banking within a year.  The impetus behind this may be early discussions in the private adviser registration debate where some argued that the SEC’s attempts to regulate hedge funds, private equity and venture through the prism of the Investment Advisers Act – created for mutual fund advisers – was inappropriate.  Clearly, we believe that private equity is a term that envelopes many asset classes, all of which are very different in their operations, levels of systemic risk, and stakeholders.  We would want to be sure that these distinctions would be recognized when exploring the possibility of an SRO. 

State vs. National Regulation of Securities Offerings—Currently, an offering is exempt from SEC registration requirements if certain standards are met.  The original draft released by Chairman Dodd would have given significant authority back to the states; the current bill seems to affirm the SEC’s power to regulate, but also gives the SEC authority to delegate regulation of certain offerings back to the states.  We’ll be looking at this provision closely as the process moves forward, given that it could mean increased compliance costs particularly for smaller funds. 

Overall we believe the bill demonstrates an understanding of the venture capital business and a willingness to thoughtfully explore certain provisions that could impact our industry further. 

What’s next?  There will be a mark up in the Senate so that other members of the Committee can weigh in on this draft legislation.  We do not expect major changes to the elements discussed above.  If the bill passes the Senate, there will be a conference to reconcile it with the House bill.  There will be a push to complete this before the November elections, but it’s a long road ahead.  As we move through the legislative process, the NVCA is committed to ensuring that Congress continues to recognize the difference between venture capital and other asset classes as it relates to the need for regulation.