The Securities and Exchange Commission is expected to decide Wednesday how it plans to grant venture capital an exemption from Dodd-Frank Act registration requirements.
The decision is part of a broad – and contentious – demand to have private equity firms and hedge funds register as investment advisors. Venture capitalists have objected to being lumped into the private equity category because of their focus on smaller, startup investments and their general lack of leverage in transactions.
Lawyers and observers say it is unclear how the commission will define venture capital in order for it to qualify for the registration exemption. “It’s really hard to tell,” acknowledged Murray Simpson, at attorney at O’Melveny & Myers, in an interview Monday.
The difficulty appears to be how to craft a definition that does not overlap with other categories of private equity and create a loophole for non-venture firms. Also of concern is whether the definition will be flexible enough to enable venture funds to invest some of their assets in secondary transactions and make investments in public companies post IPO.
There has been little indication so far of which way the commission will go. “The commission staff has been totally silent as to what it will propose to the commissioners, and the commissioners have made no statements as well as to whether they will accept, reject or modify what the staff proposes,” said Mark Heesen, president of the National Venture Capital Association, in an e-mail.
The decision could have broad implications for venture capital, placing expensive, time-consuming requirements on thinly staffed firms.