Bills
| 3.23.22

Should Fewer Venture Capital Funds be Subject to SEC Regulations? (H.R. 1219)

Do you support or oppose this bill?

What is H.R. 1219?

(Updated February 15, 2019)

This bill changes how Venture Capital (VC) funds are defined. Specifically, it increases the number of investors that a VC fund can have before being classified as an investment company from 100 to 500. Investment companies are required to register with the Securities and Exchange Commission (SEC) and are subject to numerous regulations under the Investment Company Act of 1940.

Additionally, the bill redefines VC funds as groups that invest less than $10 million in a single company. Funds that invest more than $10 million in a company aren’t exempt from regulations and registering with the SEC.

The Investment Company Act of 1940 requires investment companies to do 5 things:

  • Register with the SEC;

  • Have a board of directors, of which 75% of the members are independent from the company;

  • Limit their use of certain investment strategies;

  • Maintain a certain percentage of their money for investors who want to leave the company;

  • Disclose their structure, financial condition, investment policies, and objectives to investors.

Argument in favor

Allowing more VC funds to be free from SEC regulations will help those VC funds spend more on helping small businesses and startups and less on complying with regulations.

Argument opposed

This bill allows VC funds to escape SEC regulations that ensure that investors in the fund and businesses receiving funding are protected from potential abuse by the fund managers.

Impact

VC funds that have less than 500 investors; VC funds that invest more than $10 million in one company; businesses seeking funding from VC funds; the SEC.

Cost of H.R. 1219

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Rep. Patrick McHenry (R-NC) said in a press release introducing this legislation that his bill would help small startups survive:

“Small businesses drive our economy and create jobs, but have suffered the most in recent years.  With small business lending down, we need to pursue policy that encourages greater innovation in capital formation and allows American to invest in each other. The Supporting America’s Innovators Act does that and I’m proud to join with a bipartisan, bicameral group to introduce this important bill.”

However, the North American Securities Administrators Administration (NASAA) stated in a letter opposing this bill during the last Congress that it would allow too many VC funds to escape regulations and SEC oversight: 

“The bill would not only allow another investment vehicle to operate without regulatory oversight, but also allow an investment adviser that is not licensed or examined to manage funds raised from a pool of investors that would be five times the size of that currently permitted (i.e., 100 to 500).”
This legislation was passed by the House Financial Services Committee on a 54-2 vote, and currently has the bipartisan support of four cosponsors -- including three Democrats and one Republican.

Media:

Summary by: Chris Conrad and Eric Revell

(Photo Credit: Flickr user Simon_sees)