Should Fewer Venture Capital Funds be Subject to SEC Regulations? (H.R. 4854)

What is H.R. 4854?

(Updated July 19, 2017)

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. 4854

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sponsoring Rep. Patrick McHenry (R-NC), in a press release supporting this bill and a bill on crowdfunding, said that his bills would help small startups survive:

“Today, small businesses--particularly those in rural America--face immense challenges raising capital as traditional lenders have greatly reduced small business lending. To confront this challenge, we must harness technology and encourage innovative forms of capital formation to fill the void. Crowdfunding and angel investing are two great examples.”

However, the North American Securities Administrators Administration (NASAA) stated in a letter to Congress that the bill 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).”

Of Note: Rep. McHenry introduced this bill in tandem with another bill which aims to make it easier for business to be crowdfunded on sites like Kickstarter. As of June 16, 2016, both of McHenry’s bills were reported by the committee, meaning they could reach a vote on the House floor.

Media:

• Sponsoring Rep. Patrick McHenry (R-NC) Press Release
• NASAA Letter to Congress