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SEC Defines Venture Capital

Jeff Nolan | November 23rd
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The SEC fulfilled their obligation under the Frank-Dodd financial reform bill and defined what venture capital is.image

Represents itself to investors as being a venture capital fund. Only invests in equity securities of private operating companies to provide primarily operating or business expansion capital (not to buy out other investors), U.S. Treasury securities with a remaining maturity of 60 days or less, or cash. Is not leveraged and its portfolio companies may not borrow in connection with the fund’s investment. Offers to provide a significant degree of managerial assistance, or controls its portfolio companies. Does not offer redemption rights to its investors.

Welcome to the Department for Avoidance of New Business Creation, how may we help you?

Here’s what would, according to this definition, be illegal for a venture capital fund to undertake:

Private investment in public entity (PIPE) financing. This is where a VC fund invests in a publicly traded company and the proceeds of that investment go not to other investors but to the company in exchange for preferential shareholder rights. This has been a lucrative area for VC funds to invest in and has also been critically important for companies to tap when other finance options (e.g. debt) prove to be onerous.

Investor/founder buyouts. It’s not uncommon for a VC to invest in a company and have a portion of the invested capital go to buying out founders and other investors. It’s a way for founders to get some liquidity and for companies to dispose of investors who have external pressures related to liquidity.

Bridge financing. According to this definition a venture capital firm may only invest in equity securities, which would suggest that a VC firm would be prohibited from offering debt financing… at least under a strict reading.

This is yet another example of legislative overreach, venture capital is a very small percentage of private equity overall and in no way contributed to the last financial crisis so why is this regulatory definition necessary? It’s not and it won’t be helpful for investors who have a demonstrable track record of business and job creation.

 

[Cross-posted at Venture Chronicles]

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About Jeff Nolan

My name is Jeff Nolan and I write Venture Chronicles. What started, in 2002, as a simple initiative to understand this thing called “blogs” that I kept hearing about has evolved into something much more significant. Home About Venture Chronicles About Venture Chronicles My name is Jeff Nolan and I write Venture Chronicles. What started, in 2002, as a simple initiative to understand this thing called “blogs” that I kept hearing about has evolved into something much more significant. Along the way to becoming a bona fide blogger I started to understand the implications of user generated content. At the time I was a venture capitalist for SAP, the enterprise software company, and in my travels in the enterprise software market it became evident that blogging would be a powerful communication channel for enterprises to use, what we now call social media, and a powerful information collection mechanism for bottom up corporate intelligence. Combined with search technology, social networking software, and wikis, I was witnessing the inception of an entirely new generation of knowledge management software. I am currently the VP Product Marketing for Get Satisfaction, the simple and effective way to build online communities that enable productive conversations between companies and their customers. Over 50,000 companies use Get Satisfaction to create a social support experience, build better products, realize SEO benefits, and take advantage of brand loyalty behaviors that results in strong word of mouth marketing experiences in the market. I can be reached at jnolan-at-gmail-dot-com.