On Thursday, November 18, 2010, Zac Rosenberg, CCLS Consultant, had the opportunity to participate in the SEC’s 29th Annual Small Business Forum on Capital Formation. The event is designed to give members of the small business community and their advocates the opportunity to provide input and develop recommendations for federal agencies, Congress, and the private sector to improve small business capital formation in the U.S. Much of this year’s discussion focused around the provisions of the Dodd-Frank Act and mandated rulemaking called for thereunder.
Of particular concern was the scope of the SEC’s definition of “venture capital fund” for the purposes of the exemption from SEC registration as an investment adviser. Depending on the SEC’s approach to distinguishing “venture capital funds” from “private equity funds,” “buyout funds,” and “hedge funds,” the definition could have the effect of requiring more advisers to register than was intended, increasing costs and stifling small business capital formation. On the other hand, the possibility that hedge fund and private equity fund managers will try to structure their funds to meet the exemption, which would be inconsistent with the apparent congressional intent, may cause the SEC to be over-inclusive. More detailed analysis will be provided today upon the release of the proposed definition.
Another focus point was the changes to the definition to accredited investor, which Dodd-Frank amended by excluding the value of the person’s primary residence from the calculation of net worth. The Act also requires the SEC to adjust and modify the definition over time in light of inflation and the economy. The discussion at the forum reflected tension between the growing interest and desire for more Americans to invest in private placements and the apparent legislative and regulatory intent to make such investments more restrictive. Forum recommendations will be finalized and prioritized in the coming weeks and a formal report will be released thereafter, which may be considered by the SEC as part of their rulemaking process. If you have any questions about the recent Forum, please contact us at 619-278-0020.