The WSJ has launched the Billion Dollar Startup Club, which tracks venture-backed private firms valued at over $1 billion. I am getting crotchety in my old age, and view the fact that 73 companies fall into this category as a sign of extreme and unsustainable froth. After all, only 35 firms topped $1 billion in the dot-com bubble (adjusted for inflation).
For me these billion-dollar startups are a product of the JOBS Act's schizophrenia. On the on hand, Title I created the emerging growth companies that made it easier to go public. Because that's what we want, right? More public companies? But simultaneously Titles II, IV, and V made it easier for companies to stay private. Because that's what we want, right? For private firms to be able to raise money more easily and stay private longer? Hence the schizophrenia: the JOBS Act isn't sure what it wants, but it wants companies to be able to do it easier, whatever it is.
Now I sound like a hater, and I'm not. I just find it interesting that, for all of the talk of the need to make U.S. capital markets more amenable to new public companies, more and more VC-backed firms are staying private even with sky-high valuations.
Also, get off my lawn.
So, after swearing never to look at Above the Law again, I ventured over there to see if David Lat had posted an update on the Faruqi trial and found something relevant and interesting without the Judd Apatow feel of most ATL posts. Here, "guest conversationalist" Zach Abramowitz intereviews Carolynn Levy, long-time Wilson, Sonsini attorney turned Y Combinator partner. The interview focuses on Levy's contractual innovation, the safe. (She says it's not capitalized or acronym-ed so that it will one day be a word as commonplace as "note"). However, a safe is a "simple agreement for future equity." In other words, a convertible security, which founders and angel investors would use for early rounds of funding. The advantages to a safe over a convertible note seems to be (1) it avoids clunky California lender licensing regulations (that were amended last year, however) and (2) according to Levy, much faster to negotiate than a note because a safe has neither a maturity date or an interest rate.
So, what is it? According to the "safe primer," the safe is not debt (because no maturity date or interest rate), but it is an instrument that converts to a subset of preferred stock at the first equity round over a minimum valuation. If there is no equity round, then the safe does not mature but just stays in place. If the company fails, then the safe has a liquidation preference for the purchase price/principal. If there is an acquisition liquidity event, then the safe holder has the option of converting to common or getting the purchase price returned.
Of course, the stickiest wicket is the conversion rate for an equity round. At the time the safe is executed, the parties will negotiate for a Valuation Cap and/or a Discount Rate, and depending on whether the parties chose one or the option of both, the holder will receive a subset of preferred stock either based on the Valuation Cap if it is lower than the equity round valuation, the equity round valuation if it's lower than the Valuation Cap, or a discount from the share price of the preferred. Either way, Levy believes that having only one key term in the safe will create an easy negotiation and a six-page instrument.
I searched SSRN for any scholarly treatment of the safe and found this informative paper, Contractual Innovation in Venture Capital by John Coyle (UNC) and Joseph Green (Gunderson Dettmer). It explains that the California regulation required lenders in venture capital debt to be licensed unless the notes in question had a maturity of no more than a year, requiring founders and angel lenders to renegotiate every 11 months. In 2014, that limit was raised to 3 years. In the meantime, however, Y Combinator produced the safe.
From the ATL interview, it seems that many lawyers are unfamiliar with the new convertible security, and others wondered whether it would be treated for tax purposes as debt or equity. Zero coupon convertible bond? Valuation Cap is the face value? I don't have the asnwer for that, but will stay tuned.
I'm also interested in if this could be used for crowdfunding.
Two recent developments in the law and practice of business include: (1) the advent of benefit corporations (and kindred organizational forms) and (2) the application of crowdfunding practices to capital-raising for start-ups. My thesis here is that these two innovations will become disruptive legal technologies. In other words, benefit corporations and capital crowdfunding will change the landscape of business organization substantially.
A disruptive technology is one that changes the foundational context of business. Think of the internet and the rise of Amazon, Google, etc. Or consider the invention of laptops and the rise of Microsoft and the fall of the old IBM. Automobiles displace horses, and telephones make the telegraph obsolete. The Harvard economist Joseph Schumpeter coined a phrase for the phenomenon: “creative destruction.”
Technologies can be further divided into two types: physical technologies (e.g., new scientific inventions or mechanical innovations) and social technologies (such as law and accounting). See Business Persons, p. 1 (citing Richard R. Nelson, Technology, Institutions, and Economic Growth (2005), pp. 153–65, 195–209). The legal innovations of benefit corporations and capital crowdfunding count as major changes in social technologies. (Perhaps the biggest legal technological invention remains the corporation itself.)
1. Benefit corporations began as a nonprofit idea, hatched in my hometown of Philadelphia (actually Berwyn, Pennsylvania, but I’ll claim it as close enough). A nonprofit organization called B Lab began to offer an independent brand to business firms (somewhat confusingly not limited to corporations) that agree to adopt a “social purpose” as well as the usual self-seeking goal of profit-making. In addition, a “Certified B Corporation” must meet a transparency requirement of regular reporting on its “social” as well as financial progress. Other similar efforts include the advent of “low-profit” limited liability companies or L3Cs, which attempt to combine nonprofit/social and profit objectives. In my theory of business, I label these kind of firms “hybrid social enterprises.” Business Persons, pp. 206-15.
A significant change occurred in the last few years with the passage of legislation that gave teeth to the benefit corporation idea. Previously, the nonprofit label for a B Corp required a firm to declare adherence to a corporate constituency statute or to adopt a similar constituency by-law or other governing provision which signaled that a firm’s sense of its business objective extended beyond shareholders or other equity-owners alone. (One of my first academic articles addressed the topic at an earlier stage. See “Beyond Shareholders: Interpreting Corporate Constituency Statutes.” I also gave a recent video interview on the topic here.) Beginning in 2010, a number of U.S. states passed formal statutes authorizing benefit corporations. One recent count finds that twenty-seven states have now passed similar statutes. California has allowed for an option of all corporations to “opt in” to a “flexible purpose corporation” statute which combines features of benefit corporations and constituency statutes. Most notably, Delaware – the center of gravity of U.S. incorporations – adopted a benefit corporation statute in the summer of 2013. According to Alicia Plerhoples, fifty-five corporations opted in to the Delaware benefit corporation form within six months. Better known companies that have chosen to operate as benefit corporations include Method Products in Delaware and Patagonia in California.
2. Crowdfunding firms. Crowdfunding along the lines of Kickstarter and Indiegogo campaigns for the creation of new products have become commonplace. And the amounts of capital raised have sometimes been eye-popping. An article in Forbes relates the recent case of a robotics company raising $1.4 million in three weeks for a new project. Nonprofit funding for the microfinance of small business ventures in developing countries seems also to be successful. Kiva is probably the best known example. (Disclosure: my family has been an investor in various Kiva projects, and I’ve been surprised and encouraged by the fact that no loans have so far defaulted!)
However, a truly disruptive change in the capital funding of enterprises – perhaps including hybrid social enterprises – may be signaled by the Jumpstart Our Business Start-ups (JOBS) Act passed in 2012. Although it is limited at the moment in terms of the range of investors that may be tapped for crowdfunding (including a $1 million capital limit and sophisticated/wealthy investors requirement), a successful initial run may result in amendments that may begin to change the face of capital fundraising for firms. Judging from some recent books at least, crowdfunding for new ventures seems to have arrived. See Kevin Lawton and Dan Marom’s The Crowdfunding Revolution (2012) and Gary Spirer’s Crowdfunding: The Next Big Thing (2013).
What if easier capital crowdfunding combined with benefit corporation structures? Is it possible to imagine the construction of new securities markets that would raise capital for benefit corporations -- outside of traditional Wall Street markets where the norm of “shareholder value maximization” rules? There are some reasons for doubt: securities regulations change slowly (with the financial status quo more than willing to lobby against disruptive changes) and hopes for “do-good” business models may run into trouble if consumer markets don’t support them strongly. But it’s at least possible to imagine a different world of business emerging with the energy and commitment of a generation of entrepreneurs who might care about more in their lives than making themselves rich. Benefit corporations fueled by capital crowdfunding might lead a revolution: or, less provocatively, may at least challenge traditional business models that for too long have assumed a narrow economic model of profit-maximizing self-interest. James Surowiecki, in his recent column in The New Yorker, captures a more modest possibility: “The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature. As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.”
So a combination of hybrid social enterprises and capital crowdfunding doesn’t need to displace all of the traditional modes of doing business to change the world. If a significant number of entrepreneurs, employees, investors, and customers lock-in to these new social technologies, then they will indeed become “disruptive.”
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Uber just raised $1.2 billion at a valuation of $18 billion.
Let that sink in for a moment: a valuation of $18 billion! If that doesn't look like much, you must be thinking about Facebook's pre-IPO valuation of $50 billion, but Uber just landed the second largest private valuation on record. See here.
I have used Uber's service only once, with Vic Fleischer and Christine Hurt in Seattle, and I spent the whole ride quizzing the driver on the business model. Of course, I could have just googled it, but it was nice to see the business through the driver's eyes. It looks a lot like franchising, but with lower investment costs for the franchisees (drivers).
Why all the fuss? This is not just about replacing taxis. This is about displacing UPS and FedEx. See here for more on that possibility. Exciting stuff.
P.S. For those of you invested in the SharesPost 100 Fund, congratulations! Uber is on the list.
Longtime Glom readers know that I've been interested in the new private secondary markets for quite some time. Indeed, my summer writing focused on these new markets, where accredited (i.e., wealthy) investors can buy shares of pre-public companies from current shareholders. Security Law's Dirty Little Secret, forthcoming in the Fordham Law Review, was the result.
In the piece one of the concerns I voice is that these new markets risk disrupting the "nurturing" model of venture capital. The dominant VC narrative is that part of what makes Silicon Valley et al. so successful is that venture capitalists bring not only dollars, but also expertise and support, to the entrepreneur. VCs take seats on a start-up's board and actively advise it on the myriad challenges a fledgling company confronts. My worry was that the secondary market, by providing an easier exit for venture capitalists and substituting faceless investors for engaged, experienced VCs, risked upsetting the successful Silicon Valley start-up model.
Enter AngelList, a website backed by SecondMarket, one of the two big players in the new secondary market. According to today's WSJ, AngelList allows angel investors to invest directly in start-ups via the web. Using this website, accredited investors can buy shares straight from the company. Investors may never meet or even speak with the entrepreneurs at all.
Off the cuff, here are some thoughts:
- Angels aren't VCs. The loss-of-expertise point may matter less here. Angels generally are less active investors than VCs and take fewer control rights, so substituting unknown web investors for angels may not make much of a difference. Where you come out on this depends upon what kind of intangibles you think angels bring to the table.
- Small dollar amounts from investors--as low as $1,000, according to the article--may lower the incentives of the angels to monitor any one investment. The WSJ quotes one investor: "You say how much, hit 'go,' and you're committed," he said. "It's almost as easy as the Amazon one-click checkout." This ain't you grandmother's--or Peter Thiel's-- angel investment, boys and girls.
- This money, unlike with the secondary markets, goes straight to the start-ups, and gets there closer to when they need it. That seems like a huge plus.
- It's more egalitarian. One attraction of Angelist is that it brings the Internet's "cut-the-middleman" angle to angel investing, and makes it less dependant on who you know in the Valley.
- But it's only available to accredited investors, and thus ripe for criticism from two fronts. First, from the "$1 million ain't what it used to be" crowd, investors with that net worth and/or $200,000 in annual income aren't necessarily sophisticated enough to handle these kinds of risky investments.
- On the flipside, if you're intrigued by AngelList, you're out of luck unless you have the money to get in the door. With more and more Americans qualifying as accredited investors, AngelList is just one more reminder that, when it comes to investing in the U.S., some investors are more equal than others.
VentureBeat has created a list of leading IPO Candidates for 2013, and there are some exciting prospects. Box, Dropbox, Eventbrite, LivingSocial, Square, Survey Monkey, and Twitter are some of the familiar names on the list. Still, in a recent survey by the National Venture Capital Association, VCs and CEOs were rather restrained in their outlook. The outlook for VC investment is also muted, and I am wondering: will Fred Wilson make an investment in 2013?
P.S. If you are interested in whether the JOBS Act will have any effect on startup financing, you might be interested in the Hot Topics Program at AALS entitled "Jobs," the JOBS Act, and the Future of Small Business Finance and the U.S. Equity Markets. It is scheduled for this Sunday at 10:30 am, and speakers include Glom friends Steve Davidoff, Joan Heminway, Kristin Johnson, Jeff Schwartz, and Bob Thompson.
A recent report from Wilson Sonsini on venture-backed IPOs has lots of interesting tidbits, for example:
- Almost all of the companies are incorporated in Delaware (94%).
- More companies separated the chairman and CEO roles than combined them.
- Board committees at these companies frequently included venture capitalists who had invested in the companies (counting the VCs as independent," despite their share ownership).
- Almost all of the companies (98%) had adopted a code of business conduct.
- Over 80% of the companies implemented a classified board in connection with the IPO.
Lots more in the report. Thanks to Richard Blake for the tip.
The latest edition of The Economist has a fascinating article on “Chilecon Valley” that discusses the emergence of a startup community in Chile. The article focuses on a unique program of Startup Chile (a new Chilean governmental body) that gives grants to entrepreneurs in the United States and elsewhere to move to Chile for several months as they work on building their company and developing their technology. The grant recipients are then expected to network with, speak to, and mentor Chilean entrepreneurs.
The article touches on how law can foster or hinder the growth of a startup community, including by liberalizing immigration laws and allowing failed ventures to get a fresh start in bankruptcy.
Chile is making considerable efforts to diversify its economy beyond extractive industries like mining and agriculture. My spouse is co-organizing a fantastic three-day conference in Santiago from November 28 to December 1st that will focus on social entrepreneurship, sustainability, and innovation. The conference includes a fantastic line-up of speakers, including a keynote address by Al Gore, a pitch competition for social entrepreneurship startup companies, and some awesome music, including Devendra Banhart and Denver’s own Devotchka. Several panels will analyze the contribution of law to developing a entrepreneurial ecosystem in Chile.
You can check out my wife’s newly launched blog and website on the Chilean startup community here.
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So, just as I was getting a handle on moderation with the timesuck that is Facebook, a friend tells me about Pinterest. If Facebook is a timesuck, then Pinterest is a black hole: a very pretty, tasteful, affirming black hole.
So, what is Pinterest? I'm still not sure. It's official description is an "online bulletin board." In fact, each user (you have to be invited or get on the waiting list) may have numerous "boards," categorized by topic. Then, users "pin" images to their boards. These may be photos by the user, but almost all the time these are photos that are captured elsewhere on the web with the "pin it" app. The user may comment on the image or just pin it. When you log on to Pinterest, you are shown all the images that users have pinned on their boards -- the users you are "following" or the ones that Pinterest automatically had you follow when you joined based on your interests. If you like another user's image, you can repin it to your board. Generally, you will follow your friends, possibly other users you encounter, and then I sort of get confused.
What are people pinning? The folks I follow (and me) generally pin recipes, design ideas, fashion ideas, kids' ideas, and crafts. There are a lot of topics. I haven't pinned that much. I'm more of a browser than a pinner. I still am not quite sure what the point is except to have a pretty website to scroll through every day with photos of things most of my friends (and me) like -- a recipe to turn a watermelon into an open-mouth shark with fruit salad coming out, instructions on how to turn your builder-quality bathroom mirror into a framed thing of beauty, witty poster sayings, crock-pot recipes. what's not to like? And, unlike Facebook, there is no pressure to be witty, no requirement to read posts about other people's kids, no fear of running into extreme politics, and no fear of old sweethearts seeing your beach pictures. If we are putting our shiniest face forward on FB, then on Pinterest you are putting the shiniest face forward that you can conjure up from design/fashion/food images -- this is what my house would like like and the cooking smells it would be filled with if I had unlimited time and money.
So, now to the point. How does this make money? So far, Cold Brew Labs, headquartered in Silicon Valley, has raised $27 million in funding based on a $200 million valuation. Hmmm. If you look on Pinterest, there is no advertising. And ads would completely ruin the visuals. There is some sense out there that Pinterest may be making money based on links back to merchants. So, if I decide I like a dress I see on a website, and pin that to my board, then someone clicks back to that website, there is some opportunity for revenue there. There also seem to be commercial folks joining Pinterest. A radio station we listen to here in Champaign has been mentioning (all the time) that it has joined Pinterest. The radio station is nonprofit, but surely there are forprofit firms joining Pinterest. There are a lot of Etsy folks on there. There's also the possibility that some users who create boards like "New Dresses From X That I Love" are really X employees. Then the "ads" would be hard to distinguish from "user pins," wouldn't distract from the visual flow and would generate revenue. But this is guessing.
I have two problems with Pinterest. First, I can't really figure out how to use the site. I can't find my own friends that I know are on it. (Unlike FB, the "find friends" search engine can't find squat.) More importantly, I'm worried it has copyright problems. People are pinning anything they want from anywhere they want. If the pin comes directly from the original image on the web, then under the image, the link appears, but that's it. But who knows what images are going up without any sort of attribution. Here are the Terms and here is the Copyright Policy. Basically, users promise not to violate copyright when they pin stuff up there, and Cold Brew Labs promises to consider, in its discretion, any complaints that users have violated copyright.
Besides that, I did make the slow-cooker basalmic pork tenderloin, and it was good.
..and that's the problem Mitt Romney's got right now. You can argue that it's hard to feel too sorry for private equity types: they certainly tend to live up to their name, keeping their name and doings out of the limelight (unless they're going public this year, and have to reveal that their top 3 execs made $402 million). It's that privacy that's hurting Romney now.
The mystery of private equity is something I confront each spring as I being my Life Cycle of the Corporation course. As the title suggests, it covers a corporation's life, from founding through venture financing, going public, and being public (and M&A and bankruptcy, time permitting).
Fully a third of the substantive classes focus on venture financing. That because it takes a while for the students to grasp what venture capitalists do. We watch a movie. We discuss term sheets and Series A financing documents. We have a negotiation exercise, pitting company counsel against investor counsel. By the end of the unit, they really do get it. But it takes three weeks.
Most of America hasn't done this. So maybe when they hear, as the Journal reported yesterday, that of the 77 companies Bain invested in during its tenure, 22% filed for bankruptcy or stopped operations by year 8, or that "most of the 50-80% of annual gains" Bain produced came from "a relatively small number of deals, and some of these winning companies later ended up filing for bankruptcy protection", that sounds scandalous. To me, it sounds like Bain hit it out of the park. But I know the odds are against a successful exit, even for a venture-backed corporation. I know it's normal for a few "home-runs" in a fund to make up for a lot of ho-hum investments and some real stinkers. Most Americans don't know that.
Like Gordon, I think Perry's "vulture capitalist" label is unfair and misplaced. But there aren't really any venture capitalist household names--Gordon Gekko is one popular image of private equity, and he plays a villain. Steve Jobs may be an entrepreneur-hero, but the public doesn't lionize the VC funds that got Apple off the ground.
Gordon says this issue "should be a winner for Mitt, if he can make the connection to average voters." The question for me, is whether Romney is going to try to explain venture capital and private equity to the average American in soundbites. My experience tells me that might be a tall order.
Rick Perry is trying to label Mitt Romney and his old firm, Bain Capital, as "vulture capitalists," and Sean Hannity is not buying the rhetoric ...
Ron Paul also came to Romney's defense against Perry, Newt Gingrich, Rick Santorum, and Jon Huntsman, all of whom are criticizing Romney's record at Bain. Ron Paul is right on this one. So is the WSJ:
Private equity helps to promote dynamic capitalism that creates wealth, rather than dinosaur capitalism of the kind that prevails in Europe and futilely tries to prevent failure. Sometimes this means closing parts of the company and laying off employees, but the overriding goal is to create value, not destroy it.
This debate will be with us through the general election, it appears, either because Romney figures out how to make it a plus with the middle class or because Newt Gingrich or President Obama figures out how to make it a liability for Mitt. While the particulars of many Bain investments leave some room for interpretation, the venture capital industry in the US has been the envy of the world, and the argument in favor of European-style capitalism seems especially weak right now. This should be a winner for Mitt, if he can make the connection to average voters.
If you are at Law & Society this Friday and Saturday, come to the mini-conference on Entrepreneuship & Law that Brian Broughman (Indiana - Maurer School of Law) and our own Gordon Smith (BYU) have organized. Here is the line up:
Friday, June 3, 2011
8:15 am to 10:00 am Regulating Entrepreneurs 2122 (Chair: Brian Broughman)
- Mira Ganor (Texas), The Power to Issue Stock
- Erik Gerding (New Mexico), Shadow Banking, Financial Innovation, and Regulatory Arbitrage
- Michelle Harner (Maryland), Mitigating Financial Risk for Entrepreneurs
- Poonam Puri (Toronto), The Regulatory Burden of Corporate Law
- Discussants: Kristin Johnson (Seton Hall) & Sarah Lawsky (UC Irvine)
12:30 pm to 2:15 pm Governance Structure of Entrepreneurial Firms 2322 (Chair: Brian Broughman)
- Brian Broughman (with (Jesse Fried & Darian Ibrahim), Delaware Law as Lingua Franca: Evidence from VC-Backed Startups
- George Geis (Virginia), Organizational Contracting and Third Party Rights
- Alicia Robb (Kauffman Foundation), Entrepreneurial Finance and Performance: A Transaction Cost Economics Approach
- Discussant: Bobby Bartlett (UC Berkeley)
Saturday, June 4, 2011
8:15 am to 10:00 am Law, Entrepreneurship, and Innovation 3116 (Chair: Gordon Smith)
- Mike Burstein (Harvard), Exchanging Information without Intellectual Property
- Sean O’Connor (Univ. of Washington), Transforming Professional Services to Build Regional Innovation Ecosystems
- Peter Lee (UC Davis), The Accession Insight and Patent Infringement Remedies
- Karl Okamoto (Drexel), Law and Entrepreneurship: An Assessment Approach
4:30 pm to 6:15 pm Global Entrepreneurship 3519 (Chair: Gordon Smith)
- Afra Afsharipour (University of California, Davis), US Private Equity Investments in India
- Sofia Johan (York Univ.)(with April Knil and Nathan Mauck), Determinants of Sovereign Wealth Fund Investment in Private Equity
- Gordon Smith, Stability and Adaptability
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First we had a technology IPO that doubles the first day, now we have a law firm establishing a fund for the purpose of investing "in or with" their clients. Foley Lardner has announced that the firm's $4 million investment fund will be for the purpose of investing in their venture capital clients' funds or in portfolio companies themselves. Hearkening back to the 1990s, Foley's announcement emphasizes that "[b]y having a vested interest in our clients’ businesses, we are further demonstrating our commitment to their success by literally putting our money where our mouths are.”
First, the establishment of the fund and the reasons for it seem very retro. Foley is attempting to brand itself, and its "Private Equity and Venture Capital Practice" as part of the VC culture. Foley now has an office in Silicon Valley, and also promotes its presence near Madison, Wisconsin (in Milwaukee) and in Boston. So, if you thought Foley was a boring old East Coast or Midwest firm, now think of them as a hip, savvy incubator-type firm that can meet all of your private equity needs. This seems a little Venture Law Group to me, and VLG isn't around any more. Of course, this model has also been great for Wilson, Sonsini, which didn't skip a beat when the tech boom ended.
Second, I have written about ethical problems with law firms making equity investments in IPO clients. However, at least form the announcement, it seems that many of Foley's investments won't have that conflict. If Foley's client is the VC, and the fund invests in an issuer the VC invests in, then Foley has no conflict with the non-client issuer. I'll have to think some more about this, but it's not obvious that Foley would have a conflict with the VC in advising the VC on its investment in the startup issuer. I suppose there could be a conflict on governance of the VC fund, but I'll have to think more about that.
Third, this seems like another harbinger that we may be entering a hot IPO market. Yes, Wilson, Sonsini's investment fund has run for decades, but it seems that Foley wouldn't be starting a fund now focusing on investing alongside VCs if some nice exits weren't on the horizon. Exciting for us corporate law geeks.
Prior to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Investment Advisers Act of 1940 had an expansive exemption for advisers of private funds (including hedge funds, private equity funds and other types of pooled investment vehicles excluded from the definition of “investment company” under the Investment Company Act of 1940). Dodd-Frank removed that exemption, but expressly provided a new exemption from registration for advisers to venture capital funds. The SEC has a proposed regulation to implement these changes, and the venture industry is worried.
Because, according to the SEC release, the new venture capital fund exemption "provide[s] that the Commission shall require advisers relying on [it] to provide the Commission with reports and keep records as the Commission determines necessary or appropriate in the public interest or for the protection of investors. [The] new exemption [does] not limit our statutory authority to examine the books and records of advisers relying upon [this] exemption."
In a release implementing amendments to the Investment Advisers Act of 1940, the SEC proposes reporting requirements for exempt advisers comprising "a limited subset of items on Form ADV." That limited subset consists of seven items on Form ADV (Items 1, 2, 3, 6, 7, 10, 11), and the disclosure filed by exempt advisers would be publicly available.
You can judge for yourself whether the disclosure is "burdensome and costly," but the logic of this regulation is a bit hard to follow. As observed by one commentator, "Exempting advisers on the basis that their registration is not necessary for the protection of investors while at the same time requiring the public filing of detailed information about those advisers would seem to be inconsistent if not opposite positions."