US registration proposal now includes $150m threshold

The US House Financial Services Committee yesterday passed HR 3818, the Private Fund Investment Adviser’s Registration Act, by a vote of 67-1. The bill raises the minimum threshold for assets under management to $150m from $30m and includes an exemption for Small Business Investment Companies as well as venture capital firms.

The US House Financial Services Committee yesterday passed HR 3818, the Private Fund Investment Adviser’s Registration Act, by a vote of 67-1. The final version, which was reported out to the full House for vote yesterday, contains two new carve-outs: an exemption for venture capital firms and an exemption for small business investment companies (SBICs).

The Committee also decided to raise the threshold for assets under management at which an adviser would have to register from $30 million to $150 million.

For the many private equity and venture capital funds that are structured as SBICs, the decision will be a relief, as it fully exempts them from registration. Venture capital firms would not have to go through the formal registration process, but still must maintain such records that the SEC deems necessary and provide annual reports.

Coming up with a bright line distinction between private equity and venture capital might be difficult. The bill contains language that instructs the SEC to “identify and define the term ‘venture capital fund’ and … provide an adviser to such a fund an exemption from the registration requirements under this section.”

The SEC will not face a similar challenge in defining SBICs. SBICs are licensed by the Small Business Administration, and are already subject to leverage limits, annual financial reporting requirements and onsite compliance examinations by the SBA.

“Unlike venture capital which is difficult to define and therefore received only a quasi-carved out, SBICs are now explicitly excluded from the bill,” said Brett Palmer, president of the National Association of Small Business Investment Companies. “The fact that SBICs have been clearly defined in law for over 50 years, with a specific publicly policy purpose of using the private equity market to provide capital to domestic small businesses, struck a chord with the policymakers.”

The VC exemption is at odds with comments made yesterday by SEC chairman Mary Schapiro, who said in a speech before the Securities Industry and Financial Markets Association in New York that she “will work with Congress to avoid creating broad new carve-outs or exceptions that could come back to haunt investors in later years.”