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Investment finance regulatory proposals swirl in D.C.

March 14, 2024
By: Jason Rittenberg

From the Securities and Exchange Commission (SEC) to the Department of the Treasury, the White House budget, and Congress, various stakeholders across the federal government have proposed multiple regulations in the past several weeks that would affect the venture capital industry in general and, in some cases, venture development organizations. We offer a brief roundup of these issues.

House passes bill to facilitate private investment

The House passed a bill last week that would modify multiple regulations affecting venture capital and crowdfunding rules, as well as several company assistance activities that are common for venture development organizations.

A summary of changes in the law, as amended, includes the following:

  • Pushing the SEC to adopt its proposed registration exemption for “finders” that help issuers raise capital;
  • Helping to facilitate “demo days” by defining “general solicitation” and “angel investor” more clearly;
  • Increasing crowdfunding limits within a 12-month period from $5 million to $10 million and easing liability concerns for crowdfunding platforms; and,
  • Expanding “accredited investor” to include individuals who receive individualized investment advice or recommendations from an accredited investor.

The bill passed the House in a partisan vote, which suggests that the Senate would not be likely to advance this legislation without amendment.

Anti-money laundering reporting

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network issued a proposed rule that would subject most investment advisers to anti-money laundering and countering the financing of terrorism rules. These rules have applied to banks since 2001 but have not systematically affected private fund advisers. Under the proposed rule, all advisers that are registered investment advisers and those that report to the SEC as exempt reporting advisers (which generally includes advisers working only with venture capital funds) will also be subject to anti-money laundering and countering financing of terrorism rules.

Comments on the proposed rule are due April 15.

Increase in qualifying VC fund to $12 million in capital contributions

Following a congressional requirement, the SEC has published a five-year inflationary update of its definition of a qualifying venture capital fund. The rule puts the new level at $12 million in aggregate capital contributions and uncalled committed capital, an increase from $10 million.

Guidance emerging on private fund advisers rules

While a lawsuit against the SEC’s 2023 private fund advisers rule is still pending after a February 2024 hearing, law firms are beginning to prepare their clients to implement the changes, which could go into effect later this year. One of the major elements of the rule is restrictions on preferential treatment, including certain types of side letter terms, for venture capital funds. The legal challenge, which includes the National Venture Capital Association, questions the SEC’s authority and process for implementing the rule change.

White House targets investment fund manager compensation and capital gains rates

The White House’s proposed FY 2025 budget includes changing the treatment of investment fund manager-carried interest compensation to be taxable as income rather than capital gains.

Another change related to tax treatment that could affect venture capital activity is a proposal to tax capital gains as income for anyone making more than $1 million. This change would significantly affect post-tax investment earnings for these individuals and may therefore, affect their interest in venture capital versus other asset classes.

sec, treasury, finance