Venture Capital

How is venture capital regulated by the government?

Venture capitalists and their private equity firms are regulated by the U.S. Securities and Exchange Commission (SEC). Venture capital is subject to the same basic regulations as other forms of private securities investments. Since a large amount of venture capital is provided by banks and other depository institutions, anti-money laundering regulations and know-your-customer regulations can apply. The most notable regulation unique to venture capitalists (relative to other investors) is that they are not allowed to advertise or make any solicitations. There are also some securities regulations that affect venture capital indirectly, including those that raise the cost of building a legal compliance infrastructure.

Venture capitalists help fund higher-risk start-up firms and other small businesses that have a chance for high levels of long-term growth. Venture capitalists make their returns through the ownership of large numbers of company shares. This is considered riskier than normal equity investing, and it has gained a particularly suspicious reputation since the Internet bubble crash near the start of the 21st century.

Private equity firms (which provide venture capital) have to register with the SEC and are subject to information reporting requirements unless their funds are considered to be qualified venture capital. Qualified venture money managers include those who handle less than $150 million in assets.

Most regulations on equity investments and investors hinge on technical definitions that are written into securities legislation. Congress and the SEC have altered the definition for venture capital on multiple occasions, resulting in different equity financing practices along the way. In the past, for instance, investments that qualified as venture capital were only accessible to those who were similarly qualified as professional venture capitalists.

 

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