While a contentious reconciliation of the House and Senate bills caused some concern, we are happy to report that the final legislation is much better for the CDVC industry than that which was first introduced in the Senate. CDVCA is working to minimize the number of unexpected hurdles that could arise in implementation of the law. Dodd-Frank requires over 250 rulemakings, studies, and other regulatory actions to be completed by more than a dozen regulatory agencies. Below is an update on the status of the provisions of Dodd-Frank that could affect CDVC fund managers.

  
The definition of "accredited investor" and a proposed change in the private placement procedures. As initially proposed in the Senate, the bill would have drastically raised the amount of income or net worth an individual investor had to have in order to be deemed an "accredited investor" eligible to invest in private placements. For more information, see CDVCA's comprehensive look at the original bill in our April newsletter. As most venture capital funds and angel investor networks only accept investments from accredited investors, this change had the potential to make fundraising even more challenging at a time when it is already very difficult. The original Senate bill contained a confusing provision that would have subjected businesses issuing securities in private placements to much more complex and expensive compliance requirements, including a 120-day waiting period. These provisions had the potential to complicate both the offering of interests in a CDVC fund and the offering of stock in a company to a CDVC fund and other investors. 

CDVCA worked with the Angel Capital Association and several other national organizations to express our common position on these issues. The final version of Dodd-Frank leaves the private placement regime intact. The net worth and income thresholds for individual accredited investors remain unchanged, but the net worth calculation will now exclude the value of an investor's primary residence. Even more importantly for CDVC funds, the provisions that could have eliminated federal preemption of state securities regulation have been removed, replaced with language that disqualifies individuals who have been previously sanctioned in connection with purchase or sale of securities from using Rule 506 to shield their offerings from review.

Section 413 of Dodd-Frank calls for the SEC to undertake a review of the "accredited investor" definition to determine whether the net worth threshold should be modified for the protection of investors. After this review, the SEC is granted the authority to change the threshold applicable to individual persons through a notice and comment rulemaking procedure. CDVCA will continue to advocate against changes to the definition that would make fundraising more difficult, and we will update our members on the SEC's progress as necessary.   

"Volcker Rule." Paul Volcker's proposal to restrict banks from investing in private funds had the potential to curtail CDVC fundraising from banks dramatically. Fortunately, the Dodd bill contains an exemption for investments in Small Business Investment Companies and other investments "designed primarily to promote the public welfare." As interpreted by the Comptroller of the Currency, the "public welfare" carve-out is quite broad. It is defined to include all "qualifying investments" under the investment test for Community Reinvestment Act compliance. Several years ago, CDVCA was successful in having investments in CDVC, NMVC, and RBIC funds specifically listed as qualifying for investment test credit under the CRA, and the interagency CRA Questions and Answers released on March 11, 2010 once again reflect this treatment.

Section 619 of Dodd-Frank requires a study and a coordinated rulemaking procedure by the federal banking agencies in order to implement the Volcker rule. According to the timeline set forth in the bill, it will be nearly three years before final rules implementing the Volcker rule are promulgated, and several years after that before such rules are completely phased-in. CDVCA will monitor the study by the Financial Stability Oversight Council and the subsequent rulemaking procedures. Given the relatively small size of the venture capital industry, it is probably unlikely to be viewed as a sector that could create systemic risk to the economy.

Private fund adviser registration requirements. Dodd-Frank requires some managers of private funds to register as investment advisers with the SEC, but managers that exclusively advise venture funds are exempt.