Primum Non Nocere: The Impact of Dodd-Frank on Silicon Valley
22 Pages Posted: 1 Feb 2015
Date Written: 2011
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010 in response to the systemic credit crisis of 2008-2009, wisely did not attempt to sweep Silicon Valley venture capital financing activity into its regulatory net. The nature of the investing activities conducted by VC funds were unrelated to the types of financial market activity which gave rise to the credit crisis. Dodd-Frank’s exemption for VC funds from its otherwise universal private fund adviser registration requirement was therefore entirely appropriate.
However, SEC implementing regulations under Dodd-Frank contemplated both an affirmative reporting obligation under the Advisers Act on VC funds, and SEC examination authority with respect to VC fund books and records, which the Article argues would impose greater cost and burden on those funds than justified by the nature of their investing activities.
As a separate matter, the Dodd-Frank Act mandated that the SEC exclude the value of an individual’s principal place of residence from their net worth for purposes of determining whether the individual qualifies as an “accredited investor.” The Article discusses the implications of this change, arguing that a deleterious impact might perhaps in future be observed with respect to the availability of pre-VC “friends and family” financing for early, seed-stage startups.
The Article’s observations and arguments are made on the basis of the Author’s many years of direct experience as a former full equity partner at Silicon Valley’s largest law firm.
Keywords: Dodd-Frank, venture capital, venture capital fund exemption, Investment Advisers Act, accredited investor, Rule 506
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