The Jumpstart Our Business Startups (JOBS) Act, which President Barack Obama signed into law last week, is set to bring regulatory changes that will impact on private equity and venture capital firms.
If the US Securities and Exchange Commission does not make major revisions in the next three months, regulation D requirements, which ban firms from making general solicitations or advertisements for their funds, will be eliminated.
The industry will then be able to publicly disclose information about their fundraising, provided that the actual sales are made only to accredited investors.
Some industry voices have already expressed concern. Fund managers can say goodbye to “the mystique of exclusivity the industry has used to draw in high net worth clients” and the private equity industry will be forced into “a new level of openness” that not everyone will welcome, according to a report in Fortune.
In Asia, however, the reaction is more muted.
Niklas Amundsson, a partner in MVision Private Equity Advisers in Hong Kong, believes the existing fundraising model is unlikely to change.
The private equity model is moving increasingly toward separate accounts, with each investor negotiating special terms. The trend reinforces the practice of private deals between LPs and GPs, and does not align with the new freedom to advertise to a broader investor base, he said.
“A private equity or venture capital fund at the end of the day is a tailored, privately-negotiated product so you can't really advertise it per se. It's not a retail offering.”
Venture capital firms likewise do not foresee any major changes.
Lawrence Tse, co-founder and partner of China-based venture capital firm, Gobi Partners, says the relaxation of solicitation rules would allow venture capital firms to cast a wider net when seeking potential investors.
“But the targets we reach out to through a wider net are low probability targets because they don't know us at all. They could possibly participate in future opportunities, so the impact is helpful but not very significant.”
Crowdsourcing investments, something startups will be permitted to do under the JOBS Act, may have a bigger impact. Startups have typically sought angel investors but now they may raise up to $1 million a year by pitching to thousands of smaller investors online.
Early stage companies going after angel investors could benefit by building an alternative network of investors, Tse says. But Gobi is an A and B round investor, and therefore he doesn't anticipate the crowdsourcing method of raising money will impact significantly on his firm.
“If anything, it expands that funnel of opportunities that come to venture capital firms.”
However, angel investors may not accept the “dilution of their pre-IPO equity stakes via portfolio companies’ sale of large amounts of equity to unsophisticated, non-accredited investors”, which crowdsourcing would attract, according to a report by Weil, Gotshal & Manges.
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