US draft bill draws transparency concerns from ILPA

A House draft bill that would allow private fund advisors to keep more information private when investing in growth companies has drawn criticism from investor body the Institutional Limited Partners Association.

A draft bill in front of the Subcommittee on Capital Markets, Securities and Investment calls for the Securities and Exchange Commission to change the status of a “qualifying portfolio company” to an “emerging growth company.” That would allow private fund advisors to invest up to 100 percent of their portfolio into EGCs without being registered. Under current law, advisors which do not exceed the 20 percent investment limit are exempt from disclosing that information.

An EGC is typically defined as having less than $1 billion in annual gross revenue. The bill did not mention a threshold.

Chris Hayes, director of industry affairs at ILPA, said the proposed legislation would expand the ability for private fund advisors to claim the venture capital exemption, even in cases where the manager is primarily invested in mature and publicly held companies rather than in early-stage companies for which the venture exemption was originally intended.

“As fund managers become more complex, the need for transparency, disclosure and risk management increases in the eyes of the investors,” Hayes said. “This proposal increases the complexity and risk of a venture portfolio and decreases the ability of the LP to adequately oversee the manager.”

ILPA has been pushing for greater transparency on behalf of its members, which include pension funds, endowments and sovereign wealth funds. Last month it called for the SEC to get GPs to disclose their fees and expenses to LPs.

Committee member David Scott, a representative from Georgia, asked whether the change from qualifying portfolio company to EGC was necessary. He used Snap, the parent of Snapchat, and online storage site Dropbox as recent examples in which the two companies claimed EGC status even though their initial public offerings were oversubscribed.

“So a lot of these discussion drafts and bills amount to sort of like a drip-drip erosion of our securities laws, and I’m somewhat worried we may be ignoring the needs of investors and marketplace transparency,” Scott said.

Barry Eggers, who spoke as a member of the executive committee of the National Venture Capital Association, a VC advocacy group, told the subcommittee that removing regulatory hurdles for small companies would encourage IPOs.

Eggers is also a founding partner of Lightspeed Venture Partners, which invests in start-ups that become publicly traded companies, such as Snap and Nimble Storage. He said, without identifying the source, that all companies that have gone public since 1979 have been backed by venture capital.