A bill that a venture capital trade group and its congressional sponsor say will give firms greater flexibility to invest in companies over a longer period was passed by the House Financial Services Committee on Wednesday.
The bill's sponsor, Rep. Trey Hollingsworth, R-Ind., said venture capital firms are over-regulated, stymieing investments across the country.
The Developing and Empowering Our Aspiring Leaders Act will encourage capital formation for startups by directing the Securities and Exchange Commission to make a percentage of secondary investments qualify as venture capital, which would allow VC funds to continue to follow their portfolio companies along their growth path through more follow-on investments without fear of triggering significant regulatory burden, the National Venture Capital Association noted in a news release.
The modification would be limited to equity investments by venture capital funds.
The Dodd-Frank Act required venture capital funds to register with the SEC as Exempt Reporting Advisers and must ensure that more than 80% of their activities are in qualifying investments, defined only as direct investments in private companies, according to the NVCA release. "Otherwise they must become Registered Investment Advisers, a designation that was only meant for private equity and hedge funds and which adds a number of costs and challenges for VC firms," the release stated.
Mr. Hollingsworth said that the bill allows venture capital investors to "provide more capital to firms as they continue to grow through their lifecycle," adding that secondary investments are more common today.
In the NVCA release, Bobby Franklin, president and CEO, said the bill "would alleviate pressures on VC firms and encourage more equity investment into U.S. startups."
The bill will head now to the full House of Representatives.