I went down a bit of a rabbit hole this week while looking into a story about the SEC’s new marketing rules for private funds, which go into effect November 4. My colleagues who cover buyout funds say the industry is still trying to make sense of the rules even though they’ve been in the works since December 2020.
Before reaching out to gauge the concerns of VC firms, I first had to determine how big the impact might be. Unlike buyout funds, most venture funds aren’t what’s known as Registered Investment Advisers. Only RIAs are going to find their marketing materials under scrutiny from the SEC.
My search for a list of VC firms that are RIAs came up empty, so I decided to create one myself. I started with our VCJ 50 list, which is a ranking of the world’s 50 largest venture firms based on cumulative fundraising over the prior five years. After multiple queries of the SEC’s investment adviser database, I identified 18 VC firms that are registered investment advisers.
Given that the US venture industry alone is comprised of more than 2,000 firms, RIAs account for less than 1 percent of the total. That means the vast majority of VC firms don’t need to give the new marketing rules a second thought.
But 18 well-known firms will indeed need to make sure they are in compliance with the new rules, including Andreessen Horowitz, Battery Ventures, Bessemer Venture Partners, General Catalyst Partners, Insight Partners, Sequoia Capital and Summit Partners. See the full list.
Law firm Schulte Roth & Zabel noted in a recent memo: “The amended marketing rule will significantly impact RIAs’ marketing materials and other investor communications, performance calculations and related disclosures, as well as existing and new placement agent arrangements. In addition, RIAs will need to review and likely revise their Form ADV, compliance policies and procedures, and recordkeeping practices.”
The SEC has made clear that it will be watching RIAs closely to make sure they are in compliance. On September 19, the SEC’s Division of Examinations issued a risk alert, telling advisers they “should consider whether they need to update or revise their written policies and procedures… to ensure they are reasonably designed to prevent violations by the advisers and their supervised persons of the marketing rule.”
The SEC alert also noted that examinations “staff will review whether investment advisers are in compliance with performance advertising requirements in the marketing rule,” including a lengthy list of prohibitions, such as advertising gross performance without also talking about net performance.
If you need to bone up on the new marketing rule, I recommend you read this story by my colleagues at affiliate title Private Funds CFO.
Another good resource is this recent presentation by Igor Rozenblit, former co-head of the SEC’s Private Funds Unit who now runs regulatory consulting firm Iron Road Partners. Rozenblit digs into the new rules that will apply to any discussion about performance in fund marketing materials, such as net and gross returns.
In the meantime, I will continue to explore how VC funds may be impacted by the new rules. If you want to share your thoughts, reach me at email@example.com.