Tighter Regulation And Higher Taxes Feared By US Venture Capitalists

by Mike Godfrey, Tax-News.com, Washington

09 April 2009

Treasury Secretary, Timothy Geithner has recommended that all advisers to hedge funds (and other private pools of capital, including private equity funds and venture capital funds) above a certain size be registered with the SEC and the respective funds be subject to investor and counterparty disclosure and other regulatory requirements in order to detect threats to financial stability.

Details have yet to be worked out, but this could mark a big change for venture capital, and there is already growing concern in the industry with regard to greater taxation and regulation, as it is lumped together inappropriately with hedge funds and other much bigger players in the financial market place.

Venture capitalists point out that they invest only USD30bn a year, representing a mere 0.02% of total financial transactions, and as such are most unlikely to pose systemic threats to the market place. In addition their participation in public markets is only a minor part of their business.

The industry considers itself to be at the cutting edge of new job and wealth creation, but potential loss of privacy caused by extra reporting requirements together with the expense and complexity of compliance could prove a huge disincentive at a time when the economy most needs new enterprise.

The National Venture Capital Association stated that venture firms — as long-term investors that exchange cash raised from limited partners for equity in startup companies — have a unique role in stimulating economic growth. The industry, they say, has a fundamentally different role in the economy than private equity and hedge funds, and should not be subject to similar regulatory schemes.

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