Venture capitalists aren’t barred from SEC scrutiny – Securities


To print this article, all you need to do is be registered or log in to

Over the past six months, the Securities and Exchange Commission has settled a number of enforcement actions against venture capital advisers who are reporting exempt advisers (ERAs) and not registered investment advisers (RIAs). In the years following the implementation of the Dodd-Frank Act rules in 2011 – when large private equity and hedge fund advisers who were not eligible for venture capital or fund adviser exemptions have had to register as RIAs – we have seen the weight of SEC regulation focus on these newly registered AIRs, with relatively little enforcement action against ERAs. In fact, it is through these enforcement actions, particularly against private equity advisors, that the venture capital industry has learned to become hypervigilant with respect to conflict disclosures, as well as fees and expenses.

The landscape appears to be changing under the leadership of the SEC’s Gary Gensler. With five new enforcement actions settled against venture capitalists in September alone, we are reminded that venture capitalists are not outside the purview of the SEC. Since March, the SEC has announced the following categories of enforcement actions settled against venture capitalists:

  1. Pay to play: These four enforcement actions related to political contributions made by employees of fund managers to certain public officials in positions within government entities that were already invested in the managers’ funds.

  2. Interfund loans and consolidation: Both of these enforcement actions involved loans and transfers of money between the sponsors’ various funds that the SEC said were unauthorized and undisclosed.

  3. Management fee calculation error: Both of these enforcement actions involved management fee disclosures that the SEC said were misleading and management fee calculations that the SEC said resulted in an overpayment to managers.

The SEC’s focus on private fund advisers has been clear for some time, as evidenced by the Examinations Division’s risk alerts and review priorities. Additionally, as the industry is well aware, earlier this year the SEC proposed sweeping new rules that would have a significant impact on private fund advisers, including ERAs. The enforcement actions listed above do not include charges the SEC has recently brought against other types of private fund advisers (last week alone, 12 settlements were announced involving registered private fund advisers and alleged breaches of custody rules). As the SEC continues to focus on private fund advisers, it is likely that we will see more venture capital advisers operating under the ERA exemption under SEC scrutiny.

So what to do? This is the time to fully understand the obligations to which IBAs are bound, to adhere to them and to follow with extreme precision the elements of your agreements (such as the determination of management fees).

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR ARTICLES ON: US Corporate/Commercial Law

FinCEN geo-targeting orders

Taylor English Duma

FinCEN Geo-Targeting Orders (or “GTOs”) are specialized administrative orders issued by FinCEN pursuant to its authority under the Bank Secrecy Act.

US Compliance Enforcement

Debevoise & Plimpton

The aggressive law enforcement landscape in the United States has encouraged an increasing focus on corporate compliance programs. Businesses under U.S. jurisdiction can face significant consequences…


About Author

Comments are closed.