Writing in The New York Times, Alan Patricof and Eric Dinallo argue that increasing regulations and reporting requirements for venture capital firms would hinder, instead of stimulating, the formation of new companies and jobs. Patricof, a venture-capitalist, and Dinallo, a NYU Stern School finance professor, spell out why more regulation is unnecessary:
Venture-capital funds deal solely with privately purchased equity securities in start-up companies, which are not traded in public markets. They have as their limited partners only people who meet the S.E.C.’s definition of a “qualified client” (meaning they possess a substantial amount of money to invest). These investors, who typically allocate a small percentage of their portfolios to venture capital, are familiar with risk, but it is long-term risk, stretching out 7 to 10 years. They put their faith not in publicly traded securities but in entrepreneurs, emerging technologies and new markets.
Because their business is contained within the ecosystem of limited partners, venture-capital funds and the companies in which they invest absorb all the risk: there can be no domino effect in the world financial system.
Venture-capital funds do not leverage investments with debt either, so they’re not tied to commercial banks. They don’t sell short, trade in public securities or employ any hedging techniques.
These funds already comply with Securities and Exchange Commission requirements for reporting of private offerings on Form D. This information is adequate to allow the government to keep track of an industry that, with less than $200 billion under management, makes investments that amount to no more than 0.2 percent of gross domestic product. Venture-capital funds also comply with all rules for the private placement of securities and the formation of private, unregistered investment funds, including screening investors for suitability.
Read the whole op-ed here.