The Canadian Venture Capital and Private Equity Association (CVCA) is warning that a set of rules proposed by the United States (US) Securities and Exchange Commission (SEC) will negatively impact Canadian investors.
In a recent letter addressed to the SEC, CVCA CEO Kim Furlong argued that the new disclosure obligations put forth by the American securities markets regulator earlier this year “will have a direct negative impact on Canadian investors.”
CVCA members’ “most significant concern” is the absence of a grandfathering for existing funds.
These changes are part of a larger push by the SEC to make private capital markets more transparent. They would force registered private equity (PE) funds, hedge funds, as well as some venture capital (VC) firms, to publish detailed quarterly reports noting their fees, expenses, executive compensation, and fund performance.
According to the SEC, the proposed rules are designed to increase “transparency, competition, and efficiency” in private capital markets and protect private fund investors.
Furlong writes that CVCA members’ “most significant concern” is the absence of a grandfather clause for the application of these rules to existing funds. The obligations are set to apply to current funds, which Furlong claims “would be in effect re-writing terms that have been agreed upon between parties.” She argues that they could result in “significant cost that might render existing operations uneconomic.”
According to The Wall Street Journal, the SEC’s proposed rules were passed in a three-to-one February vote, “signaling a strong chance that a final version will be adopted.” Before issuing a final rule, the SEC is seeking public comments. Furlong’s letter came in response to this call.
“Private fund advisers, through the funds they manage, touch so much of our economy,” said SEC Chair Gary Gensler in February, when the changes were announced. “I support this proposal because, if adopted, it would help investors in private funds on the one hand, and companies raising capital from these funds on the other.”
The CVCA represents the VC and PE industry in Canada, with nearly 2,200 individual members and about 300 member organizations.
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Although the SEC’s new requirements are to be imposed on US private fund advisers, given that “most” Canadian VC and PE investors “operate on both sides of the border,” Furlong says they will have an impact on Canadian funders as well.
“While the private capital industry in Canada is growing … our industry is a fraction of the size of our US counterpart,” writes Furlong.
Furlong described the lack of a grandfathering provision as “not a reasonable outcome when the investors in question are content with the status quo and the cost model for the vehicle is already set.”
According to Furlong, the SEC’s proposed rules regarding indemnification for simple negligence stand to “introduce needless costs and fear of liability in an extremely entrepreneurial environment” and forfeit a key provision by prohibiting after tax clawbacks.
The CVCA CEO also called upon the SEC to conduct “a more robust cost-benefit analysis to determine how, and to what extent, the additional reporting requirements could impose on firms, especially smaller firms.”
Feature image by Shopify Partners via Burst.