#1#2Background on SEC's VC Fund Definition Where it Came From: Dodd-Frank eliminated the exemption from registration for investment advisors with fewer than 15 clients, thus forcing hedge funds and private equity funds to become registered investment advisors (RIAs). ● BUT, Congress specifically exempted venture capital funds from the requirement, allowing them to register as exempt reporting advisors (ERAS). • Directed the SEC to create definition of "venture capital fund" to determine who qualifies for ERA status. nvca#3Venture Capital's Vital Role in Startup Growth D EARLY DEVELOPMENT EARLY STAGE VC BUILD TEAM & Co. IDEA / START-UP SEED/ANGEL INVESTOR CONCEPT -> PRODUCT • PRODUCT RISK • SMALL CASH NEED • NO REVENUE MARKET RISK ● LARGER CASH NEED NO PROFITS nvca GROWTH LATE STAGE VENTURE SCALE Co.-> EXIT EXIT RISK HIGH CASH NEED • PATH TO PROFITS#4Policy Reasons for Exempt Reporting Advisor Status Founder + VC Growth Exemption demonstrates that VC funds were never intended target of this regulation: Long-term equity investment VC model low priority for regulation: VC funds rarely take control positions in companies, portfolio company fees don't support returns, leverage not prominent in financings. nvca Because of the economic impact of VC activity on innovation and new company growth, Congress decided that the policy priority for VC regulation should be on making capital available for startup activity rather than compliance.#5What Does it Mean to be ERA? Exempt Reporting Advisors register with the SEC under a more limited compliance and reporting regime, which simplifies and reduces the costs of running a venture capital fund. Reduced compliance costs due to: Limited form ADV filing; No form PF requirements; No routine audits, though still subject to for cause examinations; No additional cost of RIA compliance program. ● ● ● ● Greater freedom of external communications as advertising rule not applicable. Also not subject to custody or bookkeeping rules, further reducing costs and complexity of VC fund management. nvca#6#7#8#9