#90 VC Regulatory & Legal Change Coming

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VC Regulatory & Legal Change Coming

Previously, we’ve written about regulatory and legal impacts on VC funds and funds of all types, private and public. It’s important for any VC CFO/finance pro or GP to know enough regulatory and legal to make sure they’re operating in a compliant and thoughtful manner as they grow their funds and firms.

We previously wrote about this in March Checklists (Finance & Legal), VC Key Terms For Emerging Managers, and #23-Point Fund Launch Checklist (3.0). We recommend that you check these posts out as a starting point.

This week, we wanted to flag insights from one of our favorite legal and regulatory experts, Chris Harvey. He wrote a post titled Regulatory Leviathans that we highly recommend checking out where he shares the following:

New Regs Are Coming! • Breaking Down the VC Fund Regulatory Framework • Why the Advisers Act is the SEC's Most Powerful Tool • Summary of PFA Rules for VCs

LP Perspectives - Where Does ILPA Stand on Key Details?

As a reminder, ILPA engages, empowers and connects limited partners to maximize their performance on an individual, institutional and collective basis. LPs serve as trusted financial stewards who direct critical capital into private equity investments on behalf of their beneficiaries which include retirees, teachers, firefighters, police officers, universities, charities and insurance policyholders. ILPA has nearly 600 member institutions representing more than 2 trillion USD of private equity assets under management.

Per Harvey, here are six key Private Fund Rules (PFA) for VC fund managers set to pass on 8/23:

  • Fiduciary Duties: GPs would be prohibited from seeking indemnification or exculpation for a breach of fiduciary duty, bad faith, negligence or recklessness.

  • Side Letter Disclosure: GPs would be required to disclose, on a rolling basis and annually, to all current or prospective LPs any preferential treatment provided to an LP in a side letter.

  • Fees and Expenses: GPs would be prohibited from passing off registration fees, examinations or investigations, even after disclosing such fees to LPs

  • Non-Pro Rata Fee Splits: GPs would be prohibited from charging fees and expenses related to a portfolio investment on a non-pro rata basis when multiple funds invest or have invested in the same investment (e.g., in SPV or co-investments).

  • GP Clawbacks for Taxes: GPs would be prohibited from reducing their obligation to clawback any taxes paid by the GP and otherwise required to be paid back to the LPs. (This rule is saying that the GP cannot reduce its obligation to payback any required carried interest even if the GP paid taxes on it. Essentially, the regulation is preventing GPs from using tax considerations to lessen their obligations under a clawback provision).

  • Effective Date: Will these compliance rules take effective immediately? Over time? Or will emerging managers get a break as applied to new funds only?

The illustration below outlines ILPA's stance.

§ 275.211(h)(2)-1 Private fund adviser prohibited activities. (a) An investment adviser to a private fund may not, directly or indirectly, do the following with respect to the private fund, or any investor in that private fund: (1) Charge a portfolio investment for monitoring, servicing, consulting, or other fees in respect of any services that the investment adviser does not, or does not reasonably expect to, provide to the portfolio investment; (2) Charge the private fund for fees or expenses associated with an examination or investigation of the adviser or its related persons by any governmental or regulatory authority; (3) Charge the private fund for any regulatory or compliance fees or expenses of the adviser or its related persons; (4) Reduce the amount of any adviser clawback by actual, potential, or hypothetical taxes applicable to the adviser, its related persons, or their respective owners or interest holders; (5) Seek reimbursement, indemnification, exculpation, or limits

More updates to come on this topic later in the week - stay tuned!

That’s all for today folks! Thanks for your support and spreading the word! Share this on Twitter or LinkedIn to help grow “the crew!”