Special to Local Tech Wire

WASHINGTON, D.C. – Changes in tax law and other regulations as being discussed in Congress are of great concern to the venture capital industry. On Tuesday, Terry McGuire, a veteran venture capitalist and chairman of the , addressed some of those concerns.

The following is the oral testimony of McGuire before the House of Representatives Financial Services Committee in support of the Private Fund Investment Advisers Registration draft. It exempts venture capital funds from mandatory registration with the Securities and Exchange Commission. McGuire is also chairman and co-founder of Polaris Venture Partners.

Chairman Frank, Ranking Member Bachus, and members of the committee. On behalf of the venture capital industry I would like to thank you for the opportunity to be part of this important process. We understand the need to address the causes of the recent financial crisis as well as eliminate regulatory gaps so that our country is never “surprised” by massive financial failures again.

Last week Capital Markets Subcommittee Chairman Kanjorski released a discussion draft focusing on risk related to private pools of capital. We would like to express our sincere appreciation for the work of the Subcommittee and the full Committee under the leadership of Chairman Frank in drafting legislation that recognizes that venture capital firms do not pose systemic risk. We also appreciate your understanding that registering under the Advisers Act would place an undue burden on our industry.

The legislative draft recognizes the important difference between entrepreneurial risk (in which venture capitalists engage) and financial systemic risk (in which we do not). Our investment model is simple. We invest in start-up companies run by entrepreneurs using capital from ourselves and outside investors. We invest cash to purchase equity and hold that equity, working side by side with the management for 5-10 years until the company is sold, goes public, or fails. In the latter case, there is no multiplier impact on losses.

While we lose our capital, there are no derivative transactions or leverage that would lead to a ripple effect.

The elements identified by the Treasury Department as contributing to systemic risk are not part of venture capital model. We do not actively trade in the public markets. Our funds are not directly available to retail investors. While some of our investors are public pension funds, under many state laws they are limited as to the amount of money they can invest in venture capital. The number is often less than 5 percent of investable assets.

We do not use long term leverage, or rely on short term funding. We do not create third party or counter party risk. Lastly, the venture capital industry is small in size, just a fraction of other pooled investment funds.

But, for more than 50 years our collective wins have far outpaced our losses.

Tremendous economic value has been created. Venture-backed companies today account for 12.1 million jobs and represent 21 percent of U.S. GDP. Entire industries including Biotechnology, Semiconductors and now, Clean Tech, have been built upon venture

By exempting venture capital funds from registering under the Advisers Act, this Committee has eliminated a significant burden on our industry:

• As you may know, the average venture capital firm employs less than ten professionals and the administrative staff is a fraction of that.

• Registration could easily cost our firms hundreds of millions of dollars which should be directed to growing new companies, rather than unnecessary compliance.

• Finally, venture capital registration would not provide the government with meaningful insight into systemic risk and would divert government resources.

With that said, we do recognize the need for ongoing transparency. Today venture capital firms provide information to the SEC that is publicly available when we seek to raise a new fund. This filing process – which involves completing what is known as a Form D — could easily be enhanced to include information that would provide greater comfort regarding systemic risk. An enhanced Form D – let’s call it Form D-2 – for venture firms could answer questions annually on the use of leverage, trading positions and counterparty obligations, allowing regulators to continue to exempt firms that pose no systemic risk.

The D-2 solution could be a viable option because it does not require a lengthy regulatory process to test a definition of venture capital. It would cause venture firms to annually confirm that they are “safe from systemic risk” by responding to questions that reveal the nature of their investing activity. This would enable the SEC to quickly identify firms that do not meet this standard. This process would also accomplish the Administration’s goals of providing transparency and eliminating regulatory gaps. It would do so without unnecessarily burdening the venture firms, or the SEC. We look forward to discussing these recommendations further.

We applaud the Committee’s intent to protect entrepreneurial growth and innovation. We stand ready to work with you to gain the transparency you require, without hurting our industry and the start-up companies we support. I thank you for your consideration today and I am happy to answer any questions.

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