IN THE SPOT LIGHT
Guidance on the Exemption for Advisers to Venture Capital Funds
The SEC’s Division of Investment Management (the “Division”) recently issued new guidance regarding the application of the registration exemption available to investment advisers that advise solely one or more “venture capital funds” as defined in Rule 203(l)-1 of the Advisers Act (the “VC Exemption”).
The Guidance clarifies certain situations which allow an investment adviser to qualify under the VC Exemption. In general, to qualify as a “venture capital fund” the fund must be a “private fund” that represents to investors that: (i) it pursues a venture capital strategy; (ii) does not provide an investor with redemption rights other than in extraordinary circumstances; (iii) holds no more than 20% of the amount of the fund’s aggregate capital contributions and uncalled capital commitments in non-“qualifying investments” (excluding cash and certain short-term holdings); (iv) does not borrow or otherwise incur leverage in excess of 15% of the fund’s aggregate capital contributions and uncalled capital commitments, and then only on a short-term basis; and (v) is not registered under the Investment Company Act of 1940 and has not elected to be treated as a business development company.
The Division presented five scenarios that illustrate the VC Exemption. Each involves situations where advisers have asked whether the fund structures or actions would jeopardize their ability to rely on the VC Exemption. For a copy of the Guidance please go to http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-13.pdf
New Accredited Investor Standard
The SEC adopts rule revising the “accredited investor” standard: The SEC amended its rules to exclude the value of a person’s home from net worth calculations used to determine whether an individual may invest in certain unregistered securities offerings. (Dec. 21, 2011)
Insider Trading Enforcement Heats Up
Insider trading continues to be a high priority area for the SEC's enforcement program. The SEC brought 53 insider trading cases in FY 2010 against 138 individuals and entities, a 43 percent increase in the number of filed cases from the prior fiscal year. Many of these cases involved financial professionals, hedge fund managers, corporate insiders, attorneys, and even government employees who unlawfully traded on material non-public information, undermining the level playing field that is fundamental to the integrity and fair functioning of the capital markets.
Examples of the SEC's recent insider trading actions include:
- Goldman Sachs Employee - SEC charged Spencer Mindlin and his father with insider trading on confidential information about Goldman's trading strategies and intentions that he learned while working on the firm's ETF desk. (9/21/11)
- Global Consulting Executive - SEC charged a former global consulting firm executive and his friend who once worked on Wall Street with insider trading on confidential information about impending takeovers of two biotechnology companies for more than $2.6 million in illicit profits. (9/15/11)
- Hedge Fund Manager and Company Insiders - SEC charged James Turner II and his firm Clay Capital Management with insider trading ahead of public announcements about corporate earnings and merger activity based on confidential information he obtained through his relationships with company insiders, who also were charged in the scheme that generated illicit gains of nearly $3.9 million. (8/31/11)
- Corporate Board Member - SEC charged former Mariner Energy Inc. board member H. Clayton Peterson and his son with insider trading on confidential information about the impending takeover of the company. The son also tipped several close friends. The Petersons and their tippees obtained more than $5.2 million in illicit profits. (8/5/11)
- Former Major League Baseball Player - SEC charged Doug DeCinces and three others with insider trading ahead of a company buyout and obtaining more than $1.7 million in illegal profits. DeCinces agreed to pay $2.5 million to settle the SEC's charges. (8/4/11)
- Emergency Action Against Three Swiss-Based Entities - SEC obtained asset freezes against entities charged with insider trading around an acquisition announcement. The asset freezes were intended to prohibit the foreign firms from transferring the proceeds of their illegal trading overseas. (7/18/11)
- Former NASDAQ Managing Director - SEC charged Donald L. Johnson, a former managing director of The NASDAQ Stock Market, with insider trading on confidential information that he misappropriated while working in a market intelligence unit that communicates with executives at listed companies about impending public announcements that could affect their stocks. Johnson obtained illicit trading profits of at least $755,000 during a three-year period. (5/26/11)
- Former FrontPoint Partners Hedge Fund Portfolio Manager - SEC charged Dr. Joseph F. "Chip" Skowron, a former hedge fund portfolio manager affiliated with a FrontPoint Partners LLC healthcare fund, with insider trading based on confidential information about negative details of an experimental drug that he received from Dr. Yves Benhamou, a medical researcher overseeing a clinical drug trial. (The SEC charged Benhamou on 11/2/10 for his misconduct in this matter). The material non-public information that Skowron received allowed the hedge funds that he managed to avoid losses of at least $30 million. (4/13/11)
- Insider Trading Scheme Involving Corporate Attorney and Wall Street Trader - SEC charged Matthew Kluger, a corporate attorney, and Garrett Bauer, a Wall Street trader, for their involvement in a highly organized serial insider trading ring that traded in advance of merger and acquisition announcements involving clients of the law firm Wilson Sonsini Goodrich & Rosati. The ring made at least $32 million in illegal profits between April 2006 and March 2011. (4/6/11)
- Insider Trading by FDA Chemist - SEC charged Cheng Yi Liang, a chemist at the U.S. Food and Drug Administration, with insider trading on confidential information concerning upcoming announcements of FDA drug approval decisions, generating more than $3.6 million in illicit profits and avoided losses. (3/29/11)
- Expert Networks Insider Trading Scheme - SEC charged a New York-based hedge fund and four hedge fund portfolio managers and analysts who illegally traded on confidential information obtained from technology company employees moonlighting as expert network consultants, in a scheme that netted more than $30 million in illicit profits.
- Former Board Chairman of Home Diagnostics - SEC charged George Holley, a co-founder and former Chairman of the Board of Home Diagnostics Inc., with illegally tipping friends and business associates with inside information about an impending acquisition of the company. Holley's tips resulted in combined illicit profits of at least $170,000. (1/13/11)