Dec 14, 2018

VC funds want new rules on investing in unicorns and tokens

Illustration: Lazaro Gamio / Axios

Venture capitalists want more flexibility in what sorts of investments they can make, according to a letter recently sent by the National Venture Capital Association to the U.S. Securities and Exchange Commission.

Why it matters: Qualifying as a "venture capital fund" comes with benefits like fewer reporting guidelines than other types of private investment funds, but the definitions were written when companies didn't stay private quite so long, and before the advent of digital tokens.

Venture capital funds are currently limited when it comes to making what the SEC views as "non-qualifying" investments, or deals that are outside the normal course of VC business, in order to protect investors.

  • Generally, such investments may only comprise 20% of a VC fund's committed capital.

Included in the 20% basket are secondary transactions, such as buying shares in a startup from other funds or the startup's employees. The remainder must be direct deals, or stock purchased directly from the company.

  • The NVCA is asking for more flexibility, arguing that current rules are antiquated — particularly as companies stay private longer, and desire liquidity solution for founders and early employees.
  • It also argues that qualifying all investments in "emerging growth companies" (i.e. companies with less than $1.07 billion in annual revenue) would increase the number of development-stage biotechs going public — as VCs often are asked to buy into such offerings for market validation, but can be handcuffed by the 20% limit.

That 20% basket also includes purchases of digital tokens.

  • The NVCA wants digital tokens included within the 80%, arguing that it shouldn't matter if a fund invests in a startup through preferred equity or a digital token.
  • It also asks that cryptocurrencies like Bitcoin and Ether be considered “cash equivalents," which VC funds may hold without limit.

Finally, the letter asks that investments in other VC funds also be treated as qualifying investments, and that there be no limits on the subscription credit facilities that some funds use as a bridge between capital calls.

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  1. Global: Total confirmed cases as of 7 p.m. ET: 932,605 — Total deaths: 46,809 — Total recoveries: 193,177Map.
  2. U.S.: Total confirmed cases as of 7 p.m. ET: 213,372 — Total deaths: 4,757 — Total recoveries: 8,474Map.
  3. Business updates: Very small businesses are bearing the brunt of the coronavirus job crisis.
  4. World update: Spain’s confirmed cases surpassed 100,000, and the nation saw its biggest daily death toll so far. More than 500 people were reported dead within the last 24 hours in the U.K., per Johns Hopkins.
  5. State updates: Florida and Pennsylvania are the latest states to issue stay-at-home orders — Michigan has more than 9,000 confirmed cases, an increase of 1,200 and 78 new deaths in 24 hours.
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World coronavirus updates: Spain's health care system overloaded

Data: The Center for Systems Science and Engineering at Johns Hopkins, the CDC, and China's Health Ministry. Note: China numbers are for the mainland only and U.S. numbers include repatriated citizens and confirmed plus presumptive cases from the CDC

Two planes with protective equipment arrived to restock Spain’s overloaded public health system on Wednesday as confirmed cases surpassed 100,000 and the nation saw its biggest death toll so far, Reuters reports.

The big picture: COVID-19 cases surged past 900,000 and the global death toll surpassed 45,000 early Wednesday, per Johns Hopkins data. Italy has reported more than 12,000 deaths.

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Guns on display at a store in Manassas, Va. Photo: Yasin Ozturk / Anadolu Agency via Getty

The FBI processed a record 3.7 million gun background checks in March — more than any month previously reported, according to the agency's latest data.

Driving the news: The spike's timing suggests it may be driven at least in part by the coronavirus.