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VC funds want new rules on investing in unicorns and tokens

Unicorn with a dollar bill sign.
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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