Venture Capitalists Resist Regulatory Calls

WASHINGTON (TheStreet) -- Since the Obama administration proposed legislation requiring private pools of capital to register with the Securities and Exchange Commission, venture capitalists have been crying foul, saying their businesses don't pose a threat similar to that of Bank of America(BAC) and Citigroup(C).

The Private Fund Investment Advisers Registration Act of 2009, as it was originally drafted last summer, proposed that investment advisers with more than $30 million of assets be required not only to register with the SEC, but also to subject themselves to regulatory reporting requirements, which would mean, among other tasks, establishing "a comprehensive compliance program."

"It's galactically stupid," says Juan Enriquez, a managing director of Excel Medical Ventures in Boston, whose portfolio has included IPC(IPCM) and Molecular Insight Pharmaceuticals(MIPI). "No venture fund is large enough to be a systemic risk to the economy," he says.

The National Venture Capital Association has been lobbying against the proposed legislation. Earlier this month, NVCA Chairman Terry McGuire made his case in front of the U.S. House of Representatives Committee on Financial Services. He argued that while the VC industry is inherently risky -- with a third of venture-backed companies ultimately failing -- venture funds don't undermine the health of the nation's finances.

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

Venture capital firms don't actively trade in public markets, its funds aren't available to the average investor, and the industry is simply too little to pose a big risk, he argued. McGuire said U.S. venture funds held about $197 billion in aggregate assets during the first quarter, compared with $1.33 trillion for the American hedge fund industry. And in 2008, VCs invested $48 billion in start-ups, which was less than 0.2% of U.S. gross domestic product. (Venture-backed companies account for 21% of GDP.)