Venture capitalists say they don’t want to be treated as hedge funds

Venture capital investors have been making regular visits to Capitol
Hill lately to try to influence legislation that would treat venture
capital firms as hedge funds.

A bill expected to come out of the House Financial Services Committee aims to require hedge funds and other private pools of capital to register with the Securities and Exchange Commission in order to add more oversight to an industry that has been at the center of the economic crisis. The committee plans to hold a hearing on the issue on Tuesday. The Treasury Department has supported the measure.

{mosads}Venture capitalists say having to register as formal advisers with the SEC would put enormous financial burdens on their industry. They would have to hire a compliance officer and install new computer systems to meet the government’s reporting requirements, costing firms more than a quarter of a million dollars. And they say that is money that should instead be invested in entrepreneurs and new startups.

They also say they should not be treated as a hedge fund, because they do not deal with trading, derivatives or “other sources of systemic risk,” said Emily Mendell, vice president of strategic affairs for the National Venture Capital Association.

Instead, venture investors are proposing an exemption under which they would report all the information the SEC seeks without having to formally register. Typically, venture investors only report that information when they raise a new fund — anywhere from every two to 10 years. They say they are willing to file that information on an annual basis.

“The issue we face is that our ecosystem is very fragile right now,” said Joshua Green, partner at Mohr Davidow Ventures in Silicon Valley. “Tiny regulatory changes can affect the rate of capital going to innovators.”

Venture capitalists have been hit hard by the recession. They depend on pension funds and other large investors in order to come up with the money to invest in young companies. Many of those funding sources sank with the stock market.

These private investors often invest in higher-risk ventures, including Facebook and eBay, and pay large dividends to investors when companies make it big. But other regulations, namely the Sarbanes-Oxley law that places stringent reporting standards on public companies, have discouraged startups from going to the public markets. As a result, investors say they have less of a chance to get a decent return on their investments.

Roger Novak, a partner with Novak Biddle Venture Partners in Bethesda, said the unintended consequences of financial regulation could put so many firms out of business that the venture capital industry would “become inoperable.”

“We’re not asking for anything,” he said. “We’re just saying, don’t fix what isn’t broken.”

Hollywood studios applaud net neutrality proposal

When Federal Communications Commission (FCC) Chairman Julius Genachowski proposed net neutrality rules last month, he said the “open-Internet principles apply only to lawful content, services and applications — not to activities like unlawful distribution of copyrighted works … The enforcement of copyright and other laws and the obligations of network openness can and must coexist.”

That announcement was welcomed by the Motion Picture Association of America (MPAA), which consistently battles the illegal use of studio works and has been pushing for stronger copyright protections.

Dan Glickman, chairman and chief executive officer of the MPAA, met with Genachowski on Friday to thank him for enforcing copyright laws online.

Glickman reiterated his stance Wednesday during an intellectual property event at the U.S. Chamber of Commerce.

“Unlawful content on the Web takes up a huge amount of bandwidth,” he said, adding that any net neutrality rules should not get in the way of new technology solutions, such as tools that could help detect unlawful content. “We shouldn’t be rigid in our approach to these problems — technology moves much faster than some rigid system.”

Glickman also said the Internet service providers have the responsibility to make sure illegal content does not course through their networks — an issue that has caused some tension between the two industries.

“You can’t have a viable Internet without stuff to put on it,” he said. “So you have to give the creators the ability to do their thing and get compensated for it.”

Internet service providers, he said, “can’t turn a blind eye to infringed material that goes on their pipes.”

The MPAA is also asking the FCC to grant a waiver that will make high-definition movies available to consumers in their homes before the official DVD release date.

But groups including the New America Foundation, Electronic Frontier Foundation and Public Knowledge are urging the FCC to deny the request, saying the technology used would give MPAA too much control over consumer devices. The groups also say MPAA hasn’t shown evidence that the plan would reduce copyright infringement.

In an ex-parte filed with the FCC, Michael O’Leary, chief counsel for the MPAA, said the proposal does not interfere with consumers’ other programming options.

Former FCC chief joins law firm

Former FCC Chairman Kevin Martin is joining the law firm Patton Boggs to co-chair its telecommunications practice with Jennifer Richter, a partner in the firm.

In a statement, Patton Boggs managing partner Stuart Pape said that “there is a long and distinguished record of former FCC chairs succeeding in private practice. We have every expectation that Kevin will do that and more.”

{mosads}Martin spent eight years at the FCC as both chairman and a commissioner, and also worked on President George W. Bush’s presidential campaign. He was known for pushing for a la carte pricing for cable TV and helped approve several large mergers within the telecommunications industry. He also oversaw the auction of a large swath of coveted wireless airwaves that raised nearly $20 billion for the government, but the agency failed to follow through on Congress’s mandate to establish a national network for public safety organizations with those airwaves.

Martin left the agency in January and took a temporary position at the Aspen Institute. Past FCC chairmen have gone to the private legal sector, including Richard Wiley, of the Wiley Rein law firm, which has remained active in telecom lobbying.