How Is Venture Capital Regulated by the Government?

Written by Lindsay Mayhall on April 13, 2022

In the last year, venture capital has become a buzzword in many different industries as several companies have had an incredibly successful initial public offering (IPO). In fact, venture-backed companies have raised $2.59 billion in 2021/2022 through IPOs and secondary offerings, according to Dealogic. But there is a reason why you haven't heard of most venture capital firms: only a small percentage of them will be involved in funding an IPO.

Venture Capital and Regulatory Oversight

The Securities and Exchange Commission (SEC) oversees most of the rules governing venture capital.

It's important to note that while the SEC is responsible for regulating most companies' offerings and financial disclosures, it's not required to do so with venture capital funds.

Venture capital funds are regulated according to a limited number of laws and regulations. These include:

Accredited Investors Rule: The Accredited Investor is a standard set by the SEC. It determines who qualifies as an accredited investor for private placement transactions. It requires that an investor have a net worth of $1 million or more, excluding the value of their primary residence, or earn an annual income of at least $200,000 per year ($300,000 for married couples).

The Investment Company Act: This act requires investment companies registered with the SEC to disclose information about their portfolio holdings and operations on Form N-Q, which is publicly available through EDGAR.

The reporting requirements differ depending on the type of investment company. For example, Venture Capital Funds must comply with Regulation S-X, which has specific accounting requirements applicable to venture capital funds.

Insider Trading

Insider trading is understood to be the buying or selling of stock by a person who knows a piece of non-public information about the business, which may affect its value. In the United States, insider trading is a federal crime.

There are three elements to this crime:

The person buying or selling must have had access to non-public information. This can include company executives, employees, and advisors who have access to private business information.

The person must have bought or sold securities while in possession of such information.

The person must have done so with the intention of profiting from the non-public information.

An example of possible insider trading is as follows:

Despite being a South African, Elon Musk is an American citizen who was born in 1971. He is the founder and CEO of Tesla Motors, SpaceX, The Boring Company and Neuralink.

Like many other Silicon Valley companies, PayPal was also founded by two people with very different backgrounds. Max Levchin was raised in Kiev, Ukraine and Peter Thiel was born in Frankfurt, Germany. Both immigrated to the United States as children with their families and grew up to be successful entrepreneurs.

Both men were involved in PayPal's initial public offering (IPO) when the company went public on February 15th 2002. However, Elon Musk did not sell any shares during the IPO — instead he used his own money to purchase almost $5 million worth of newly issued shares which he sold after the stock price increased. This allowed him to make more than $180 million dollars (over half a billion dollars today) from this sale alone!

Elon Musk has been accused of insider trading by short sellers who have claimed that Tesla's stock price is overvalued because it has risen so much since its IPO in 2010.*

Do Your Due Diligence 

The government has an interest in regulating the venture capital industry to ensure that all participants are treated fairly, and to make sure that investors know what they're getting into when they invest in companies through a venture capital firm.

Investors who want to participate in specific investment deals can do so by buying shares directly from the company issuing them. In many cases, though, individuals who want to invest in startups and other smaller companies will do so through a venture capital firm.

Venture Capital Firms as Broker-Dealers

Although VC firms are not exchanges (like the NYSE), they are required to register with the SEC as broker-dealers because they act as intermediaries between issuers (startups) and investors. As broker-dealers, they are required to provide certain disclosures to investors, including:

Company budget information

Financial statements

Projections of future revenue and income

Information about other investments made by the fund

Investor qualification information

As noted earlier, the venture capital industry has been growing rapidly over recent years. It is continuing to grow and evolve as we speak. More and more, venture firms are sprouting up as we enter into a period of increased interest in entrepreneurship. There are several sets of regulations that may apply to this field. First and foremost, there's the Dodd-Frank Wall Street Reform and Consumer Protection Act, which can be found at . This act contains numerous provisions designed to protect investors from fraud and abuse in a wide range of areas of finance, including securities claims and corporate governance. The gov also keeps an eye on venture capital through the IPO process at . Each time a venture capital firm attempts an IPO, the Securities Exchange Commission will review its offering circular (confirmatory statement) to ensure that their disclosures comply with existing regulations and identify whether or not the market is too thin for an offering.
Go VC is an early seed venture capital firm that invests in a diverse range of young startups in the tech space and beyond. The core mission of Go VC is to build successful investment partnerships that include capital and expert strategy to ensure all investments achieve optimal results.