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Finance

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Feb 20, 2024

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Michael Trifaro and Matthew Meyer ENT 465 Professor Del Vecchio Presentation Summary Main Questions : 1. Will regulations deter prospective clients/investors from the private market? 2. How will regulations affect the operations of the business and the margins by which they are used to obtaining? 3. How does this affect the development of future VCs and will there still be incentive to operate in this industry? Summary: After the dramatic rise of the venture capital world in 2021 with low costs of capital and the private sector of finance becoming a direction that investors were eyeing for greater returns, the current outlook in 2023 has shifted drastically. With high inflation rates, a greater cost of borrowing, and ultimately a looming recession, the venture capital world is drying up in comparison to the boom that it underwent in 2021. More importantly, funding in 2021 alone was over $680 billion, making it a significant asset class. This drastic growth only entices the federal government, more specifically the SEC to seek regulation. Essentially, the goal of the SEC in this scenario is to protect investor returns, and this new push for regulation was catalyzed by the collapse of FTX which had nearly $2 billion in funding before going bankrupt. The new push comes under the Investment Advisers Act of 1940 where there is a proposed rule that will

address lack of transparency, conflict of interest, as well as other ethical concerns around private fund advisers. The specifications also make clear investors will be aware of the full cost of investing in private funds as well as the performance of the fund, paired with no preferential treatment or compensation schemes. Lastly, this will make it easier to open up litigation against VC firms. These proposed regulations do not come without backlash. The National Venture Capital Association was not enthusiastic about this proposal because of how it is a sharp departure from the traditional low level of intrusion at a regulatory level on these firms. This creates a cost of being venture capital backed now because there are additional expenses such as mandated audits, which will slim profit margins. These regulations will make it harder for VCs to cover up mistakes that venture backed CEOs were normally able to cut corners around to maintain the business. While regulation will help protect equity investors, the very nature of VCs is taking great risk which investors understand because if successful they will reap great reward. Regulatory policies would be better suited for the private equity industry where there are more mature and profitable companies that are having proper due diligence done. Ultimately, the conflicting issue here is that there will potentially be a wedge between the VC and the portfolio companies which can stunt innovation and returns, which is what the SEC was trying to protect. After discussing the potential outcomes of a law being passed, we realized that there could be both positive and negative effects on the venture capital world. If VC firms would be required to be more transparent, we believe that this could even out the playing field in the VC world and allow smaller firms to begin to compete with the larger firms. All in all, stricter regulations of the Venture Capital space go against traditional hands-off approach and will force VC firms to adapt in order to maintain a competitive edge.

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