Watered-down SEC fund disclosure changes still worth paying attention to

Venture capital firms have some disclosing to do.

On August 23, the SEC passed a handful of new fund disclosure rules concerning clawbacks, preferential treatment of LPs and fees.

Fund managers might not have paid much attention to this, though; the rules that the SEC passed were a watered-down version of the initial proposals, including the removal of a potential rule change that VCs seemed most worried about regarding fiduciary duty. But there are still a few things that VCs should pay attention to — especially emerging managers.

The changes to the rules, while not drastic, have the potential to make fundraising more difficult for VCs. Also, punishment for not following the rules correctly will fall on GPs themselves; they can’t turn to their LPs for financial help anymore.

“My initial thoughts on this were, it’s like trying to learn a new dance,” Chris Harvey, an emerging fund lawyer at Harvey Esquire APC, told TechCrunch+. “Everyone is doing the waltz, [but now] we are getting rid of the waltz, and we are moving to a new style. There will be some toe stepping, and not everyone will be on the beat.”

The treatment of LPs

There are two key rule changes for VCs to consider.

First, there’s new language regarding preferential treatment. The new fund disclosure rules require firms to disclose any preferential treatment of an LP that could have material or negative impact on the other LPs involved in the fund. This could include giving an investor a different capital call structure, different rights to co-investments or different fees.