SEC eyes rule requiring VC fund managers to oversee investee firms

The Securities and Exchange Commission (SEC) is drafting a rule requiring venture capital (VC) fund managers to actively participate in the management of their investee companies.

This move is part of the SEC’s proposed amendments to regulations governing venture capital (VC) and private equity (PE) funds.

Previous SEC rules mandated a venture capital company to be a general partner to their investee company. However, in the proposed draft, the VC fund manager will be the general partner instead of the venture capital company.

For instance, Norrsken Foundation will not be mandated to be a general partner to any of its investee companies in Nigeria. However, the managers of its African-focused VC, Norrsken Africa Seed Fund, will be required to participate in the management of any of its investee companies.

In its report, the private equity team at Udo-Udoma & Belo-Osagie noted that the proposal may introduce ‘operational complexities.’

“Fund managers will need to have the requisite skills and expertise and to manage the business relevant businesses directly,” the report said.

In June 2024, SEC outlined a draft of some of its proposed amendments to PE and VC funds in Nigeria, following a January release of proposed amendments to its regulation of Collective Investment Schemes (CISs). One significant draft was the identification of VC and PE funds as CISs, thus subjecting them to some of the general rules for CISs.

However, the tagging of VC and PE funds as CISs can reportedly lead to “inappropriate regulatory requirements that do not match the operational realities of VC Funds.”

The draft also contains the definition of VC and PE funds in Nigeria. VC funds are defined as collective investment schemes that invest primarily in early-stage companies. Private Equity Funds (PE Funds) are defined as collective investment schemes investing primarily in private equity/unlisted companies, whether or not in an attempt to gain control, based on a specific investment strategy and defined investment horizon.

In line with the regulations of CISs, VC funds may now be mandated to release prospectuses when raising funds. A prospectus is required to provide a summary of the issue, along with details on the directors and key stakeholders involved. It should include information on target companies, highlighting investment opportunities, past performance, and unique entrepreneurial factors.

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Additionally, the document should outline exit strategies and other pertinent financial and operational information, such as statements of assets and liabilities, profit and loss accounts, and cash flow projections.

Other proposed amendments to the rules

A proposed rule change for CISs, now applicable to VC and PE funds, seeks to shift the basis for calculating annual supervisory and regulatory fees from net asset value (NAV) to total assets under management (AUM).

According to the draft, this amendment aims to provide a more accurate reflection of the total assets under a fund manager’s oversight.

In simpler terms, the annual regulatory fees paid by these funds should be based on the total value of all the assets they manage (AUM), rather than just the value of the fund’s net assets (NAV).

Only PE funds of more than N5 billion will be required to register

Private equity funds with a target size of N5 billion or less are exempt from registration. However, they must submit their governing documents to the SEC for a ‘no objection’ approval before commencing operations. The threshold has been increased from the previous N1 billion.

According to the report by Udo-Udoma & Belo-Osagie, this proposal “reduces the regulatory burden on smaller funds, allowing them to operate more efficiently.”

The proposal mirrors the U.S. regulation for venture capital funds, which exempts VC funds from SEC registration if their assets under management do not exceed $150 million. According to Tracxn, there are about 83 PE firms in Nigeria. A regulation like this can drive the rise of smaller PE firms targeted at micro and small businesses.

PE Fund Managers’ semi-annual reports

Another proposed amendment is that PE fund managers must issue at least half-year financial reports to their investors. The report must provide detailed information on total commitments, drawdowns, and distributions, along with any changes to the investment strategy, current and new investments.

It should also include a clear breakdown of each investment’s outcome, the valuation of each investment, and statements regarding benefits, fees, and net management fees.