The legislation governing private equity investments in the United States is a combination of federal, state, and local laws. We show you its main features.
As with any investment, there are certain laws and regulations that govern private equity investing in the United States. However, these laws are not always clear. Therefore, it is important to define the parameters of this type of investment in the United States.
The U.S. Government has several laws and regulations that regulate private investment, but the exact structure of these rules often changes. Many of the laws in place regarding private investment have been put in place over the past decade, and with so many changes in place, it can sometimes be difficult to understand what you are legally required to do as an employee or owner of a private investment firm.
We tell you about the major laws that govern private equity investing.
Laws Governing Private Equity in the USA
In the United States, investment capital companies are subject to various federal and state laws. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) was established to put more restrictions on banks and financial institutions in the wake of the Great Recession.
It includes several key provisions relating to private equity investment companies and their employees, including that they must register with the Securities and Exchange Commission (SEC) as investment advisors, which requires them to submit the ADV form each year, along with a list of the fees they charge investors, making these details publicly available.
On the other hand, investment capital funds are subject to the same regulatory and reporting requirements as other registered investment companies. The Securities Act of 1933 regulates the offering and sale of securities, including shares in funds, and certain SEC rules apply to private funds that are registered under Regulation D of this law.
Also, the Investment Company Act of 1940 regulates venture capital fund activities, including leverage limits, liquid investment restrictions, and diversification requirements. The Securities Act of 1933 regulates the issuance of securities by private companies, including reporting requirements for issuers.
Importance of the SEC in private equity regulation
The Securities Exchange Act of 1934 regulates brokers and exchanges. Brokers must register with the SEC, which requires compliance with various rules regarding financial information, insider trading and other matters. The SEC also has jurisdiction over exchanges such as the Nasdaq that trade securities listed on their markets.
The regulation of venture capital companies in the United States is primarily the responsibility of state securities regulators and the Securities and Exchange Commission (SEC). It also regulates venture capital companies through its enforcement authority, which is derived from a number of federal laws.
The New York Attorney General’s office also has authority over private equity investment advisors through its jurisdiction over consumer protection.
The SEC requires an investment adviser to register with it by filing the ADV form. This form is submitted annually and provides information about the company’s business practices, fees, conflicts of interest, and disciplinary history. A copy of this form must be sent to investors upon request or within 15 days of making an investment.
Ventures are generally exempt from registration under federal law as long as they manage less than $150 million in assets or if they are not presented to the public as companies offering investment advice. However, many states require registration regardless of the amount managed or whether the company has been presented to the public.