The SEC has had its eyes on the VC market for over a year now and a new proposed rule may fundamentally change the VC regulatory landscape. A recent Crunchbase article highlights the proposed rule and its potential impact. While the National Venture Capital Association has come out against the proposed rules, industry feedback seems a bit more mixed.
An interesting component of the proposed rule is that it may allow for LPs to pursue litigation as a remedy if proper due diligence is not conducted on a particular deal. This could sidestep protections otherwise afforded from the business judgment rule. Reportedly the recent collapse of FTX is providing additional incentive for the SEC to regulate venture markets. Prior reports of the SEC's intent to regulate VC centered on increasing transparency and added protections for LPs such as pension funds and endowments.
This could potentially have a chilling effect on some early-stage capital providers at a time when startups and funds are facing increasing external market pressure from inflation, supply chain challenges, and geopolitical issues.
The Securities and Exchange Commission and venture capitalists have traditionally lived in two different worlds, but if a new rule from the regulatory agency advances, VCs could find their world under increased scrutiny.