Private equity/venture capital law is the area of law that pertains to private investment funding and startup capital funding.
With private equity and venture capital funding, business owners find the financial capital they need to do business.
The area of business is subject to varying levels of regulation depending on the type of investment.
Private equity/venture capital law governs how these investments are made.
What Is Private Equity Law?
Private equity law is the law that pertains to private investment financing.
Private equity is the funding provided for a company when the company is not publicly traded.
Investment firms make large contributions of capital to these companies.
In exchange, they often end up with a controlling interest in the company.
Large institutions typically engage in the business of private equity investing.
Private equity law is the law that surrounds how private equity investments are sold and bought and what disclosures and reports must be made during the process.
What Is Venture Capital Law?
Venture capital law is the law that pertains to funding early-stage startup companies.
Investors put money into startup businesses that they believe are going to be successful.
Various laws and regulations govern how individuals and firms can make these investments.
Venture capital law is the sum total of the laws and regulations that govern venture capital investments.
Startup companies turn to venture capital as a way to raise funds when they don’t qualify for traditional funding like bank loans.
Companies that perform well return high return rates for their investors.
Companies that begin with venture capital often have a goal of eventually making a public offering.
Venture capital lawyers give extensive guidance to these startups in all areas of legal and quasi-legal matters that may impact the ability of the startup to operate their business.
Differences Between Private Equity and Venture Capital Law
Although there are many similarities, private equity and venture capital law have some important differences.
In general, private equity investment occurs with established businesses while venture capital tends to involve new startups that have a large potential for high investment returns.
In both cases, investors provide the companies that they invest in with significant amounts of money.
In the case of private equity, the investors often purchase so much that they have control of the company and major decision-making authority.
For venture capitalists, the original business owners usually retain control of the company.
In general, there are more regulations for private equity than there are for venture capital.
Private equity tends to be governed under securities law with similar laws and requirements.
However, there are significant regulations that apply to both venture capitalism and private equity that require legal guidance.
Venture capitalism requirements have been relaxed in recent years, but there are still some regulations that still apply.
Lawyers must be prepared to help their clients understand changing regulations and when they apply.
What Do Private Equity/Venture Capital Lawyers Do?
Private equity/venture capital lawyers help their clients understand and comply with investment laws that apply to their financial ventures.
Private equity and venture capital are often high-risk.
Because of the potential for high rewards, there are also disclosures and regulations that go along with these financial activities.
Attorneys in the field of private equity/venture capital help their clients with a range of legal and quasi-legal issues associated with raising capital and completing a sale.
They help their clients with securities compliance, drafting contracts of sale, intellectual property, monetization, and personnel issues.
In order to succeed, an attorney must have a thorough understanding of the client’s business as well as knowledge of the securities laws that apply to the business transactions.
A private equity/venture capital attorney may work on behalf of the company, or they may work on behalf of the investors that provide the funds.
Where Do Private Equity and Venture Capital Laws Come From?
Private equity transactions are regulated by the Securities and Exchange Commission.
Many private equity sales have the same regulations as other private securities investments.
There are anti-money laundering regulations and know-your-customer regulations that firms must follow.
Because private equity is seen as risky investing, firms must register with the Securities and Exchange Commission (SEC) in order to participate in private equity investing.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act places restrictions on banks and when they may participate in venture capital.
Because of the Dodd-Frank law, banks can’t use their own reserves in order to make private equity investments.
Generally, the restrictions completely prohibit banks from undertaking venture capital investing.
In addition to the restriction on banks, the Dodd-Frank law requires private equity fund managers to register with the SEC.
The Securities and Exchange Commission
A large source of nationwide private equity regulation comes from the Securities and Exchange Commission (SEC).
The SEC is the governing body of the United States for securities transactions of all kinds.
Private equity transactions fall under the auspices of the SEC.
Most recently, the SEC redefined venture capital requirements.
In 2011, the SEC reduced the requirements for venture capital registration and reporting.
If a venture capital firm has at least 80% of its investments in qualifying firms, it can avoid SEC registration.
While there are typically more regulations and requirements for private equity as compared to venture capitalism, it’s important for a venture capital attorney to ensure that their client isn’t subject to registration laws.
Errors can lead to costly enforcement actions, and clients rely on their attorneys in order to ensure that they identify and meet compliance requirements.
United States Securities Laws
The United States government has passed a variety of laws that relate to securities investing including private equity and venture capital.
The Securities Act of 1933 requires some registration and mandatory disclosures in order to protect consumers.
The purpose of the law is to provide transparency in investing and open information sharing for prospective investors.
Similarly, the Securities Exchange Act of 1934 regulates what a firm must do to offer securities.
Private parties may bring a lawsuit for fraud under the Securities Exchange Act of 1934 if they believe that they are the victim of a fraudulent securities offering.
Other laws include the Sarbanes-Oxley Act of 2002 and state Blue Sky Laws.
The Sarbanes-Oxley Act provides for federal oversight of auditing activities while state Blue Sky Laws aim for transparency and honesty in investment disclosures.
All of these laws are meant to require transparency for private equity and venture capitalism so that investors have the information that they need to make sound choices and with the intention that the economy can remain stable through widespread regulation.
Who Practices Private Equity/Venture Capital Law?
Private equity and venture capital attorneys are business attorneys.
However, they are not just business attorneys.
Instead, they understand finances, capital business funding, and business growth models.
Successful private equity and venture capital attorneys have significant business training and experience.
They understand the nature of the business venture in order to provide sound advice for their clients as they finalize funding agreements and conduct operations.
The practice of private equity and venture capital law is largely advisory.
Attorneys can expect to spend a great deal of time explaining laws to their clients.
Regulations require complex disclosures.
Private equity/venture capital attorneys are involved in the process of helping their clients meet their legal obligations.
Litigation is less common for private equity/venture capital attorneys than it is for other legal specialties.
Although disputes may arise, it’s more common for attorneys in the field to spend their time preparing documents and filings than engaging in high-conflict litigation.
Nevertheless, negotiation skills are still important as attorneys in the field work with other parties in order to create and finalize business deals.
Why Practice Private Equity/Venture Capital Law?
Private equity/venture capital law is a rewarding career choice for any attorney who is also skilled in business and finance.
For lawyers who would rather work with numbers and financial regulations than walk into a courtroom on a frequent basis, private equity/venture capital law is a welcome legal niche.
Attorneys with a background in accounting or finance are uniquely qualified to undertake work in the field.
Attorneys in private equity or venture capital may work for the government, for a business, or for a private law firm.
With many options, an attorney can structure their career in the way that they find most palatable.
Enforcement work and policy-shaping actions may be rewarding for a government attorney, while in-house counsel may find satisfaction in having one, singular and present client.
Private practice attorneys typically work for large firms and specialize in only business law matters including private equity and venture capital.
Starting a Legal Practice for Startups
Private equity and venture capital are two ways that businesses get the resources they need to do their work.
In order to succeed, they need sound legal advice about the regulations that apply to these financial transactions.
Private equity/venture capital lawyers are a critical part of the business.