Notwithstanding populist professions that style, not substance, is what will actually determine yesterday’s final presidential tally, venture capitalists presumably still took to the polls with a number of salient issues bouncing around the booth. And we?re not just talking about those now-infamous tax breaks for the wealthiest 1% of Americans.
Instead, the big electoral jackpot winner could eventually determine how far proposed and expected regulatory reform proceed over the next four years. For example, President Clinton has still yet to approve or veto a budget proposal that included a number of ERISA reforms which could lead to an increase in the amount of funds available to alternative investment vehicles.
“This election is important because if either party won the trifecta ? both houses of Congress and the White House ? the results would probably be quite different,” said Mark Heesen, president of the National Venture Capital Association.
Namely, the expectation is that a President Gore would likely support a status quo in which most private equity professionals have grown quite comfortable over the past eight years. A President W. Bush, on the other hand, could well try to push the comfort envelope by backing a number of so-called business reforms that would revisit legislation like 1978?s Hart-Scott-Rodino Antitrust Improvement Act and Regulation 701 of the 1933 Securities Act, which governs stock option distribution. Bush could also really confirm his daddy?s boy reputation and reopen the capital gains tax debate.
“On core issues of concern to us, both Gore and Bush have been pretty supportive of the high-tech industry so we understand why [normally-Republican] venture capitalists have feet in both camps,” Heesen said. “We also think that a typical VC is really thinking about a reasoned decision on who they support based on both business issues and social ideology.”
He added that the NVCA?s political action committee has not given money to either presidential candidate, although its overall spending this year has been slightly tilted toward the Republican Party. It has also cut no checks to Ralph Nader, who Heesen said would be extremely detrimental to the venture industry.
In an extremely-unscientific poll of Private Equity Week readers (conducted through both targeted emails and online balloting) however, Nader actually pulled just over 7% of the vote. Overall, Bush edged out Gore by a 46.9% to 40.8% margin.
With the election less than 24 hours away, and a number of venture capital voters still up in the air, the following are a selection of relevant upcoming legislative issues:
Hart-Scott-Rodino was initially put into practice because, prior to the mid-1970?s, many mergers and acquisitions that raised potential antitrust and competitive issues were completed before governmental watchdogs even learned of them. The law presented such agencies the opportunity to adequately investigate the deals before being set in stone.
It has also historically encompassed transactions valued at $15 million or more and considered them reportable if one part brought $10 million to the table in sales or assets, if the other participant had at least $100 million in sales or assets. That size test has remained unchanged since 1978 and deal value has been significantly diminished due to inflation.
As such, Congress has proposed a provision to this year?s Commerce, Justice and State Appropriations bill that would amend the virtually obsolete terms of HSR and increase the threshold from $15 million to $50 million, which government estimates indicate will cut the number of pre-notification filings virtually in half.
In addition, the proposed modifications will change the $45,000 filing fee ? implemented about a decade ago ? to a graduated system, depending on the size of the transaction.
You?ve Got Options
The distribution of stock options to employees and consultants of private companies is also a hot issue. Currently, Regulation 701 of the 1933 Securities Act states that, within a 12-month period, a company must not distribute options to employees or consultants that exceed the greatest of three standards: either $1 million, 15% of the issuer?s total assets, or 15% of the outstanding amount of the class of securities being offered and sold.
The problem, it seems, is that the definition of a “consultant” is up for grabs.
For example, when Artistdirect Inc. filed an S-1 with the SEC last September, it included a recission offer toward the end of the document. By offering its artist partners securities and defining the musicians as consultants, the company exceeded its maximum, violating the 1933 Act and California securities law.
“Artists have never been able to participate in the equity upside of the music industry, and concluded with counsel they could be deemed consultants,” said company Chief Financial Officer Jim Carroll. “It?s one of those areas of the law where who?s protecting who from what?”
In compliance with the laws, it was forced to offer to repurchase the share at the exercise paid price plus interest at the rate of 10% per annum from the date of issuance until the recission offer expired, 30 days after the effectiveness of the registration statement. While Carroll, like many venture investors, argues that stock option compensation programs are an attractive mechanism for rewarding an entire team, the ambiguity in Regulation 701 is a disadvantage on all sides of the game: employees, managers and investors.
“A lot of what the high-tech world has done is a style, is a culture. The goal of creating the causes a lot of these companies to overlook basic dull policy and procedures,” said Michael Keeling, president of the Employee Stock Ownership Program, a Washington, D.C.-based group.
Give More To Get More
The final major issue this election season is ERISA reform, which could allow highly-compensated employees (defined as an individual earning above $80,000 per year) to pump more defined money into their pension and 401k plans. Such a move could increase the limited partner capabilities of pension funds, plus also finally prompt 401k managers to get into the game.
This is, for the most part, a partisan issue with Republicans in support and Democrats towing the traditional labor line.
“The Republicans seem to be more sympathetic to arguments that some changes should be made to the rules, but some Democrats on the Congressional committee this year seemed open to some types of change,” said Donald Myers, partner with ReedSmith LLP.
Finally, Silicon Valley folks will have the opportunity to vote on an array of education reform ballot initiatives which the NVCA?s Heesen described as essential to the high-tech industry?s future well being.
One such proposal — a voucher-like bill named Prop 38 ? received has received a significant amount of VC interest as investors have engaged in some fairly-public battles over its merits. The latest savlo came yesterday as Tim Draper sent out a mass e-mail urging people to support the initiative, calling it something that would “create a brighter future for all of California?s kids.” He did not, however, cite any of the arguments against school voucher programs.
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