NVCA Today

Working closely with the NVCA CFO Task Force, NVCA filed two important comment letters in July. Both issues could have a significant impact on venture capital firm operations if the outcomes are unfavorable.

FAS 157-g - LP reliance on GP financials

The first letter was filed with the Financial Accounting Standards Board regarding the ability of LPs to rely on GP financial statements to be fair value for the LP's own financial statements. There are a number of issues with the exposure draft (known to its friends and critics alike as "FAS 157-g"). While one paragraph states that LPs can rely on GP portfolio NAVs in the most common situations, another paragraph could be read to require significant disclosures and discussion by the LP to support those numbers far beyond what GPs typically report. The terminology was also of concern. LPs could rely on GP NAVs as a "practical expedient" for fair value rather than acknowledge GP financials to be fair value. Because of a precedent where a "practical expedient" we relied upon was abandoned shortly after being adopted, our view is that GP financial statements, prepared appropriately, should be considered to actually be fair value. Another point we commented on was language that would require GP and LP dates to line up in order for GP reporting to be considered even a practical expedient for fair value. For example, if read strictly, the proposal could render a 6/30 GP report essentially useless for a 7/31 LP report. FASB received 40 comment letters including ours and letters from those with whom we work closely. A number of the CFO Task Force members worked with staff and counsel on this letter.

Post-Scandal Custodian Rules

The second letter was filed on July 28th with the Security and Exchange Commission. As with the prior letter it was in response to a proposed rule. In this case, the proposal would place new requirements on registered investment advisers who have custody of client assets -- for VCs, stock and other interests in portfolio companies. Our view is that the policy rationale for exempting venture capital from SEC registration remains valid and highly relevant. However, because of the breadth of various legislative proposals that would expand the reach of SEC registration, we commented on the proposed Custody Rules not knowing if, at some point, they might apply to the bulk of member firms. While the new rules are perhaps an understandable reaction to the oversight failures in the Madoff situation, the proscribed mechanisms such as third-party stock holding, surprise SEC audits, and annual SAS-70 safe harbor certifications each came with considerable cost and operating overhead. Our view is that the current VC audit process, which generally involves a detailed reconciliation of holdings, provides sufficient assurances to LPs. A very active and engaged subgroup of the CFO Task Force worked on this letter. Thanks to Tim Curt of Warburg Pincus, Ed Colloton of Bessemer, and James Stevenson of ABS Capital for working closely with NVCA staff. We thank Stephen Holmes of InterWest and Mike Maher USVP for additional input. We hope that the comment letter will also be helpful in informing the SEC on the potential costs of VC registration.

The CFO Task Force continues to meet monthly and now includes the CFOs of 100 NVCA member firms. For more information on the CFO Task Force, contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .