New state law eases venture-capital rules

The legislation, SB 1005, essentially exempts venture-capital managers from state laws requiring registration of “investment advisers,” which includes professionals who advise individuals such as financial planners and some stockbrokers.

Venture capital is a form of private equity where funds invest mainly in early-stage companies, and it forms the lifeblood of many technology-based emerging growth companies.

The new state exemption from financial adviser regulation, signed into law March 17, will eliminate a bureaucratic hurdle for venture capitalists looking to invest in Arizona companies, said an attorney who pushed for the change.

“In itself it will not create more venture capital, but it removes some important barriers,” Aaron Cain, a corporate lawyer with Fennemore Craig in Phoenix, said of the new law.

Cain said the Arizona exemption, based on a model law proposed by the North American Securities Administrators Association, was needed because of changes in federal law under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Dodd-Frank removed an exemption used by venture-capital firm managers to avoid registration as investment advisers so long as they had fewer than 15 clients, replacing it with other exemptions for managers of venture-capital and private-equity funds. Most states had similar exemptions based on the federal law.

Since Dodd-Frank dropped the 15-client exemption, most states adopted their own exemptions for venture capitalists, but not Arizona.

“All the legal requirements that apply to stockbrokers applied to venture capitalists,” said Cain, who has represented many venture-capital firms. “You hold that extra layer of burden on them, and they say ‘No thank you.’”

The Arizona legislation’s primary sponsor was Sen. David Farnsworth, a Mesa Republican and chairman of the Senate Financial Institutions Committee. SB 1005 passed both houses with just one dissenting vote.

Sen. Steve Farley, a Tucson Democrat who worked with Farnsworth to advance the bill, said it made sense to grant the exemption as allowed under the Dodd-Frank Act, noting the bill attracted bipartisan support.

“Because we had not taken advantage of that exemption under Dodd-Frank, we were at a competitive disadvantage to other states in attracting venture capital,” Farley said.

Arizona did have an exemption for advisers whose only clients were investment companies or other institutional investors — so long as they did not have an office in the state — or if they had fewer than six clients.

But Cain said that state exemption ran counter to efforts to get out-of-state venture-capital firms to set up offices in Arizona.

Venture-capital investment in Arizona in 2015 totaled $113.5 million invested in 28 deals, down from $252 million and 30 deals in 2014, according to data from the National Venture Capital Association.