A new bill has been signed into law that exempts managers of venture capital funds from the licensing required of stockbrokers. Attorney Sarah Strunk from Fennemore Craig will tell us how the new law is expected to help remove a barrier some considered burdensome and non-competitive.
Ted Simons: A new bill signed into law purports to make it easier for venture capitalists to invest and do business in Arizona. Here to tell us more about the new law is Sarah Strunk, chair of the board of directors at Fennemore Craig. Good to have you here, thanks for joining us.
Sarah Strunk: Thank you.
Ted Simons: What exactly does this new law do?
Sarah Strunk: It actually brings us in line with many other states in the country on private equity and venture capital advisors. An investment advisor is typically regulated at both the federal and state level unless there's an exemption. In many states there are exemptions that are common among the states that allow certain private advisors to certain funds to be exempt. And we didn't have that in Arizona, and our laws were quite a bit out of date. It does update our laws.
Ted Simons: Basically the old law was that these managers were licensed pretty much the same as stockbrokers?
Sarah Strunk: Pretty much. The old law in Arizona was if you had a place of business in Arizona, even if you had no clients at all in Arizona, you were regulated. And there were not common exemptions you would see in other states. It really was an impediment for many who wanted to come to Arizona and open up a private equity fund or a venture capital fund and do business in Arizona, because they weren't regulated in the same way or didn't have the same exemptions they expected in other states. If you were regulated here you had to take a series 65 exam, like a stockbroker's exam, get if I wanted, be inspected, have your advertising and all sorts of things reviewed by the department.
Ted Simons: And the new law the venture capital private equity funds exempt?
Sarah Strunk: It doesn't totally exempt them. You still-have to register and venture capital funds are exempt. Private equity fund still does have to register and pay a fee but they don't have to go through all the other requirements someone regulated would.
Ted Simons: If I'm a venture capitalist and I move to Arizona and I want to do business, what kind of regulations are in place to make sure I'm on the up and up?
Sarah Strunk: If you're a venture capitalist you're exempt F. you're in a private equity fund, it's a little bit different. Gawk to the department and register for the exemption, pay the $250 fee and then file notices every year. It's an annual thing to be exempt.
Ted Simons: How much difference will this really make?
Sarah Strunk: I think it'll make quite a bit of difference. I was at a private equity roundtable about a year ago talking to a number of private equity participants in the market here. And a couple of us, particularly lawyers, were lamenting that our laws were out of date. Talking about problem and continuing to realize that was the case, we got together and decided we really need to do something bit. David Farnsworth, Senator Farnsworth, the chair of the financial institutions committee asked to us help him. So we did starting last year, help him draft this exemption, which is modeled on a nationwide exemption drafted in 20. It does bring us up to date.
Ted Simons: And I think for those who heard when I said venture capitalist, if I came in from Wyoming or whatever, there would be nothing as far as regulation, that puts up a red flag. Shouldn't there be some sort of regulation?
Sarah Strunk: The venture capital model is not regulated on the federal level. There are exemptions there and most states follow through with that. This is the case with venture capital. It doesn't change the securities issues when they are raising funds trying to collect money to invest in companies. So the securities laws are alive and well and the antifraud law resource alive and well.
Ted Simons: So Fly-By-Nighters, you're still being watched.
Sarah Strunk: Yes. It carries through the bad boy exemptions. If you've been convicted of fraud h any trouble with securities legislators in the past you may not qualify.
Ted Simons: It's usually not a very positive conversation, two tenths of a percent of venture capitalist dollars went to Arizona. What else can be done to attract seed money? It can't just be the licensing and regulation process. What else is going on out there?
Sarah Strunk: Whenever a business wants to locate in a particular state, they want to know what the laws are, what the regulatory scheme is of that state. If you are out of line with what national law resource generally that's a red flag and they have to dig deeper. Coming in line with most of the states will help. We know anecdotally we've had calls from funds in Chicago that have wanted to come to Arizona. When they found out that we didn't have the similar North American securities administration exemption everybody else had, they decided they didn't want to come to Arizona. So we know that will help. But part of it is just having that deal flow and having lots of things to invest in. We're hopeful that this will help bring some to Arizona and bring some out of the shadows. We're sure there are probably some people who are operating as investment advisor that are probably not bothering to register.
Ted Simons: As far as this being an outdated law, laws are put into place for a reason regardless of when it was. Do we know why it was enacted?
Sarah Strunk: It predates Dodd-Frank law by at least five years, so really, it was so out of date I really don't know exactly why. And even at the time our exemption wasn't common or similar to other states. Most states allowed to you have the same exemption the federal government had, which is if you had 5 or fewer clients you were exempt. We didn't even have that. We had a provision that said if you have an office in the state, and you have fewer than six clients you were exempt. So I really don't know why we were so restrictive. And unusually so.
Ted Simons: Okay. So doesn't cost the state a thing, correct?
Sarah Strunk: Doesn't cost a thing.
Ted Simons: No tax credits involved, nothing along those lines?
Sarah Strunk: Nothing along those lines. Hopefully it'll raise some revenue with people applying for an exemption for. Those that didn't that should have, they will get more revenue.
Ted Simons: Looks like bipartisan support in the legislature.
Sarah Strunk: It had overwhelming support, things really to the staff at at the Corporation Commission who worked with us to come up with a bill they could support. Matt Newberg and Phillip Hoffman over there were very, very helpful in getting this moved forward.
Ted Simons: Good to have you here.
Sarah Strunk: Thank you very much.
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Sarah Strunk: Attorney at Fennemore Craig