Venture Capitalists Warily Eye Texas, CA Disclosure Bills

August 15, 2005 ( - Venture capital firms are closely watching a newly adopted Texas law, and a similar legislative proposal in California, that could help establish a standard for public pension funds' disclosures about their venture capital holdings.

The legislation, both the one recently signed into law by Texas Governor Rick Perry and a similar bill currently winding its way through the California legislature, is designed to specify what information about the public pension funds’ venture capital investments should be released, Dow Jones reported. The California bill (See Golden State Guidelines Proposed for Venture Capital Disclosures ) passed the Senate in May and an Assembly vote is expected by early September. If it passes, as expected, the bill will be sent to Governor Arnold Schwarzenegger, who hasn’t yet taken a public position on the proposal.

Venture capitalists are concerned that the bills will lead to the revelation of detailed information about individual companies, and ultimately provide insights into their investment strategies. Most venture capital players argue that data about technologies, business strategies and financial strength would put their start-ups at a competitive disadvantage during a fragile period in their development, according to the report.

In recent years, courts and state officials cited open record laws to demand that sensitive data about venture capital investments be made public (See   UC Losses Venture Capital Disclosure Court Battle ), particularly when taxpayer funds were ostensibly placed at risk. In exchange, some in the venture capital field fought back by blocking public entities from joining new funds, as Silicon Valley’s Sequoia Capital did in 2003 to the investment arms of the University of California and University of Michigan. 

According to the Dow Jones report, the Texas bill already has had an impact. The legislation specifies 16 types of data a public pension fund must release about its private-equity holdings, including the amount of money invested, the IRR, or internal rate of return on an investment, and the fees paid to a venture firm. Information not specified is confidential.

As in Texas, where venture capitalists, pension-fund officials and legislators worked together on the legislation, the California bill has been a lesson in coalition building, according to Dow Jones. Leading the effort on lobbying were the University of California and involved the state’s largest public pension fund, the California Public Employees Retirement System, or CalPERS.

The measure would require the release of performance data such as IRRs and management fees, but protect portfolio company information and the contracts pension funds sign with general partners.