SEC Proposes New Rules Needing VC Fund Managers To Partake In Investee Companies

The Securities and Exchange Commission (SEC) has proposed new rules that mandate venture capital (VC) fund managers to participate actively in the management of their investee companies.

This initiative is part of a broader revision of the SEC’s regulations governing VC and private equity (PE) funds in Nigeria. The shift marks a departure from previous rules, which required VC firms themselves to serve as general partners.

Under the new rule, fund managers, not the VC firms, will act as general partners, meaning entities like the Norrsken Africa Seed Fund must directly manage their investee companies rather than through an overarching foundation.

A recent report from Udo-Udoma & Belo-Osagie highlighted that the rule could add “operational complexities” for fund managers, as it necessitates specific skills to manage investee companies actively. This regulatory shift follows SEC’s earlier draft in June 2024, which redefined VC and PE funds as collective investment schemes (CISs), bringing them under general CIS rules. However, this reclassification has drawn industry feedback regarding the potential imposition of rules that may not align with the operational realities of VC and PE funds.

In recent developments, the SEC also introduced key amendments designed to reshape regulatory frameworks for venture capital (VC) and private equity (PE) funds. These changes aim to improve transparency, streamline requirements for smaller funds, and enhance regulatory oversight.

First, the prospectus requirement for VC funds marks a significant shift. VC funds may now be mandated to release prospectuses, aligning with CISs regulations during fundraising rounds. This document would include detailed profiles of directors and key stakeholders, potential investment opportunities, and essential financial projections along with exit strategies, ensuring prospective investors have a comprehensive understanding of the fund’s structure and prospects.

Secondly, a shift in the regulatory fee basis has been proposed. The SEC suggests calculating annual regulatory fees based on total assets under management (AUM) rather than the net asset value (NAV). This change reflects a more holistic approach, as AUM encompasses all managed assets, offering a more extensive assessment of a fund’s financial responsibilities.

Moreover, the amendments introduce an exemption for smaller PE funds. Funds targeting a size of ₦5 billion or below are exempted from the mandatory registration previously required, though they must still submit their governing documents for SEC approval. Raising this threshold from ₦1 billion reduces regulatory burdens, encouraging more accessible growth for smaller funds.

Finally, PE fund managers face new reporting requirements. Managers must now issue semi-annual financial reports that cover fund commitments, drawdowns, distributions, and any strategy adjustments. These reports should also provide valuations and detailed fee structures for each investment, offering greater transparency to investors and stakeholders.

These amendments collectively aim to foster a more supportive regulatory environment for VC and PE funds while safeguarding investor interests.

The new SEC proposals align closely with U.S. regulations that exempt VC funds with AUM below $150 million from registration, potentially fostering growth among Nigeria’s smaller PE firms focused on micro and small enterprises. With approximately 83 private equity firms operating in Nigeria, these changes could spur additional interest in the sector and increase support for early-stage companies through a regulatory environment tailored to their needs.