(Bloomberg) -- Accel is the latest venture capital firm to consent to heightened regulation with the US Securities and Exchange Commission, a tradeoff that allows it to buy more shares of non-public companies that have been changing hands at steep discounts on private markets.
The Palo Alto, California-based firm registered with the SEC as an investment adviser called Accel Management Co. The firm, which manages about $30 billion, will now be subject to increased disclosure and compliance requirements and regular SEC examinations.
Venture funds are largely exempt from such oversight as long as they observe restrictions on their investments and their use of leverage, among other things. That exemption limited the type of trading Accel could do on the secondary market, but its new status as an investment adviser lifts that restriction and also allows it to borrow more money.
Accel joins a long list of VC firms that made a similar move in recent years, including Sequoia Capital, Bessemer Venture Partners and Andreessen Horowitz, which registered as an investment adviser in 2019 in part to invest in cryptocurrencies. Earlier this year, Lightspeed Venture Partners became a registered investment adviser, also seeking to focus on secondary markets.
“Accel has been operating professionally for some time now,” the firm said in an emailed statement. Being a registered investment adviser “gives us the flexibility to continue to meet the changing needs of companies inside and outside our portfolio.”
The secondary markets have become increasingly attractive in recent years, thanks in part to a slump in startup valuations since the pandemic. During the heady days of 2021, many startups’ valuations soared. Now shares of those companies trade more cheaply on secondary markets in part because firms don’t want to hold new fundraising rounds at lower valuations — the dreaded down round.
‘Little Opportunity’
“There is very little opportunity in the primary market unless you are already a venture capital investor in those companies,” said Howe Ng, head of analytics at Forge Global Holdings, a private securities marketplace.
Founded in 1983, Accel ranks as one of the largest and most-established US venture firms, with a string of successful private investments that include Facebook — now Meta Platforms Inc. — Dropbox Inc., Spotify Technology SA and Slack, now owned by Salesforce Inc. In 2022 Accel raised $4 billion of capital commitments for its Leaders IV fund, which invests in late-stage growth private companies, the most heavily traded stocks in venture secondary markets. Late last year, the firm raised money for a new $650 million fund.
Its registration shows that it’s primarily owned and managed by seven people, including Sameer Gandhi, Andrew Braccia and Richard Wong.
In an interview last year, Wong said that Accel and other venture firms were scooping up shares of startups on the secondary markets, where the price per share was often lower than the companies’ official valuations. While private companies raise money by issuing shares through primary offerings, their founders, employees and early investors often cash out by selling to buyers in the secondary markets, including VC funds, institutional investors and high-net-worth individuals.
While prices in the secondary market have firmed up this year, Accel would like to continue buying there, according to a person familiar with the situation who requested not to be identified in order to discuss confidential aspects of the registration. Its capacity to do so, however, could have been constrained by the exemption that VC firms received when Congress mandated more supervision of hedge and private equity funds in the wake of the 2008 financial crisis.
To maintain this exemption, VC firms have to devote at least 80% of fund assets to “qualifying” investments, defined as equity securities that are purchased directly from private companies. Shares purchased on the secondary market can count against the 20% limit on “non-qualifying” assets.
Now that Accel is registered with the SEC, the 20% ceiling no longer applies. The registration also lifts curbs on leverage, including a cap limiting loans to 15% of capital for no more than 120 days. Accel’s registration said it intends to use capital call lines of credit, a form of borrowing against investor commitments that has become popular among private equity firms.
“The big thing is really the capital call facility,” said Robert Sawyer, co-chair of the private funds practice group at Foley Hoag in Boston. “It has been growing quite a bit in the venture capital space,” Sawyer said, adding that “a lot of firms would like to have those outstanding more than 120 days.”
--With assistance from Hema Parmar.
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