A discussion on regulating venture capitalists is building up as new legislative proposals in Congress would require private pools of investment capital to be registered with the Securities and Exchange Commission (SEC). The objectives of such legislation are to protect the public from abuses and to limit further risks to the financial system.
In a guest blog for growthology.org (“Regulating Venture Capitalists? The Right Case and the Wrong One”), investor, writer, and entrepreneur Paul Kedrosky says: “Regulate them if you take the principled position that they are a source of systemic risks; don't regulate them if they are not.” According to the author, financial market regulation should be driven by risk and assets, not by title. Since venture capitalists do not engage in systemically risky activities, do not usually have leverage, do not use complex financial derivatives and are not tightly intertwined into the banking system, they are not a source of systemic risk and should not be regulated.
Others have also argued against regulating venture capitalists. See for example, venture capitalist Alan Patricof’s and NYU Professor of Finance Eric Dinallo’s opinion piece in the New York Times (“Stopping Start-ups”). However, Kedrosky and these authors disagree on why venture capitalists are not a source of systemic financial risk. For the latter, venture capitalists are not such a source because they do not really participate in public markets. Kedrosky has a different take, as you can read by following this link.