A Proposed Legislative Solution for Private Equity Fund Disclosures

Abstract

Private equity funds have managed for years to fit into a unique hole in federal securities laws. As long as they meet certain requirements, such as a limited number of sophisticated investors, they are exempted from disclosure. As a result, they are not generally required to make information about their investments publicly available. Due to recent lawsuits filed under state Freedom of Information Acts and Public Records Acts, many of private equity funds' wealthiest investors, including public universities and state pension funds, must disclose information about their investments. Consequently, information about the funds they invest in is being cast into a public light for the first time. The reaction from the venture capital community has been primarily negative, with some of the more prestigious funds going so far as to ban public institutional investors altogether. This Article discusses how private equity firms have found exemptions in federal securities laws to avoid disclosing information about their investments. It then describes how state public disclosure laws intended to benefit the public may be hurting the public by causing private equity firms to kick public institutions out of funds rather than face disclosure. Finally, the Article considers statutory, regulatory, and political solutions to the problem, and concludes that a uniform state law strikes an appropriate balance between respecting the privacy of private equity firms and protecting the public by shedding light on investment returns.