In the United States, at both the federal and state level, investors that are public agencies (such as state and local government employee pension funds, public university endowments, etc.) are usually subject to rights of members of the public to request information about their activities by way of a “freedom of information” (FOIA) request. Since the rules related to this are promulgated by the federal government as well as the various states, there are many different sets of rules in place, each of which operate in their own manner. Similar rules exist in some non-United States locations. As these public agencies (and fund-of-funds vehicles with such agencies as investors in them) are very often investors in venture capital funds, the potential does exist for such funds that these FOIA requests could result in the unexpected and unplanned public disclosure of sensitive information about the fund and, perhaps, its underlying portfolio companies. This fact pattern has led to a number of discussions with our clients regarding how to manage such requests when they come in and, more importantly, how best to plan in advance for them to minimize the information that may need to be disclosed.

Some years ago, there was considerable concern with respect to a number of states that a fund manager’s information (be that pitch books, PPMs, partnership agreements, quarterly and annual reports or other materials) might be subject to disclosure to the general public upon demand. As it turned out, given how the laws have developed in this area, this has not proven to be a major concern today, as nearly all of the relevant laws have come to expressly provide, or at least have been interpreted by regulation or otherwise to provide, that essentially all of the sorts of highly sensitive information about themselves and their underlying portfolio companies that fund managers would most care about protecting from public disclosure now qualify for protection from such public dissemination (most frequently because such information is considered a “trade secret” in nature, and thus, protected by specific provisions in applicable state laws and regulations).

The type of protected information described above usually includes all portfolio company level information and all information about the strategy and terms of a fund’s offering. A number of states do permit the request by the public and subsequent dissemination of certain fund level (as opposed to portfolio company level) information, and some states go so far as to mandate its public disclosure even without a specific FOIA request from the public. For example, California requires that its public entity investors (CalPERS, CalSTRS, etc.) affirmatively disseminate to the public such fund level information, which is usually done by way of website. Fund level information varies by the location in question, but generally includes items such as name of fund, year of formation, aggregate capital commitments, the dollar amount of capital contributions, the dollar amount of distributions, the fair market value of the interest as of a specific time, the amount of fees (and sometimes carried interest) assessed, and so forth. Note, though, that the preceding is not reported on a portfolio-company basis, as information at the portfolio company level is generally viewed as trade secret.

Funds exist for a long period of time and these laws do change. California, for example, recently broadened the list of information deemed to be “fund level,” and thus, required for public disclosure. Accordingly, fund managers generally rely on two levels of protection to put them in the best position to disclose as little information as possible about their funds and the underlying portfolio companies. First, upon inception of a relationship, they analyze the current conditions of the investor in question with respect to what disclosure risks such investor poses to the fund manager (presently, for example, public investors in certain states are typically viewed as a bit too “leaky” to accept as investors, whereas the other states are viewed as mostly tolerable in our experience). Thus, concentrated planning for FOIA exposure issues during the investor intake phase is important.

Second, fund managers craft partnership agreement provisions which offer ongoing protection through several typical methods: (i) the confidentiality provisions are carefully crafted to provide that only a limited set of “fund level” information may be publicly disclosed by public agency investors or by fund-of-fund investors to their own public agency investors; (ii) the public agency investor is required to notify the fund manager of any FOIA requests and handle, or provide assistance for the fund manager to handle, resisting the request to the extent it is overbroad; (iii) the fund manager is permitted to demand the destruction or return of information from the investor if there is a later determination that there is a material likelihood of the public gaining access to it (this information being information beyond the broad fund-level scope, i.e. the type of information that is expected to remain confidential from public view); (iv) the fund manager, on a prospective basis, can stop providing sensitive information to the public agency (or fund-of-funds) investor if there is a non-permitted disclosure of information or there is a material likelihood or risk of the public gaining access to or being disclosed such information; and (v) in some cases, the fund manager may be able to cause a mandatory withdrawal of a particularly troubling investor.

In practice, a fund manager will need to decide whether it wishes to cross the line of accepting public agency investors or fund-of-funds investors with public agencies in them. Some managers determine that they do not even want fund level information available in the public domain and they elect to refrain, wholesale, from relationships with such investors. Other managers determine that they are fine with fund level information being publicly available, they accept these types of investors, and they rely on the above stated “typical protective provisions” to provide protection over the long life of the fund. No matter what course you may take, you will need to plan adequately for this issue in advance and determine the position your fund will take in respect of these sorts of prospective investors.

Jordan Silber
Jordan Silber

Posted by Jordan Silber