IRS Reform Bill Includes Relief for Venture Capital Industry

Business Wire, June 29, 1998

PALO ALTO, Calif.--(BUSINESS WIRE)--June 29, 1998--The Western Association of Venture Capitalists and the Silicon Valley law firm Wilson Sonsini Goodrich & Rosati today applauded the U.S. Congress for including technical corrections relief for the venture capital industry in pending IRS reform legislation.

The legislation was passed by the House of Representatives on June 25th and is expected to be passed by the Senate and signed by the President in early to mid-July.

H.R. 2676 corrects Section 1045 of the Internal Revenue Code, which was enacted as part of the Taxpayer Relief Act of 1997 and designed to foster investment in emerging growth companies. Under Section 1045, individual taxpayers may "rollover" (tax-free) any gain realized on a sale of "qualified small business stock" when the sale proceeds are reinvested in other qualified small business stock. This benefit not only encourages individuals to invest in emerging growth companies, but also encourages them to reinvest any profits once the original investments mature.

Unfortunately, Section 1045 benefits generally would have been unavailable to individuals who invest in qualified small business stock indirectly, through professionally managed venture capital funds (most of which are organized as limited partnerships). H.R. 2676 will amend Section 1045 to specify that individuals who invest in qualified small business stock through partnerships, limited liability companies, S corporations, regulated investment companies and certain types of trusts are entitled to the same rollover benefits as individuals who invest in such stock directly.

Without the correction provided by H.R. 2676, an individual who invests through a professionally managed venture capital fund could have forfeited the investment incentives provided by Section 1045. Since venture capital funds are among the most important sources of capital for emerging growth companies, particularly in the high-tech sector, the lack of parallel treatment for venture fund investments in qualified small business stock would be highly disruptive to the growth of new companies as well as the

venture capital industry.

Western Association of Venture Capitalists President Philip Gianos, of the venture capital firm InterWest Partners, hailed the action, "This legislative fix reflects an increased recognition inside Washington of the crucial role venture capital funds have played in the success of Silicon Valley and other segments of the U.S. economy."

Leading the effort to correct Section 1045 are Glen Kohl and Jonathan Axelrad, two members of Wilson Sonsini Goodrich & Rosati (WSGR). Mr. Kohl is the chairman of WSGR's tax department and recently served in Washington with the U.S. Treasury Department as Deputy Assistant Secretary for Tax Policy. Mr. Axelrad is one of the leaders of WSGR's venture capital fund practice and has devoted much effort in recent years to issues affecting the venture capital industry. Assistance was also provided by the National Venture Capital Association.

"This shows that Washington will respond if you have a legitimate grievance and work effectively to make your voice heard. Here, the Treasury and Congressional tax staffs were extremely sophisticated and quickly understood the problem with Section 1045," said Mr. Kohl. Added Mr. Axelrad, "Once H.R. 2676 becomes law, the availability of tax-free rollovers will create a powerful incentive for individuals to invest in emerging growth companies through professionally managed venture capital funds."

Wilson Sonsini Goodrich & Rosati is based in Palo Alto, California and is the nation's leading law firm representing participants in the high-tech economy. The firm regularly advises more than 300 public companies, 2000 emerging growth companies, and the venture capital funds and investment banks that support them. The firm has nearly 500 attorneys, 107 of whom are members of the firm, and a support staff of more than 700. Additional information regarding Mr. Kohl, Mr. Axelrad and WSGR is available at www.wsgr.com.

The Western Association of Venture Capitalists is a membership organization founded in 1967. It currently represents more than 100 venture capital firms.

The National Venture Capital Association is a membership organization founded in 1973. It currently represents nearly 300 venture capital firms.

Background information on Section 1045 is available at the WSGR web site. Set your browser to www.wsgr.com. Click on "Practice Areas," then on "Tax."

    CONTACT: Wilson Sonsini Goodrich & Rosati
              Ashley Heinze, 650/493-9300 ext. 6612
              aheinze@wsgr.com
                  or
              InterWest Partners
              Philip T. Gianos, 650/854-8585
              flip@interwest.com
                  or
              National Venture Capital Association
              Mark G. Heesen, 703/524-2549
              mheesen@nvca.org