Over the past few years, the lines between growth equity and venture capital have blurred. As VC investors have moved toward later stage deals, growth equity players have gravitated toward sectors and industries where "growth" may be easier to find, creating an overlap that can make it tougher for outsiders to discern between the two. It's a gray area, however, that could become black and white as private equity firms are nearing a deadline to register with the Securities and Exchange Commission, while VCs probably hope to remain exempt from such requirements.

On the VC side, firms such as Austin Ventures, Accel, Greylock Partners, Battery Ventures and others have ramped up their growth equity activity. Austin Ventures' partnership with Silverback Acquisitions in November, for instance, outwardly looks like any other rollup strategy that might otherwise be led by buyout firms such as GTCR or Clayton Dubilier & Rice.

Kurt Jaggers, a managing director at TA Associates, says that traditionally the distinction between growth and venture comes down to the size and type of transaction. It can also revolve around the expected liquidity, anticipated growth or both. "That to me is literally the distinguishing characteristic," he says. But Jaggers, like a lot of pros, believes the SEC will ultimately re-define the playbooks of those on the VC side.

The Riverside Co.'s Loren Schlachet, a managing partner at the firm, says that it can be easy to cross the line into VC. "We found that our funds have at times started doing some smaller deals in companies that aren't making a lot of money; viewing them more as very late-stage venture capital but it's really growth capital," he says. The firm's 2009 investment in PharmMD Solutions, for example, is a deal he says could qualify as "a very late stage" venture capital investment. Regardless, Riverside, based on the proposed rules, will be registering with the rest of its PE counterparts.

The SEC in December defined what constitutes venture capital -- creating a distinction for the asset class that was necessary after the Dodd-Frank Act exempted VCs from having to register with the Commission. It only took the SEC 135 pages to clarify what VC firms can and cannot do to maintain their designation. According to the proposal, VC firms can only invest in equity securities of private operating companies "to provide primarily operating or business expansion capital ([and] not to buy out other investors)." The SEC drew a line at leverage, ruling that the fund cannot be levered, nor can portfolio companies borrow in connection with investments. Sponsors also have to provide "a significant degree" of managerial oversight and funds cannot offer redemption rights to their investors.

As of press time, the proposed definition was still accepting comments. It had already received over 100 from venture capital and buyout pros alike. Some of the comments attempted to explain away the similarities. John Geschke, general counsel of Norwest Venture Partners, for instance, cited that the Commission's prohibition of debt would "create undue and unnecessary restrictions" on the ability of VCs to invest companies that may grow through acquisition. He added that the activity is "distinct from the typical uses of leverage by private equity funds to redeem existing stock in a portfolio company or return capital to a fund."

Geschke also touched upon the term "growth capital," noting "use of the terms 'growth equity' and 'growth capital' in marketing and fund materials should not in and of itself result in disqualification under the grandfathering provisions."

If the SEC doesn't rework the definition to include those firms that play in the growth equity arena, some VCs may be forced to register. "I don't know how they will differentiate the two. It's very fuzzy," says one industry source, noting that it would be daunting for VC's to alter their approach.

Still, most expect the SEC will tinker with the definition, with a second source anticipating that more color will come in a matter of months.

Whether or not a line is drawn distinguishing the PE growth players and the VC growth investors depends on whether the SEC adjusts the definition based on the feedback received. Mark Heesen, president of the National Venture Capital Association, for instance, noted in his comments that regulators should embrace the gray areas. "Perhaps most critically," he wrote, "without some measured degree of flexibility and certainty in the [venture capital fund] definition, the exemption for investment advisers to VCFs may be rendered meaningless."

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