Venture capital units of commercial banks are expected to receive a special boost if the financial modernization bill wending its way through Washington becomes law.

The legislation -- which would dismantle Depression-era barriers separating commercial banks, insurers, and securities firms -- would free bank-owned venture capital units to make unlimited investments in nonbank companies. The caveat is that banks would not be allowed to take management control of these firms.

Currently, bank-affiliated venture capital units may take stakes of only up to 5% of a nonfinancial company's voting stock.

"Bank-affiliated venture capital funds were at a disadvantage getting the initial round of financing, because companies knew they wouldn't be able to provide subsequent rounds of financing" due to restrictions on their level of investment, said Robert Kabel, an attorney for the Washington law firm of Manatt, Phelps & Phillips LLP.

Assuming financial modernization becomes law, banks should be able to market their investment capabilities just like venture capital units that are independent or affiliated with investment banks, he added.

But one venture capitalist at a fund affiliated with a commercial bank said the benefits of the bill would affect its administrative and legal costs more than its competitive position.

Current regulations of bank-affiliated funds "make investments more complicated," said Buzz Benson of U.S. Bancorp Piper Jaffray Ventures in Minneapolis, which has $225 million of assets under management. But he said the regulations do not "prevent us from doing any investments."

Mr. Benson, who was with the venture capital unit before U.S. Bancorp bought the investment bank Piper Jaffray Cos. in December 1997, said the bill should cut down on time and expenses associated with making new investments.

Nowadays, banks use a Glass-Steagall Act exemption that lets their venture capital units take up to a 49% stake in a small business. But these investments carry their own penalties -- license fees and wait times. For example, U.S. Bancorp Piper Jaffray Ventures, which raises all its money through limited partnerships with other institutional investors, has a nine-month wait every time it wants to register a new partnership with the Small Business Administration. It must also file quarterly reports with the SBA, and pay licensing fees to register as a small business investment company, and therefore be permitted to buy up to 49% of a small business.

The current regulations are "a nuisance," said Joseph Bartlett, a senior corporate partner at Morrison & Foerster in New York who helped the former Chemical Banking Corp. put together its venture capital unit, which later became Chase Capital Partners. The venture capital business "is very robust right now, and some of the big banks are really big players," despite these restrictions, he added.

Still, bank-affiliated venture capital units represent a growing portion of U.S. venture capital, and their investments have produced some stellar gains this year. For example, Chase Manhattan Corp.'s Chase Capital Partners expects a $240 million return on its $29.5 million investment in the Spanish-language Internet provider StarMedia Network Inc.

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