After being battered by rising interest rates and choppy markets, the venture capital industry is sweating new regulations that could expose fund managers to legal risks.

The SEC is putting the final touches on a rule that would make it easier for investors to sue VCs for bad behavior, negligence or recklessness. It would “open up all types of litigation risk to being a venture capitalist,” Justin Field, the National Venture Capital Association’s senior vice president of government affairs, told MM.

The proposal, which could be finalized as soon as this quarter, would “drive a wedge between VCs and portfolio companies that will hurt both innovation in this country as well as [investor] returns, which is what the SEC is supposed to be trying to protect,” he added.

Of course, the rule wouldn’t just apply to venture capitalists. It would also cover private equity firms, hedge funds and certain real estate investment companies – any private investment fund that’s already subject to SEC oversight.