Carta Policy: Weekly Brief for April 8

Carta Policy: Weekly Brief for April 8

Author: The Carta Policy Team
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Read time:  7 minutes
Published date:  April 8, 2022
Congress unveils capital markets bill, Biden nominates SEC commissioners, and Gensler and Yellen make statements on digital assets regulation.

TL;DR

  • Congressional policymakers unveil cap markets proposals; it’s unlikely a comprehensive package will be enacted, but this sets a foundation for bipartisan discussions on various provisions.

  • Biden nominates two to the SEC—a Pelosi aide and Republican Senate Banking Committee counsel; both are expected to be confirmed.

  • Gensler asserts the SEC should be “technology neutral” in regulating digital assets, while noting that SEC & CFTC could jointly regulate certain platforms on which there are crypto and commodity-based tokens.

  • The Senate confirmed Ketanji Brown Jackson to the Supreme Court, making her the first Black female justice. The vote was 53-47, with three Republicans voting in favor.

Macro matters

Congressional agenda

Congress will break for the Easter recess, but will return to a full agenda. Expect House and Senate negotiators to resolve differences on the COMPETES Act, the U.S. competitiveness bill; we are still working to strip out the language that would direct the SEC to rewrite regulations around raising capital in private markets under certain offerings. The Senate will push forward on nominations, including those to the Federal Reserve Board. And expect Senate Democrats to revive Build Back Better 2.0 conversations. Sen. Joe Manchin remains in the driver’s seat, having articulated what he wants in a package, including deficit reduction, which means provisions such as qualified small business stock (QSBS) remain in jeopardy; we remain engaged. 

Russia-Ukraine update

The Senate voted unanimously to remove Permanent Normal Trade Relations (PNTR) status for Russia and its ally Belarus in one bill and to ban Russian oil imports in another. The House is expected to pass the legislation, sending it to the President’s desk. The White House announced that it would impose further investment and financial sanctions, and Treasury Secretary Yellen declared the U.S. will not participate in certain G20 meetings if Russia remains in the group and that Russia’s participation in the Financial Stability Board (FSB) should be minimal.

Carta Liquidity new report on secondary market liquidity…with policy nexus

The report is now available and covers important private market insights—including the surge in secondary liquidity for private companies. It also includes an analysis of the SEC’s ambitious regulatory agenda, including policy proposals that could have a broad impact on access to capital and investment opportunities in the private markets. View the report here.

Capital markets

Congress marks 10-year JOBS Act anniversary with capital formation proposals

This week marked the 10th anniversary of the Jumpstart our Business Startups (JOBS) Act—bipartisan legislation that expanded opportunities for small businesses and startups to access capital, and reduced frictions that discouraged companies from going public. Building on the successes of the JOBS Act, Sen. Pat Toomey, the lead Republican on the Senate Banking Committee, announced the JOBS Act 4.0—a package of approximately 30 legislative proposals designed to boost capital formation and economic growth ( fact sheet & section-by-section). This follows up his request last year for capital formation proposals, where Carta submitted comments focused on broadening investor access, liquidity, and opportunity in the private markets. 

The draft package contains a number of provisions that would affect the entrepreneurial ecosystem and increase access to capital and investment opportunities, including proposals designed to:

  • Expand who qualifies as an accredited investor by allowing individuals to invest 10% of income in private securities, and requiring the SEC to develop test to measure sophistication;

  • Allow accredited investors to self-certify under 506(c);

  • Expand the size of qualifying venture funds and eligible venture investments;

  • Create a micro-offering safe harbor;

  • Exempt “finders” from broker-dealer registration requirements;

  • Expand retail investor access to private funds through retirement accounts and other publicly available investment funds;

  • Permit “gig workers” to receive equity compensation under Rule 701.

Carta and a coalition of organizations that support the ecosystem applauded these renewed legislative efforts focused on capital formation.

Rep. Patrick McHenry, the lead Republican on the House Financial Services Committee, released a report containing a number of similar policy recommendations. 

While it is unlikely Congress approves a comprehensive capital formation package this year, some of these ideas have bipartisan support and can serve as a basis for future legislative action. Support for these proposals can also help counter some of the problematic proposals we anticipate coming out of the SEC that could reduce access to capital and investment opportunities and push more private companies into the public space.

Biden announces SEC nominees

President Biden nominated two individuals to serve as SEC Commissioners: Jaime Lizárraga, a longtime senior advisor to Speaker Nancy Pelosi, would replace Democratic Commissioner Allison Herren Lee; and Mark Uyeda, an SEC attorney currently serving on the Senate Banking Committee staff and a previous adviser to former Commissioner Mike Piwowar, would fill the Republican vacancy created by Commissioner Elad Roisman’s departure. These nominations will likely be considered together to help ensure a smooth confirmation process and return the five-member commission to full voting power.

Lawmakers call for AML/KYC regime for private fund industry

Sen. Elizabeth Warren and other top Senate Democrats are calling for the Treasury Department and SEC to use their existing authority to subject the private funds industry to an anti-money laundering (AML) regime. There is growing concern that private equity funds, hedge funds, and venture capital funds are attractive vehicles for money launderers and sanctioned individuals to hide assets because they are exempt from requirements to maintain AML and “know your customer” programs. The Treasury Department has previously attempted to require private funds and advisers to set up AML programs, though proposed rules were never finalized. The Biden Administration has announced its intent to close this “loophole,” and with increasing Russian sanctions and concerns from lawmakers, it is possible such a proposal gains traction. The SEC could also require private funds to submit beneficial ownership and related information as part of its recent Form PF rulemaking and has received comments in support of that outcome.

Manchin criticizes SEC climate disclosure proposal

In a letter, Sen. Joe Manchin said that the new climate proposals proposed by the SEC go against the regulatory body’s stated mission, and that such policies will add “undue burdens on companies,” especially in the fossil fuel industry. Manchin argued the proposed changes are also unnecessary given that nearly two-thirds of companies in the Russell 1000 index release sustainability reports. Later in the week, 19 Senate Republicans sent a separate letter that echoed claims made in Manchin’s letter. The SEC’s climate disclosure rule proposal is currently in a 60-day public comment period.

Crypto & digital assets

Gensler pushes for more regulation of crypto platforms, suggests joint oversight with CFTC

SEC Chair Gensler made the case for enhanced SEC regulation of crypto trading platforms and tokens, and continued his push for platforms to register and be regulated like exchanges. For platforms that trade both crypto-based security and commodity tokens, he suggested joint regulation with the CFTC, though the industry and a growing number of policymakers would prefer CFTC to have primary oversight of the spot markets. Gensler believes the SEC should be “technology neutral” and current regulations should be applied to the crypto markets so as to “not risk undermining 90 years of securities laws and create some regulatory arbitrage or loopholes.” Commissioner Peirce, who has been particularly critical of the SEC’s approach to digital asset regulation, recently argued that a technology-neutral approach only works if “new technology can in fact comply with a prescriptive rule-set designed for old technology” and that technologies forced into an inflexible regulatory framework could fail if not given a chance to develop and thrive. 

In related news, Treasury Secretary Yellen argued digital asset regulation should be based on risks, not technologies, noting that consumers, investors, and businesses deserve the same protection regardless of the vehicle—a balance sheet or distributed ledger. Secretary Yellen believes in many cases regulators currently have the authority needed to manage crypto risks and provide appropriate oversight of digital asset exchanges.

Sen. Toomey releases stablecoin proposal

Sen. Toomey released a discussion draft establishing a new regulatory framework for stablecoins this week. The proposal would authorize three options to issue payment stablecoins, establish a new Office of the Comptroller of the Currency (OCC) license for stablecoin issuers, and clarify that insured depository institutions are permitted to issue stablecoins. The draft bill would also subject all stablecoin issuers to standardized requirements, including disclosures regarding the reserve assets backing the stablecoin, clear redemption policies, and mandatory routine audits by registered public accounting firms. Late last year, the President’s Working Group report left open the possibility that the Financial Stability Oversight Council might step in if Congress was unable to pass a bill regulating stablecoins.

Banking & financial products

FDIC crypto guidance

The Federal Deposit Insurance Corporation issued guidance telling financial institutions to engage the agency if they are currently pursuing or plan to pursue any cryptocurrency-related activities. The guidance follows similar instructions from the OCC in November, which directed banks that want to offer custody services or engage in other crypto-related activities to get the approval of their local OCC supervisory office. Both sets of guidelines emphasized the potential risks of cryptocurrency, especially as banks are increasingly getting into digital assets.

Upcoming events

Notable SEC proposed rules and comment deadlines

*60-day comment period after publication on SEC website or 30 days after publication in Federal Register, whichever is longer.

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The Carta Policy Team
Carta’s Policy Team aims to connect the policymaking community and venture ecosystem to build an ownership economy and advance policies that support private companies, their employees, and their investors.