Carta Policy: Weekly Brief for September 23

The Topline:

• Senate legislation would lower 12(g) threshold to force more private companies to go public

• GOP leaders question authority of SEC and CFPB rulemakings and other agency actions

• Treasury requests comment on plan to address illicit financing risks of digital assets, and lawmakers close in on deal to task Fed with stablecoin oversight

• FTC issues policy statement to bolster protections for gig workers from unfair practices

Macro matters

Congress likely to reauthorize programs for small businesses working on public sector challenges

With midterm elections looming, Congress continues work toward a resolution to prevent a government shutdown, as funding expires on September 30. Congress is also moving to reauthorize the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) programs, both of which expire September 30. These programs incentivize small enterprises, including startups, to undertake R&D directed at federal and public sector needs by investing federal funds into these companies. The Senate passed a bill this week that would reauthorize the programs for three years while adding controls to mitigate national security risks related to the R&D. The House is expected to take up the bill next week and pass the authorization before the deadline.

Interest rate hikes continue

The Federal Reserve’s Federal Open Markets Committee (FOMC) announced its third consecutive 75 bps interest rate increase. After the meeting, Fed Chair Jerome Powell reiterated that the Fed will continue to raise interest rates until inflation abates, setting up further rate hikes at the FOMC’s November and December meetings.

Carta data report: Median net IRR for most VC fund vintages declined in H1 2022

Median net internal rate of return (IRR) for most VC fund vintages declined in H1 2022, with 2017 and 2020 vintages seeing the largest drops, according to new Carta data. After returns rose in 2021, most vintages are currently in decline. Learn more about the latest trends here: “Early 2022 data shows a drop in median IRR across funds.”

Capital markets

Legislation introduced to force private companies into a public reporting regime

As referenced in last week’s update, Sen. Jack Reed introduced S. 4857, the Private Markets Transparency and Accountability Act, which would lower the SEC registration triggers for larger private companies. Democratic policymakers, including SEC leadership, have become increasingly concerned with the growing number of private companies opting to remain private instead of entering the public markets. Section 12(g) sets the threshold for when companies must register their securities with the SEC and become subject to a public reporting and disclosure regime. Generally, private companies do not run afoul of 12(g) unless they surpass 2,000 “holders of record” or have more than 500 non-accredited investors on their cap table. 

This legislation would add additional triggers, requiring private issuers to register their securities with the SEC if their valuation (minus affiliate shares) exceeds $700 million or the company has more than $5 billion in revenue and 5,000 or more employees (including independent contractors). 

Such reforms have the potential to push a substantial number of private companies into a public reporting regime much earlier in their lifecycle, which could could have a chilling impact on capital formation, as private market investors will recognize that any growth in private markets will be capped when the company is forced to go public, at which time the fund may need to divest shares; this weakens the investment rationale in late stage growth companies. It would also likely lead to more consolidation through mergers and acquisitions and decrease competition

It is unlikely that the Reed proposal will become law. However, its support from prominent senators gives the SEC political cover to pursue policy changes to push more private companies into the public reporting space, which is consistent with the SEC’s regulatory agenda and the sentiment of Commission leadership. Chair Gary Gensler’s regulatory agenda includes potential 12(g) reforms, which could change the way holders of record are determined under 12(g) by looking through certain investment structures (such as special purpose vehicles, or SPVs) to count beneficial owners as shareholders.

McHenry pushes Gensler on statutory authority for rulemaking proposals

Rep. Patrick McHenry, the lead Republican on the House Financial Services Committee, was joined by other House GOP committee leaders in a letter to SEC Chair Gary Gensler requesting the agency’s statutory justification for pending and expected rulemaking proposals. The request comes after the recent Supreme Court decision that limits the ability of federal agencies to take major action without explicit congressional authority, and the letter specifically questions the SEC’s authority to promulgate a number of controversial proposals, including its climate disclosure proposal, SPAC proposal, and proposal to expand the definition of “exchange,” which some believe could capture digital asset platforms. These proposals will almost certainly be subject to legal challenge if finalized, and inquiries questioning congressional intent could help bolster the case for agency overreach, especially given the Court’s recent actions to narrow the power of the administrative state. McHenry, who is expected to become Chairman should the Republicans retake the House majority (as predicted), may not have the ability to stop the SEC from moving forward on its rulemaking agenda, but he can use aggressive oversight to require the agency to justify its actions and slow down the process. A similar letter was sent to the CFPB as well. 

Crypto & digital assets

New Form 1040 crypto question highlights IRS enforcement 

The IRS released its draft 2022 Form 1040 (used by individual taxpayers to file their taxes with the IRS) with an amended version of the cryptocurrency reporting question. This is the IRS’s latest iteration to increase reporting around taxable events on digital assets.

• The 2021 Form 1040 read: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

• The new draft 2022 Form 1040 currently reads: “At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

Replacing “virtual currency” with “digital asset” changes the question to bring NFTs and other crypto innovations into the scope of tax filing requirements. However, taxpayers and stakeholders continue to urge the IRS and Treasury to provide a long-awaited definition for “digital asset,” along with authoritative tax guidance to supplement the informal guidance currently available in IRS’s online FAQs.

Treasury seeks input on action plan following framework release

The Treasury Department released its Action Plan to Address Illicit Financing Risks of Digital Assets, which outlines proposals on monitoring emerging risks, improving global anti-money laundering/combating the financing of terrorism (AML/CFT) regulation and enforcement, impacts of central bank digital currencies, and engaging with the private sector, among other steps. Treasury has requested comment by Nov. 3.

Lawmakers inch closer to deal on legislation that would task Fed with oversight of stablecoins

The House Financial Services Committee leadership moved closer to a bipartisan deal on stablecoin legislation that would subject both bank and non-bank issuers to regulation from the Federal Reserve. The proposal also includes a two-year freeze on the issuance of new “endogenously collateralized” (a broad term that may refer to any token backed or partially backed by other tokens from the same issuer) stablecoins. Existing stablecoins would be protected, within limits, from the moratorium. Next week is the last time Congress is in session before the elections; however, negotiations are expected to continue with the goal of passing a final bill before year-end.

Banking & financial products

Bank CEOs testify on economy, lending, consumer protections, and digital assets

The heads of the largest U.S. banks testified before Congress this week. Among the various macro issues discussed, the rise of the non-bank and fintech sector was a primary focus of the hearings. The CEOs of Bank of America and Wells Fargo cautioned lawmakers that growing levels of non-bank private credit are in part attributable to the regulatory burdens imposed on banks. JPMorgan Chase’s Jamie Dimon was concerned that with a possible recession on the horizon, smaller companies will struggle to access financing and achieve securitizations. 

On digital assets, Dimon, long a crypto skeptic, likened them to “decentralized Ponzi schemes,” while suggesting stablecoins be regulated in a manner similar to money market funds, a potential regime with growing support. The CEOs of Citigroup, Bank of America, and Wells Fargo said their banks have no plans to finance crypto mining; miners have struggled to raise capital in recent months as their operations face deepening scrutiny. 

Taxation & accounting

Inflation Reduction Act doubles small business R&D credit

Passed into law on Aug. 16, the Inflation Reduction Act (IRA) doubled the small business R&D credit to $500,000, which eligible businesses can claim against their payroll tax liability beginning in tax years after 2022. Payroll tax is comprised of social security and medicare taxes. To be eligible for the small business R&D credit, a startup must have generated revenue for less than five years and have less than $5 million in annual gross receipts. Current law allows those eligible startups to apply a $250,000 credit against the employer’s 6.2% portion of Social Security tax, and the IRA has expanded the rules to allow small businesses to apply an additional $250,000 credit against the employer’s 1.45% portion of Medicare tax. A reverse calculation of these values reveals that to qualify for the full $500,000 credit, a startup would need $2.5 million in R&D expenses and approximately $17 million in annual payroll tax—a threshold small businesses would struggle to max out. 

Antitrust, privacy, & technology

FTC wants more staff, DoJ to release antitrust draft guidelines in coming weeks

During the Judiciary Committee’s oversight hearing of federal enforcement of antitrust laws, discussion focused on ways to enhance enforcement to improve competition, as well as staffing and morale issues at the Federal Trade Commission (FTC). FTC Chair Lina Khan pushed for more resources to keep up with the size of the economy, noting the FTC has fewer staff than it had in the 1980s.  At a separate speech, Fellow FTC Commissioner Alvaro Bedoya called for the FTC to use Robinson-Patman Act, a 1936 price-discrimination law, to combat anticompetitive practices. The head of the DOJ’s Antitrust Division, Jonathan Kanter, said the division is revising guidelines to better reflect case law on horizontal and non-horizontal mergers and hopes to have an initial draft in the coming weeks.

DOJ proactively enforcing interlocking directorates

The DOJ has reportedly sent letters to various public companies, investors, and individuals indicating it may pursue lawsuits against them for violating Section 8 of the Clayton Antitrust Act. The section on “interlocking directorates” prohibits any person from simultaneously serving as an officer or on the board of directors of competing companies. The agency has previously signaled its intention to ramp up its enforcement of Section 8 to break up interlocking directorates. Section 8 enforcement is typically seen during merger reviews but the DOJ is reportedly sending these letters proactively based on publicly available information such as SEC filings and earnings calls. If accurate, the DOJ’s actions would represent a notable expansion of antitrust enforcement. 

FTC prioritizes gig workers in policy statement

The FTC issued a new policy statement to bolster gig worker protections, noting it will focus on ensuring information provided about the costs and benefits of gig work is accurate, addressing unlawful constraints imposed on independent contractors, and identifying anticompetitive practices that disadvantage gig workers. Gig workers are also awaiting the Department of Labor’s reworked final rule on the classification of individuals as independent contractors or employees; the Biden administration revoked a lenient Trump-era rule on the matter shortly after taking office.

Upcoming events

• OCC Minority Depository Institutions Advisory Committee Meeting – Sept. 27 at 10am (ET)

• CFTC Market Risk Advisory Committee meeting – Sept. 28 at 9:30 am (ET)

• SEC Chair Gensler at MIT AI Policy Forum – Sept. 28 at 12:15 pm (ET)

• SEC Chair Gensler at Investment Adviser Association’s 2022 Policy & Leadership Forum – Sept. 28 at 1:20 pm (ET)  

• OCC Innovation Office Hours – Sept. 28-29

• FHFA Public Listening Session on Fintech in Housing Finance – Oct. 06 at 2:30pm (ET)

• DC Fintech Week – Oct. 11-12

Notable SEC proposed rules and comment deadlines

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