Issue Briefs

Private markets: Issue brief

June 6, 2023
The Carta Policy Team

Safeguarding the engine for innovation

Issue

Public policy surrounding the private markets is at an inflection point: In a shift from the last two decades, policymakers are increasingly scrutinizing and regulating private markets. Greater regulation may increase barriers to capital for companies and funds, constrain investor access, and push more private companies public before they are ready.

The scale and impact of the SEC’s proposed—and planned—reforms should alarm entrepreneurs and the investors that back them. Such policies will undermine not only the venture capital ecosystem, but all the facets of the broader economy it touches.

The venture ecosystem: driving innovation, growth, and opportunity

Startups are the engine of our economy—and the private markets are where they build and grow. 

Startups are often unable to access bank loans or traditional financing. Instead they turn to the venture ecosystem. In exchange for equity ownership—and a piece of uncapped potential—angel networks and VCs provide capital to fledgling businesses. Using the exempt offering framework, private companies can raise the capital that enables entrepreneurs to build.

Private markets provide long-term capital with greater risk tolerance that enable entrepreneurs to turn a concept into a company. 

Venture capital model drives innovation in several ways:

  • Patient capital supports ambitious undertakings: Venture capital is long-term capital with risk tolerance. The typical duration for venture capital investment is around ten years because it takes time to build, iterate, and scale. 

  • Venture capital underwrites volatility: Pursuing the products and projects that drive innovation is hard. Some projects—and companies—will fail. Many will take time to deliver results. Private capital assumes a longer timeline and understands that progress is not guaranteed or linear. Despite resulting uncertainty, venture capital invests in the people, the products, and the projects. Venture capital invests in progress. 

  • Ownership drives alignment—and results: Core to the venture capital model is equity ownership—for both the investors that provide capital and the founders and employees who build the company. These longer-term initiatives often do not provide immediate signal, much less financial results; they require durable commitment and alignment. Equity ownership aligns interests and creates accountability among all parties: Investors have a stake in monitoring progress and supporting the effort, and founders’ and employees’ compensation is tethered to performance. 

These companies incubating in the private markets will drive the next chapter of innovation. Their work often takes time to develop and commercialize. And private market investment, which is patient capital aligned through the equity ownership model, enables companies to pursue such projects.

Public policy: Facilitating entrepreneurship & innovation

Policymakers understand the importance of these companies and initiatives, and designed a private market policy framework to facilitate entrepreneurship and support these startups and growing companies. Historically, this effort has been bipartisan. The bipartisan Jumpstart Our Business Startups (JOBS) Act of 2012 is a recent reflection of this bipartisan consensus. It encourages private capital formation that enables entrepreneurs to build businesses, create jobs, and spur economic activity. 

The core pillar of this framework and the JOBS Act is facilitating access to capital across a company’s lifecycle. At its earlier stages, a company likely lacks a track record or the ability to reliably predict future results. It has a higher risk of failure, but possibly a higher rate of return. As the company grows, it likely becomes more sustainable and the downside risk diminishes, and eventually, the company—when it has the size, scale, and predictable growth patterns—may elect to go public. 

The question is not what phase of the journey is best, but rather how policy supports a company at each stage. 

The inflection point

The bipartisan consensus has been eroding as of late, and the SEC’s recent proposals and forthcoming agenda signal its plans to scrutinize and more aggressively regulate private markets.  

Policy is infrastructure. It can facilitate innovation or bind its growth. Regulation creates important rules of the road to help build a strong, sustainable ecosystem. Companies and funds that raise and deploy capital are subject to a host of regulations at federal and state levels based on their business and operations. Our focus is not to erode that regulatory framework, but modernize it in ways that facilitate growth, innovation, and opportunity. Engaging to shape that framework is important. As the SEC’s actions have proven, we are at an inflection point.

Bottom line

  • There is a policy shift in privatemarkets: Policymakers are more aggressively scrutinizing and regulating private markets. We need to engage to ensure the framework continues to drive innovation.

  • Private markets drive innovation: Bipartisan policymaking has established a private market framework that drives patient capital to entrepreneurs, helping them launch companies and invest in the long-term initiatives that drive innovation.

  • Private companies are not public companies: The exempt offering framework exists to help startups and growth- stage companies raise capital without the same burdens as public companies. This is by design, and enables small businesses to grow and compete while also keeping the U.S. at the edge of technological innovation.

  • The market ecosystem is a spectrum: Markets—and the regulatory system that governs them—should support companies across their lifecycle, helping them scale from idea to IPO.

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