Blog /Policy Weekly 02 03 23
Policy weekly: SEC Commissioner Crenshaw advocates for private company disclosure regime

Policy weekly: SEC Commissioner Crenshaw advocates for private company disclosure regime

Author: The Carta Policy Team
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Read time:  9 minutes
Published date:  February 3, 2023
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Updated date:  September 19, 2023
HFSC opens with proposals to expand small biz capital formation and investor access to private markets.
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The Topline

  • Private markets top of mind for Congress…and the SEC 

  • Crenshaw proposes private company disclosure regime and signals upcoming SEC action

  • States set up climate disclosure action; Uyeda and lawmakers oppose ESG investing rules

  • Fed keeps crypto firm out of its master accounts

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Private markets top of mind for Congress…and the SEC 

The House Financial Services Committee (HFSC) will kick off its policy agenda next week with a pair of hearings focused on improving small business capital access and expanding private market investment opportunities. We expect the discussions to focus on a number of reforms to expand investor access and improve capital formation opportunities outside of traditional funding hubs and networks, including:

We also expect Republicans will use these opportunities to push back on the SEC’s private market agenda, which includes a number of items aimed at bringing more transparency to the private markets. If implemented, these policy changes would have significant impacts on the venture ecosystem, making private markets less accessible for founders and investors. 

Why it matters:Capital formation is at the top of the McHenry agenda, and despite the legislating challenges that come with divided government and deep partisan divides, we believe capital formation proposals could gain bipartisan traction. Support for these proposals could also help moderate actions out of the SEC that are expected to make private market capital formation more challenging. With increasing progressive skepticism around private markets and an SEC agenda that seeks to rein them in, proactive engagement with policymakers will be critical. There is opportunity here, and the Carta Policy Team will be working with our coalition partners on this front to bolster small business capital formation and the venture ecosystem. 

The Carta Policy Team just released a policy outlook examining the capital formation agenda in Congress and its implications for venture in greater detail. Check it out here.

Other HFSC activity to watch next week:

  • Data privacy: To advance another policy priority of McHenry’s, HFSC will hold a hearing on data privacy and fintech, with discussion centered around a financial data privacy proposal released last year, among other things. 

  • China: HFSC’s first policy hearing will focus on combating the economic threat from China, with discussion to include topics like outbound investment to China and efforts to increase transparency in financial transactions. This effort is part of a broader China-focused agenda in the House, including the creation of a new committee focused on U.S.-China competition. 

The Carta liquidity report: 2022 in review

The private secondary market has evolved against a backdrop of widespread economic uncertainty. Last year, the secondary market started with a bang—it was the busiest first half ever for secondary activity on Carta. It ended the year with a murmur. Carta’s 2022 Liquidity Report details how the private market evolved, which may inform how it is setting up for 2023.  

Crenshaw proposes private company disclosure regime and signals upcoming SEC action

In remarks this week, SEC Commissioner Caroline Crenshaw advocated for imposing disclosure obligations on companies and funds raising capital under Regulation D (Reg D). As Reg D is the predominant way companies and funds raise capital in the private markets, this is a big deal—and the ecosystem should be paying attention.

As the private markets have grown, so has skepticism around them. Crenshaw argues the private markets do not provide investors the same protections as public markets because of the lack of disclosure, typical corporate controls, and limited price transparency. While Reg D was designed to provide small businesses a path to raise capital without the heightened obligations of the public markets, today even the largest private companies are able to access enough capital under Reg D to avoid going public, which Crenshaw alleges drives capital away from the startup ecosystem. 

To address these concerns, Crenshaw proposed two “incremental, but essential” reforms to Reg D to address the the growth and opacity of the private markets:

  • Reforms to Form D, including expanding the information collected on the publicly filed form to include information around investors, assets under management, and governance and operational metrics; requiring Form D to be filed 15 days before any solicitation to raise capital; conditioning the use of Reg D on the filing of Form D; and requiring the form to be certified by an executive officer.

  • Heightened disclosure obligations for large private issuers and capital raises beyond those required on Form D, at both the offering and on an ongoing basis. This two-tiered approach would be based on the size of the issuer or issuance and include independent audit requirements.

Why it matters: Crenshaw’s remarks are signal, not noise. The SEC is expected to consider changes to Reg D this year, and as one of three majority votes, her views may inform—or preview—private market reforms we can expect to see coming out of the Commission. The timing of the speech also suggests these reform proposals could be coming soon. Progressives in Congress have been pushing for more private market disclosures, either by forcing large private issuers into the public markets or through enhanced Reg D obligations, and this support helps provide cover for the SEC to act. Depending on the scope of the proposal, these changes could create significant organizational costs that would disproportionately affect small and emerging managers and founders seeking to raise private capital under Reg D. If incorporated, Crenshaw’s recommendations could also potentially push larger private companies into a public-like reporting regime.

In other SEC news…

The SEC’s Small Business Capital Formation Advisory Committee (SBCFAC) is scheduled to meet next week to discuss the SEC’s private fund adviser proposal, which the SEC is expected to finalize this spring. This proposal would impose a number of new obligations on SEC-registered private fund advisers and prohibit all private fund advisers—including those in venture capital—from engaging in certain activities, such as the use of side letters or indemnification for simple negligence (a significant departure from common industry practice). There has been bipartisan pushback on this proposal, and feedback from the SBCFAC on the proposal’s negative impacts on capital formation could bolster these efforts. Carta submitted a comment letter highlighting our concerns about the potential negative impacts the proposal could have on small and emerging fund managers.

The Committee will also discuss revenue-based financing and other alternatives to traditional bank or venture funding for smaller private companies.

States set up climate disclosure action, Uyeda and lawmakers oppose ESG investing rules

CA proposes its own climate disclosure rules—for public and private companies 

The SEC is expected to finalize its climate disclosure rule this spring, and while the rule is expected to be less aggressive than initially proposed, companies should brace for related policy at the state level. Democrats in California’s state house are backing legislation to require U.S. companies with over $1 billion in revenue doing business in the state—around 5,400 companies—to disclose greenhouse gas emissions. This effort would go further than the SEC’s proposal, as it would apply to both public and private companies and require disclosure of Scope 3 supply-chain emissions. 

Why it matters:While the SEC’s climate disclosure proposal will likely be tied up in litigation even if it is finalized, progressive state legislatures are preparing to act in that vacuum. That may result in even more aggressive policies, such as the one proposed in California, which would, if passed, include private companies with $1 billion in revenue. Similar legislation is also expected in New York. Climate disclosure bills were also considered by CA and NY legislatures last year; these failed, but if enough state lawmakers feel the final SEC rule comes up short, the resulting momentum could drive the bills across the finish line later this session.

Republicans push back on ESG investing rules

At the federal level, SEC Commissioner Mark Uyeda criticized the rise of ESG investing, citing concerns with the lack of consistent methods for issuing ESG ratings and a uniform definition of ESG. Existing regulatory frameworks are sufficient to police ESG investing, Uyeda argued, and the creation of new ESG-specific rules would be clouded by the lack of structure around the concepts of ESG. Uyeda also raised concerns with the Department of Labor’s beleaguered rule to allow retirement plan fiduciaries to consider ESG factors when making decisions. The rule is being challenged in court by over two dozen Republican state attorneys general, and Sen. Joe Manchin joined all 49 Senate Republicans in sponsoring legislation to repeal the rule.

Why it matters: From the minority, Uyeda has limited ability to influence the SEC’s regulatory plans but will continue to use his platform to highlight and bolster Republicans’ opposition to Gensler’s agenda. 

Fed keeps crypto firm out of its master accounts

The Fed dealt crypto firms a blow when it rejected Custodia Bank’s application to join the Federal Reserve System. The central bank cited the “significant safety and soundness risks” caused by its crypto activities, along with a risk management framework that is insufficient to address crypto risk concerns. The Fed clarified that banks are not prohibited from providing custody services for assets like bitcoin and ether if appropriate risk management frameworks are put in place, and it published a new policy statement to clarify that both uninsured and insured banks supervised by the Fed will be subject to the same limitations on activities—including novel crypto banking activities like issuing crypto assets on decentralized networks. In June, Custodia, which has a banking charter from Wyoming, sued the Federal Reserve Board and the Kansas City Fed for their “patently unlawful delay” in reviewing its application to access the Fed’s master accounts, a challenge that will continue despite the Fed’s latest decision.

Why it matters: Access to the Fed’s master account would have allowed crypto-focused banks like Custodia to directly access the payment rails that allow traditional banks to transfer money to each other. Without access, these institutions require an intermediary such as a traditional bank. Crypto firms faced challenges in accessing many systems available to traditional financial services companies before the decline in digital assets, which has only complicated matters in the intervening months. 

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Author: 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.