- FDIC takes control of Silicon Valley Bank
- HFSC discusses proposals to bolster public company capital formation
- Biden’s budget targets carried interest and capital gains, though will not move forward
- Lawmakers restart conversations on regulatory framework for digital assets
- Powell signals more rate increases
HFSC discusses proposals to bolster public company capital formation
The House Financial Services Committee held a hearing to explore ways to encourage companies to transition into public markets, though policymakers had different ideas on how to achieve this goal. While Republicans support increasing the number of public companies, they stressed it should not come at the expense of the vibrant private markets. They assert companies are increasingly staying private because of increasing regulatory burdens and the short-term focus that comes with the public markets—all challenges which are disproportionately felt by smaller companies in public markets. Democrats, on the other hand, pointed to deregulation of the private markets, including through the bipartisan JOBS Act, which has allowed companies to stay private and subject to less regulation. Among Democrats, there is growing support for redefining section 12(g) to push large private companies to go public, in addition to subjecting private companies to certain financial and ESG disclosures, with a possible Sarbanes-Oxley-like audit component.
Why it matters: As the public-private divide continues to grow, capital formation policies are becoming more partisan. Many of the Democratic themes track the SEC’s private market agenda and give Chair Gary Gensler support to push forward on redefining the private market regulatory parameters. If implemented, these changes could have broad implications for entrepreneurs and funds trying to raise capital in the private markets, particularly in underserved markets.
Silicon Valley Bank is shuttered
On March 8, Silicon Valley Bank (SVB) announced it had sold approximately $21 billion of its “available for sale” securities and would seek to raise $2.25 billion to bolster its balance sheet. On Thursday, March 9, SVB’s depositors lost confidence in the institution and began to withdraw their money. The market followed and the stock dropped 60%. The fundraising plan subsequently faltered. Today, March 10, while exploring sale options, the California regulator shut down the bank, and the Federal Deposit Insurance Corporation took control to guarantee insured deposits.
Why it matters: SVB has been a pillar of the innovation ecosystem, so its ripple effects will be felt throughout. The situation is fluid and developing, but in addition to the direct impact on SVB’s customers and counterparties, regulators and market participants will be watching whether similar depositor pressure moves to other financial institutions. SVB’s failure will also raise concerns with policymakers around the venture ecosystem, which has been under scrutiny from the SEC and others in Congress.
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Biden’s budget includes new and familiar tax proposals affecting venture
President Biden unveiled his $6.8 trillion FY2024 budget request, kicking off a government funding debate. His proposal, which he will use to drive campaign messaging, included:
- Carried interest: Eliminating the preferential treatment afforded to carried interest by treating it as ordinary income for tax purposes
- Capital gains: Equalizing the taxation of capital gains and wage income for individuals earning over $1 million
- IRA limitations: Limiting the eligibility of high-income individuals for tax-favored retirement accounts (though it does not restrict investment in private assets)
- Stock buyback: Increasing tax on stock buybacks from 1 to 4%
- Corporate rate: Raising the corporate tax rate to 28% from 21%
Why it matters: Neither the budget nor the more aggressive tax changes will become law in this divided Congress. Funding will, however, frame the coming political debate and rhetoric around tax policy, specifically about targeting provisions that impact venture and individuals making over $400k. This means we should expect continued focus on items like carried interest and potentially areas such as qualified small business stock (QSBS) in the coming months.
Crypto debate returns to Capitol Hill
Digital assets were yet again in the spotlight on Capitol Hill. The House Financial Services Committee convened a hearing on the Biden administration’s “attack” on digital assets, which asserted that the SEC’s regulation through enforcement based on legacy regulations without clear guidance has created more risk in the market, and that Congress needs to legislate. Other crypto-focused hearings featured the CFTC and centered on the scope of and outlook for various bipartisan legislative proposals to regulate the crypto sector, including the Keep Innovation in America Act, Digital Commodities Consumer Protection Act, Responsible Financial Innovation Act, and Digital Commodity Exchange Act. Commenting on the latter three, CFTC Chair Rostin Behnam was generally supportive of the proposals and emphasized the importance of ensuring that whatever form federal oversight takes, it must create a single market system for the cryptocurrency industry.
Why it matters: There was momentum on crypto bills in late 2022 after the FTX collapse, but lawmakers are just starting to regain steam on the legislative front; the shuttering of Silvergate Capital may further stoke these fires. The interest in a framework is there, but the policy and politics are still coming together. Unresolved issues include the appropriate breakdown of regulatory responsibilities among financial regulators, safeguards against conflicts of interest, guardrails around custody requirements, and the balance between protecting investors and promoting innovation.
Powell moves markets with indications of further interest rate hikes
In December, the Federal Reserve projected interest rate increases would cap out around 5.25 or 5.5%. Fed Chair Jay Powell’s message this week before House and Senate committees: Brace for more. Powell pointed to persistent increases in the Personal Consumption Expenditures price index as a concerning indicator of stubborn inflation that remains well above the Fed’s 2% target rate. Powell warned of a “bumpy road” back to the 2% benchmark, pushing market expectations for the next shift from a quarter-point increase up to a half-point bump.
Why it matters: Over the past 14 months, the Fed ratcheted rates up, and this week it signaled more to come. This may compound the already cooling marketplace and the related turmoil seen in certain institutions such as Silicon Valley Bank.
News to know
- Democrats push for final climate rule. Fifty-one members of the U.S. House and Senate asked the SEC to quickly finalize proposed climate risk disclosure framework that encompass scope 1, 2 and 3 emissions, despite opposition to the inclusion of scope 3. (see also Politico’s Q&A with Chair Gensler).
- Second Circuit considers whether syndicated bank loans are securities. The three-judge panel is reviewing a case with ramifications for the financing of acquisitions via syndicated bank loans versus private credit.
- Court reviews SEC’s denial of Bitcoin ETF. In June 2022, the SEC denied a request to turn Grayscale Bitcoin Trust into an ETF. Grayscale sued, and the case is now before a federal appellate court, where the judges expressed skepticism with the SEC’s arguments.
- Senate confirms new IRS commissioner. The Senate voted 54-42 to confirm Daniel Werfel as head of the IRS. He’ll quickly face intense Republican scrutiny over how the agency will spend the $80 billion it received under Democrats’ Inflation Reduction Act.
- SEC open meeting on 3/15. The SEC is expected to consider a number of proposals that would enhance safeguards for customer information, amend Regulation SCI, and create new cyber risk management rules for broker-dealers.