Carta CEO advocates for VC ecosystem & policies to bolster it

Carta CEO advocates for VC ecosystem & policies to bolster it

Author: The Carta Policy Team
Read time:  8 minutes
Published date:  April 21, 2023
Gensler grilled on crypto, private markets, & ESG

The Topline

  • Carta CEO testifies to Congress that venture ecosystem drives innovation and should be broadened 

  • Gensler grilled on crypto, capital markets, & ESG

  • Debt limit approaches, while deal seems further away 

  • Tax proposals on QSBS and carried interest introduced with implications for venture 

Carta CEO Henry Ward testifies before House Financial Services Committee

Henry Ward, the founder and CEO of Carta, testified before the House Financial Services Committee this week on the importance of the venture ecosystem to American innovation and the need to bolster it and broaden its reach. In his testimony, Ward emphasized the following themes:

  • The venture ecosystem is the engine of innovation

  • The policy framework can be improved to expand investor access and facilitate capital formation across the country

  • Public markets benefit from robust private markets, which create the pipeline of startups that grow into mature public companies

  • Ownership benefits employees and drives innovation

You can watch the full hearing and read Ward’s complete written testimony here

Why it matters: Next week, we expect the committee to consider and vote on a number of capital formation proposals that would expand access to capital for small businesses, increase investment opportunities, and ease the transition for companies to enter the public markets if it fits their business model. The committee will consider many bills, but a number of proposals will help improve access to capital for emerging managers and companies, and increase retail investment opportunities. 

  • Accredited investor: There are a number of legislative proposals that would expand onramps to qualify as accredited investor, including through a testing mechanism and other qualifications.

  • Retail access to private funds: Legislation would raise SEC-established caps to allow closed-end funds (which are accessible to all investors) to invest in more private market assets.

  • DEAL Act: Expands the ability for VC funds to make fund-of-fund and secondary investments, which could help drive more capital to emerging managers..

  • Improving Capital Allocation for Newcomers (ICAN) Act: Increases the utility of qualifying venture capital funds by increasing investor limits and how much capital can be raised.                                                                                                                                                                                                                                                                                                      

< SEC’s Small Business Forum. Rita’s panel “ Investing in Small Business: Success and Challenges Facing Smaller Funds” will cover challenges facing emerging funds, particularly outside traditional VC hubs, and policies to lower barriers and better support these managers. Tune in on Wednesday, April 26, at 1 pm (ET), tell your friends, and register here.>>

HFSC Republicans grill Gensler on crypto policy and aggressive agenda 

SEC Chair Gary Gensler faced a barrage of criticism from HFSC Republicans (and some Democrats) on the agency’s ambitious rulemaking agenda and comment process. While the contentious hearing covered an expansive list of topics, here are a few highlights:

Gensler on crypto.Much of the focus was the SEC’s controversial approach to crypto, including the use of the enforcement process to regulate instead of providing clarity through rulemaking. Gensler stood his ground that the laws were clear, the SEC has the authority to regulate, and firms are choosing to stay noncompliant by not registering with the Commission. Republicans slammed Gensler’s “come in and register” policy, describing it as a “willful misrepresentation” of a nonexistent process. The only way Congress is likely to alter the SEC’s approach to crypto is through legislation, though a comprehensive regulatory framework is unlikely to advance. In the meantime, we are likely to see the SEC and other agencies continuing their authorities to regulate (even if inconsistent) unless a court steps in.

Gensler on private markets: Gensler faced bipartisan concerns around the SEC’s proposed private fund adviser rule and its impacts on emerging managers. As we have highlighted, this proposal could substantially change the way venture capital operates, and there has been growing concern around the impacts of the proposal, which could be finalized any day now. Democrats offered Gensler support for moving forward with other items on the agenda that could increase burdens to raise capital in the private markets and potentially push private companies to go public, including through changes to how “holders of record” are counted under Section 12(g). Gensler’s opposition to expanding access to the private markets could make it harder to achieve bipartisan support on capital formation proposals, though we still think progress is possible.

Gensler on ESG and public markets. Gensler fielded familiar criticisms of the SEC’s proposed climate disclosure framework, particularly around Scope 3 disclosures, where there was bipartisan concern with downstream impacts on smaller private companies that work with public companies. There has been signal the SEC could scale back its climate proposal, though some progressives are pushing Gensler to stand firm and potentially go further. Members also raised concerns around the SEC’s sweeping market structure reform proposals, which could have unintended consequences that raise costs and make markets worse for retail investors.

Republicans unveil debt limit proposal, but no deal in sight

House Speaker Kevin McCarthy released Republicans’ proposal to avoid a default on U.S. debt. The broad package would raise the debt limit by $1.5 trillion, pushing the cliff to March 2024. The proposal would also cut federal spending to FY 2022 levels, cap spending increases to 1%, repeal IRS funding increases, and eliminate Inflation Reduction Act tax credits that benefit the development and manufacturing of clean energy technologies. The bill was quickly panned by Democrats and the White House, and it would be dead on arrival in the Senate—if it can even clear the House. 

Why it matters: The debt limit may be breached in early June, and the two parties remain far apart on a path forward. Expect continued posturing that leads to a game of chicken, which will only abate when the market and economy deteriorate as they price in a default. It’s not clear when that will happen—maybe even June—but expect the economy to look worse before the politics of compromise look better. 

Tax proposals introduced with implications for venture ecosystem

Lawmakers introduced a number of tax proposals that could have an impact on the venture ecosystem:

  • QSBS expansion: Rep. David Kustoff and Sen. John Cornyn introduced the Small Business Investment Act, which would expand the scope of businesses that are eligible for the QSBS gain exclusion. Broadening the exclusion would encourage investors to support more startups with tax-free investment incentives.  The proposed QSBS legislation would not only enable greater investor access to early-stage companies, but also would make it easier and less costly for innovative startup companies to raise capital. 

  • Carried interest: Rep. Bill Pascrell introduced the Ending Wall Street Tax Giveaway Act, which proposes taxing carried interest—the share of profits that private fund GPs receive as compensation—at ordinary income tax rates instead of the lower capital gains tax rate. Closing the so-called carried tax “loophole” has been on the Democrat agenda for years and almost passed as part of the Inflation Reduction Act last year, but it was stripped at the last minute. Further, the bill would prevent QSBS tax treatment for carried interest capital gains. 

Why it matters: Tax policy will continue to be a focus point for lawmakers in the coming months, particularly as discussion continues around the debt ceiling. While unlikely to pass, we expect the carried interest bill to be a talking point for Democrats, who use the carried interest “loophole” to highlight wealth inequality. The political environment also makes it harder to expand QSBS, but Carta will continue to advocate for QSBS treatment and protect its utility.

News to know:

  • SEC reopens comment period for “exchange” definition. The SEC reopened the comment period on a January 2022 proposal that would modify the definition of “exchange” to capture additional entities the agency felt should qualify. The SEC also issued a new supplemental release that specifically addresses the inclusion of DeFi platforms and crypto asset securities in the definition of exchange. 

  • Supreme Court rules against FTC, SEC in jurisdictional fight. As a result, it will be easier for parties to challenge these agencies’ authority by bringing suit in federal court instead of first being subject to administrative proceedings. The unanimous decision underscores the growing skepticism of agency in-house adjudication proceedings.

  • New SEC guidance on Reg BI. SEC staff guidance suggests broker-dealers and investment advisers should start considering alternative investments when determining whether an investment is in the best interest of their client. 

  • Republicans revive stablecoin draft. House Republicans are trying to jumpstart progress on a narrower stablecoin legislative framework, once a spot of bipartisanship in the committee, but lawmakers revived a stalled discussion draft from the 117th Congress and Democrats favor now starting from scratch.

  • CFPB discloses broad data breach. The House Financial Services and Senate Banking Committees are probing a data breach at the CFPB. The agency reported that an employee breached over 250,000 consumers’ data.

  • FDIC publishes Deposit Insurance Fund update. The FDIC released its semiannual Deposit Insurance Fund (DIF) update; according to staff projections, the DIF reserve ratio is expected to reach the minimum ahead of the statutory deadline of September 30, 2028, despite the impacts of recent bank failures.

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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.
DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.  All product names, logos, and brands are property of their respective owners in the U.S. and other countries, and are used for identification purposes only. Use of these names, logos, and brands does not imply affiliation or endorsement. ©2023 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.