Topline
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Committee approves bipartisan bills to expand accredited investor, but work remains on broader cap formation package
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Committees coordinate on comprehensive crypto framework, sidestepping jurisdictional issues
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Carta participates in SEC Small Business Forum to push policy to broaden venture ecosystem
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Dark omens cloud economic outlook—debt ceiling, economic projections, and First Republic
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Hopes dim for data privacy legislation
Committee approves bipartisan bills to expand accredited investor, but work remains on broader cap formation package
The House Financial Services Committee advanced 14 capital formation-focused legislative proposals this week—13 with bipartisan support and one along party lines. As we previewed, the docket included several standalone proposals to expand the scope of the accredited investor definition to encompass more individuals. The Committee also approved a broader capital markets package, the Expanding Access to Capital Act, which among other things, included:
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DEAL Act: would expand the definition of qualifying venture investments to include fund-of-fund investments and secondaries. The current definition is largely limited to direct primary investments in companies.
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ICAN Act: would increase the limits on the amount a qualifying venture fund can raise and increase the number of investors it can have.
Although accredited investor legislation was bipartisan, DEAL and ICAN were included in the broader package that failed to attract Democratic support.
Carta supports these legislative items and applauds the Committee for its work. As detailed in our testimony before the Committee last week, we believe expanding onramps to qualify as an accredited investor expands investor access while increasing the pool of capital available for founders and fund managers. Further, legislation to lower barriers for emerging fund managers (DEAL & ICAN) will be important to broaden the venture ecosystem to more places and people.
Why it matters: McHenry plans to bring the committee’s bipartisan bills to the House Floor under suspension of the rules, a process used to quickly pass non-controversial bills in the House. His Expanding Access to Capital Act will need to be considered under regular order, and will likely remain partisan, but there is a chance to build bipartisan support for certain provisions—namely the DEAL Act & ICAN—to provide a path forward. Even if successful in the House, the Senate Banking Committee’s Chairman has little appetite for capital formation bills. We will need to build bipartisan support among his rank-and-file Senate members to push the agenda. This will be hard, but possible. And it will take some time, but requires engagement now.
Republicans team up on crypto framework
The House Financial Services and House Agriculture Committee formalized their joint effort to regulate the digital asset sector and provide “clear rules of the road.” This joint committee effort is noteworthy, potentially overcoming an important jurisdictional hurdle that often stifles legislation. The respective subcommittees coordinated on complementary hearings held this week, and plan to host a joint subcommittee hearing in May.
The SEC’s current approach of regulation through enforcement based on legacy regulations without clear guidance has created more risk in the market, which has pushed Congress to step in and legislate. And with the recent bank crises, Congress is stepping again—McHenry and Subcommittee Chair French Hill alleged this week that the FDIC, Federal Reserve, and Office of the Comptroller of Currency are coordinating to deny banking services to the digital asset ecosystem.
Meanwhile, Coinbase sues the SEC
The SEC is headed to court over its efforts to apply existing securities laws to the crypto sector. After months of inaction, Coinbase is suing the agency over the SEC’s failure to respond to its July 2022 petition for rulemaking on the regulation of digital asset securities. Despite its radio silence on the petition, the SEC did serve Coinbase a Wells notice in March 2023, signaling that it intends to pursue enforcement actions against the platform’s exchange, staking, and wallet businesses. SEC Chair Gensler continues to argue that crypto’s problem isn’t a lack of clarity, it is a lack of compliance.
Why it matters: Committees with overlapping authority of the fluid digital asset markets are collaborating to overcome jurisdictional hurdles to craft a comprehensive regulatory framework. One key way in which the legislation will seek to address the current lack of clarity in the digital asset regulatory framework is by defining key terms (i.e. commodity versus security) in the digital asset space, thus settling the turf war between the SEC and CFTC. This could unlock a path forward in the House, but also re-ignite the Senate debate focused on the Lummis-Gillibrand comprehensive text. Comprehensive regulation is still hard to complete, and it is too early to predict the endgame, but these are positive steps forward.
Carta at the SEC Small Business Forum
The SEC’s Office of the Investor Advocate convened the 42nd Annual Small Business Forum this week. The event’s panels stretched across four days and featured Carta’s own Rita Astoor as part of a discussion of the challenges facing small funds. In her comments, Rita discussed policy changes that could benefit small funds, such as creating more on-ramps to qualify as an accredited investor and regulatory changes that could incentivize established VC funds to invest in emerging funds to help build entrepreneurial ecosystems.
Why it matters: The SEC’s Small Business Forum solicits public input and develops policy recommendations to benefit capital formation, which are delivered to the Commission and to Congress. Recommendations from the Small Business Forum often serve as the basis for bipartisan legislation—a number of which were featured in the markup earlier this week. Many of the panelists supported policies that expand access to capital, such as modernizing the definition of accredited investor and permitting structured access to private market investments.
Dark omens cloud economic outlook
Despite President Joe Biden’s insistence that Congress pass a “clean” bill to raise the debt ceiling, House Republicans passed legislation to raise the debt limit through March 2024 coupled with spending cuts and Republican priorities. The bill will not become law, but puts the pressure back on the administration. Shifting estimates of when the United States will reach the “X date” and default on its debt are heightening the economic strain of the looming cliff, and several large banks are projecting reduced or flat economic growth. Fears of a recession jumped with the Department of Commerce’s latest GDP report, which put Q1 economic growth at 1.1%, down from 2.6% in Q4 2022. Against this backdrop, First Republic Bank (FRB) is again teetering with reports that the government is now attempting to coordinate a private sector rescue of the institution. FRB’s renewed instability coincides with a push from Republicans for answers from the FDIC and Treasury on the implosion of SVB and Signature Bank and with the release of the Federal Reserve’s first report on the turmoil.
Financial Capability Month:As FinCap month (let’s see if that nickname sticks) comes to a close, we wanted to share a more comprehensive resource to learn all things equity, venture capital, and ownership— the Carta Classroom. Check out Equity 101 and Cap Table 101, data deep dives, and the Policy Desk of course. The page will be updated on a regular basis and we hope it serves as a valuable resource.
Hopes dim for data privacy legislation
The House Energy and Commerce Committee is attempting to restart the debate on a bipartisan data privacy framework, but the panel’s hearing this week showcased mounting roadblocks. Lawmakers are working on a revised version of the American Data Privacy Protection Act (ADPPA), but crucial compromises struck last session are at risk of collapsing. The last discussion draft included federal preemption for the majority of states, while exempting from that federal preemption strict privacy statutes in California and Illinois. Republicans are expected to remove the delicate balance and apply a blanket federal preemption, which is a dealbreaker for Democrats. This not only exacerbates partisanship, but does so while even Republican support for the overall framework is wavering. The campaign for bipartisan data privacy legislation has also suffered with Sen. Roger Wicker’s departure as top Republican on the Senate Commerce Committee. His former counterpart, Chair Maria Cantwell, remains in her role but is not involved in negotiations.
Why it matters: Data privacy was one of the few opportunities for bipartisan action this Congress, and while the effort is not completely stalled, it’s not advancing, either. If this broader data privacy push fails to advance, it eliminates a vehicle that portions of Chairman McHenry’s narrower financial institutions-focused privacy legislation could hitch a ride on.
News to know
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Form PF amendments set to be voted on by the SEC next week. The proposed Form PF amendments, which were originally scheduled to be finalized last month, will increase the detail and timeliness of information certain private fund advisers will be required to file with the SEC. The SEC is also expected to finalize new rules around stock buybacks.
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FSOC moves to tighten nonbank scrutiny. The Financial Stability Oversight Council (FSOC) is proposing to alter Trump-era guidance on how the Council determines whether to subject nonbank financial companies to enhanced supervision.
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Agencies issue AI warning. In a joint statement, the Department of Justice, the Consumer Financial Protection Bureau, the Federal Trade Commission, and the U.S. Equal Employment Opportunity Commission outlined their commitment to combating bias in artificial intelligence and automated systems.
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Lawmakers revive cannabis banking bill. A bipartisan, bicameral group of lawmakers reintroduced the Secure and Fair Enforcement (SAFE) Banking Act; the legislation came close to enactment last session and would provide legal cannabis businesses with access to financial services.
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UK blocks Microsoft acquisition. Britain’s Competition and Markets Authority (CMA) blocked Microsoft’s attempted acquisition of Activision Blizzard.
Upcoming events
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CFTC Commissioner Pham speaking at California Digital Assets Week – May 3 at 1:25 PT / 4:25 ET
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Senate Judiciary Committee hearing: Competition in the Digital Advertising Ecosystem – May 3 at 11:30am PT / 2:30pm ET
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Carta hosts Cap Table 101: SAFEs, Convertible Notes and Your First Employees – May 4 at 10am PT / 1pm ET
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FTC Chair Khan and AAG Kanter in a fireside chat at the Anti-Monopoly Summit 2023 – May 4 at 5:15 a.m. PT / 8:15 a.m ET. ET
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SEC Commissioner Pierce speaking at the Financial Times Crypto And Digital Assets Summit – May 10 at 1:05 a.m. PT / 4:05 a.m. ET (in London)
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SEC Chair Gary Gensler speaking at the FINRA Annual Conference – May 16 at 7:30 a.m. PT / 10:30 a.m. ET
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SEC Conference on Emerging Trends in Asset Management – May 19 at 2 p.m. PT / 5 p.m. ET