Debt ceiling deal moves to Senate to prevent default

Debt ceiling deal moves to Senate to prevent default

Author: The Carta Policy Team
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Read time:  7 minutes
Published date:  June 1, 2023
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Updated date:  September 5, 2023
House votes to expand accredited investor onramps with overwhelming support.

Topline

  • Congress on track to approve debt ceiling deal and prevent default

  • House votes to expand accredited investor onramps with overwhelming support

  • Ex-Coinbase insider trading settlement leaves industry without clarity

  • Treasury confirms scope of outbound investment review

Congress on track to approve debt ceiling deal and prevent default

After months of posturing and weeks of negotiations, Speaker Kevin McCarthy and the White House reached an agreement over Memorial Day weekend to prevent default. On Wednesday, the House passed the Fiscal Responsibility Act (FRA) by a vote of 314-117, raising the debt limit through 2024 in conjunction with new spending reforms aimed at reducing the federal deficit. In addition, the FRA:

  • Imposes new work requirements for certain public assistance programs

  • Claws back over $1 billion in IRS funding and $28 billion in unused COVID-19 relief funds

  • Streamlines permitting for energy and infrastructure projects

  • Terminates the moratorium on federal student loan repayments

A majority of both parties supported the measure, and the FRA is expected to clear the Senate in similar fashion, though votes could stretch over the weekend. In the event the final vote occurs on the June 5 X-date or the following day, the Treasury Department could bridge the gap and avoid a short-term default.  

Why it matters: With the Senate well on its way to raise the debt limit, Congress is set to prevent a historic default that would have likely devastated the economy and weakened America’s global status. But the process laid bare the fractious state of Washington, and the Republican caucus in particular. Despite McCarthy’s efforts to cast the agreement and its spending cuts as a win for conservatives, roughly one-third of Republicans voted against the measure. While there were some rumblings that the dissent from the right could endanger McCarthy’s speakership, such a rebellion is unlikely—at least at this point.  But pressure from the conservative flank will only continue to build, making it even harder to legislate in a divided government over the coming months. McCarthy will be expected to secure additional funding cuts and implement conservative policies through the appropriations process, setting the stage for another clash with the White House and Senate Democrats (and a potential government shutdown) when funding runs out at the end of September.  

House votes to expand accredited investor onramps with overwhelming support

In addition to taking the first step to prevent the nation from defaulting, the House also passed a number of bipartisan measures that would help expand access to the private markets. Notably, the House passed the Equal Opportunity for All Investors Act, which would allow individuals to qualify as accredited investors if they pass an examination designed to measure financial sophistication. Under the bill, the SEC would be responsible for developing the test and FINRA would be responsible for administering it, free of charge. The House is expected to consider additional accredited investor legislation next week that would codify the current financial thresholds and expand sophistication onramps, which we also expect to receive a strong bipartisan support. 

Why it matters: A strong bipartisan vote increases the likelihood that these provisions become law, particularly if they are included as part of a broader negotiated package. Navigating the current political landscape and private market skepticism among senior Senate Democrats will be challenging, but not impossible. Engagement will be key, and Carta will continue working with our ecosystem partners to advance these policies to expand access to capital and private market investment opportunities. Even if these proposals are not ultimately enacted, bipartisan unity to expand accredited investor onramps could push the SEC to moderate some of its expected efforts that would narrow the pool of accredited investors and make capital formation more challenging. 

Ex-Coinbase insider trading settlement leaves industry without clarity

The SEC has settled with a former Coinbase employee in the SEC’s first-ever cryptocurrency insider trading case. In the novel action, the SEC declared nine digital tokens to be securities. Despite declaring the tokens securities, the Commission has not brought charges against the platform—which is not SEC-registered—to date. With the settlement, a court will not have the opportunity to resolve the question as to which digital assets are securities—a characterization Coinbase has refuted in this case. This represents a continued pattern of the SEC bringing charges on the basis that a digital asset is a security, but ultimately dodging a legal determination around that characterization through the settlement process. 

Why it matters: The SEC appears committed to continuing the method of regulation through enforcement, with efforts this year on track to outpace 2022. Until a court or Congress weighs in, expect the SEC to continue to set regulatory policy through enforcement. Imminent progress on crypto regulation seems unlikely, despite calls from legislators and the crypto industry for the SEC to provide clearer definitions around digital assets. The House is still spinning its wheels as stablecoin legislation, which was once considered the low-hanging fruit of bipartisan legislation this term, looks as if it has lost all momentum. The Financial Services Committee was expected to consider proposals this summer, but there is no crypto-related markup on a draft June schedule. The schedule could still change, but it appears unlikely that a vote will happen in the next month.

Treasury confirms scope of China-focused outbound investment review

This week Assistant Treasury Secretary Paul Rosen confirmed that the scope of the impending executive order (EO) to review outbound investments will be “narrow and tailored,” and noted that targeted sectors will include semiconductors, AI, and quantum computing. The Biden administration has been floating an outbound investment review EO since last year, which would require investors to provide notifications on investments in China and allow the government to review and potentially restrict them. While supporters claim this new authority would fill a gap in U.S. policy that other export controls and the Committee on Foreign Investment in the U.S., lawmakers and industry leaders have pushed back, citing the negative impacts on private fund investment into companies with tethers to supply chains or sensitive technology linked to certain regions. Last week, House Financial Services Chairman Patrick McHenry sent a letter to Treasury voicing his concerns with the proposed outbound investment review and urging the administration to work with Congress on legislation rather than taking unilateral action through an executive order.

Why it matters: While most agree that outbound investment is an area that requires a policy solution, many remain leery that an EO is the most effective way to do so. However, the planned “reverse CFIUS” EO seems to be imminent, though it appears that the scope has been significantly narrowed compared to earlier drafts. Ultimately, the EO will introduce a compliance burden and potential divestment risk for private funds, which will be required to report international investments, and as a result, could reduce U.S. competitiveness. Expect more debates like this one as the line between purely economic issues and national security issues continue to blur as the U.S. maintains a strong focus on countering China.

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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.