Court decision in Ripple case serves as a win for crypto industry

Topline

• Ripple scores big win in landmark crypto case, while Congress continues to debate regulation

• Congress gears up for a busy July, with strong focus on financial services

• House Republicans ask for justification of SEC’s private fund adviser rule

• FTC and DOJ continue crackdown on PE despite scrutiny

• EU and U.S. reach long-awaited agreement on privacy

There is a regulatory shift in how regulators oversee private markets. Read our very own Holli Heiles Pandol’s piece that was published in Semafor to learn more about the SEC’s proposed rules that would radically change how private funds—including venture capital—operate and are regulated. Be sure to register for Carta’s upcoming virtual event, Increasing Regulatory Scrutiny and What It Means for VC, which will further dive into this topic as well.

Ripple scores big win landmark crypto case, while Congress continues to debate regulation

In a nuanced ruling, a U.S. District Judge ruled on Thursday that Ripple did not violate federal securities laws by selling its XRP token on public exchanges, representing a big win for the crypto industry. However, in support of the SEC, the judge did rule that the sale of XRP to institutional investors constituted a sale of unregistered securities offerings. The judge used the Howey Test in determining when XRP would be determined a security and found that it hinged on the identity of the seller being disclosed. Per the Howey Test, an investment with the “reasonable expectation of profits to be derived from the efforts of others” would constitute an investment contract, and thus would define the transaction as a security. In this case, since institutional investors knew that the seller was Ripple, they could reasonably infer that Ripple would boost the value of XRP and thus make the value of their tokens appreciate. On the other hand, people who bought XRP on digital-asset exchanges didn’t know they were buying from Ripple since the seller isn’t disclosed, and therefore weren’t relying on Ripple to drive the value of the XRP. So while the courts agreed with the SEC in regards to institutional investors, the ruling that XRP is not considered a security on public exchanges is game changing for the crypto industry.

More developments on the crypto front:

• The ruling will likely renew calls for clearer crypto legislation. House Financial Services Committee Chair Patrick McHenry has tentatively scheduled a late July markup of two key crypto bills. While the stablecoin bill appears poised to receive bipartisan support and move forward, there is not a clear path forward on the Republican draft proposal for a comprehensive framework to regulate digital assets. 

• On the Senate side, Senators Lummis and Gillibrand reintroduced their crypto framework bill, which is largely the same as the 2022 version with some additive consumer protection pieces as a result of the FTX collapse late last year. 

• Meanwhile, Senate Finance is soliciting public feedback on the taxation of digital assets. Crypto was already a focus in Congress throughout July, and this ruling will only increase the spotlight on crypto regulation. 

While the regulatory framework bills are steps in the right direction, they are unlikely to move forward in their current form.

Why it matters: The Ripple outcome is a huge win for the crypto industry. SEC Chair Gensler has focused much of his enforcement efforts on crypto exchanges for trading unregistered securities. This ruling has put those enforcement actions into question, as the SEC’s authority would only apply if the token was considered a security. In terms of regulation, the SEC has taken the perspective that SEC regulations for cryptocurrencies are clear, and this ruling shows that is not true. Expect the outcome of this case to impact the congressional agenda, and due to the uncertainty caused by the court’s decision, expect more constructive engagement by the SEC on providing regulatory clarity. 

Congress gears up for a busy July, with strong focus on financial services

After the holiday break, the financial services agenda is in full swing on the Hill. Several key policy areas appear to be taking priority, identified below:

• Corporate Transparency Act (CTA): The House Financial Services Committee will hold a hearing July 18th on the CTA, which will require small businesses to report information on their beneficial owners. Republicans are likely to focus on the burden CTA may place on small businesses and push for delay. Carta is working with partners to scope a compliance regime to help covered entities on our platform.

• SAFE Banking Act:The Senate is focusing its attention on the SAFE Banking Act, which would allow cannabis businesses to access the financial system. Senate Majority Leader Chuck Schumer signaled that the SAFE Banking Act is a priority; the legislation has bipartisan support in the Senate, though it is unclear if it has enough support to clear a 60-vote threshold at this time. 

• ESG: Next week, the SEC’s Director of Division of Corporation Finance Erik Gerding will testify in front of the committee. While the focus of the conversation will largely center on proxy voting reform and ESG climate disclosures (as it is “ ESG Month” in the House) a hearing would provide an opportunity to press Director Gerding on the Commission’s plans to reign in the private markets—most of the anticipated rulemakings around Regulation D, Section 12(g), and changes to the accredited investor standard would originate under his division.

House Republicans ask for justification of SEC’s private fund adviser rule

Republican leaders on the Financial Services and Appropriations Committees are pressing the SEC to justify its economic analysis for its private fund advisers proposal. Congress urged the agency to reconduct its economic analysis in the latest funding bill that was enacted last year, and members on both sides have specifically raised concerns about the impact of the proposal on small and emerging managers and business, particularly among diverse and underserved communities. 

Why it matters: It is unlikely that Congress will be able to stop the SEC from moving forward to approve the proposal, but questions regarding the sufficiency of the Commission’s economic analysis could help bolster expected legal challenges to the rule. 

FTC and DOJ continue crackdown on PE despite scrutiny

The SEC is not the only agency that has private equity in the crosshairs; the industry is top of mind for U.S. antitrust regulators, too. Reports this week suggest the Federal Trade Commission (FTC) and Department of Justice (DOJ) are close to deciding whether to challenge Thoma Bravo’s acquisition of ForgeRock over competition concerns; the private equity firm acquired Ping, a competitor to the identity verification-focused ForgeRock, in 2022. The case would likely hinge on what Thoma Bravo plans to do with ForgeRock post acquisition; namely, whether it would be merged with Ping, a competitor and existing portfolio company. 

Meanwhile, FTC’s ongoing bid to block Microsoft’s acquisition of Activision Blizzard suffered a notable setback; a federal judge in California sided with Microsoft on Tuesday, declining to issue a preliminary injunction to block the acquisition ahead of the trial in August. The FTC has filed to appeal the decision, but the temporary restraining order preventing the companies from inking the deal will expire on July 14. 

Why it matters: The FTC and DOJ are tasked with pursuing practices they deem anticompetitive, but under Lina Khan and Jonathan Kanter, they’ve charted a historically aggressive course. If the agencies decide to intervene in the acquisition of ForgeRock, it would be the largest private equity transaction ever challenged by either regulator. A challenge would have ramifications for the roll-up strategy oft-deployed by PE firms, which have broadly been a target of FTC Chair Khan and DOJ antitrust chief Kanter. Building on their complementary crackdown on interlocking directorates, FTC and DOJ also recently partnered on a proposal to significantly expand the Hart-Scott-Rodino (HSR) filing requirements, a pre-merger filing for transactions over a certain threshold. 

EU and U.S. reach long-awaited agreement on privacy

On Monday, the European Union approved a landmark deal to allow companies to freely transfer data between the EU and United States. The deal replaces a 2020 accord which was struck down by the E.U.’s highest court because it did not include enough privacy protections. This deal will provide relief to tech giants, such as Meta and Google, and other multinational corporations who have faced a myriad of lawsuits in recent years over the handling of European’s data. However, privacy advocates in the EU will push back,  claiming U.S. privacy laws aren’t strong enough to protect the data of Europeans.

Why it matters:While much of the focus on the lack of a federal privacy framework in the U.S. has focused on the negative impact to businesses operating in the U.S. who have to deal with a confusing and burdensome patchwork of state regulations, it is clear that the slow rolling of federal privacy laws has an impact that stretches beyond U.S. borders. And federal efforts to craft a framework have continued to stall, as the once-bipartisan American Data Privacy and Protection Act has been held up by discussion surrounding the appropriate degree of federal preemption of state data privacy regimes.

83(b) election for founders

Founders on Carta’s platform can now more easily file an 83(b) election, a tax filing that moves up the timing of tax liability to the grant date of equity issuance. This new feature, available for all individuals that have accepted founder stock within the last 30 days, will automatically generate the 83(b) form along with instructions on how to file and an email notification that includes issuance date and days left to file. 

Why it matters: Carta developed this tool to help founders potentially reduce their tax obligations by timely filing an 83(b) election. We continue to work with our coalition partners to support legislation and request IRS relief that would enable permanent e-signature and e-filing for 83(b) elections to make it easier for founders and employee-owners to maximize the value of their ownership. 

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Join Carta’s Policy Team every week on Friday’s at 9:00 a.m. PT / 12:00 p.m. ET for a 5-minute roundup of the week’s key policy updates impacting the innovation economy. Register here.

News to know

• House passes bill to extend MiFID II relief. The relief addressed conflicts between U.S. and EU law around how analysts can be compensated for investment research. The SEC allowed this relief to expire last week despite concerns that smaller companies would no longer have access to research coverage. The EU and UK are also expected to reverse course on research payments, which strengthens the case for extending relief until that time. 

• SVB sues FDIC over seized funds. SVB Financial Group is suing the FDIC in an attempt to recover the $1.9 billion seized by the agency in March, arguing that the loss of the funds is hindering its reorganization efforts.

• Barr calls for revamp of capital rules for banks with over $100 billion in assets. Federal Reserve Vice Chair for Supervision Michael Barr noted that the Fed intends to pursue new risk-based capital rules that would apply to banks with $100 billion or more in assets and to establish long-term debt requirements for the same group, among other changes.

• OECD wins breathing space to finalize global tax accord. Countries that have signed off on the accord have agreed to keep a lid on unilaterally taxing tech giants if enough progress is made by year’s end.

• FTC opens investigation into OpenAI over potential ChatGPT consumer protection violations. To investigate if ChatGPT has violated consumer protection laws, FTC requested records from OpenAI that outline how they address risks related to its AI models.

Upcoming events

• SEC Chair Gary Gensler to give remarks on artificial intelligence and security regulation at the National Press Club Headliners Luncheon – July 17 at 11:00 a.m. PT / 1:00 p.m. ET

• Commodity Futures Trading Commission’s Technology Advisory Committee meeting – July 18 at 9:00 a.m. PT / 12:00 p.m. ET

• House Financial Services Committee Subcommittee on Capital Markets hearing: Oversight of the SEC’s Division of Corporation Finance – July 18th at 7:00 a.m. PT / 10:00 a.m. ET

• House Financial Services Committee Subcommittee on Financial Institutions and Monetary Policy hearing: Climate-Risk: Are Financial Regulators Politically Independent? – July 18 at 7:00 a.m. PT / 10:00 a.m. ET

• House Financial Services Committee Subcommittee on National Security, Illicit Finance, and International Financial Institutions hearing: Potential Consequences of FinCEN’s Beneficial Ownership Rulemaking – July 18th at 11:00 a.m. PT / 2:00 p.m. ET

• House Financial Services Committee Markup on Digital Asset Bills – July 19th, time TBD

• Carta event: Increasing Regulatory Scrutiny and What It Means for VC – Aug 1 at 10:00 a.m. PT / 1:00 p.m. ET

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