Policy Newsletter

Crypto legislation readied ahead of voting next week

July 20, 2023
The Carta Policy Team

Topline

  • Gensler returns to the Hill as anticipated crypto markup is set take place next week

  • U.S. antitrust regulators propose draft merger guidelines targeting tech and PE

  • Concern over FinCen beneficial ownership rule unites lawmakers

  • Congress targets venture investments in Chinese tech

  • SBA adopts reforms to expand SBIC program

Gensler returns to the Hill as anticipated crypto markup is set take place next week

On Wednesday, SEC Chair Gensler testified in front of the Senate Appropriations Committee, where he advocated for increased funding to strengthen the SEC’s ability to address risks in the crypto market, noting that crypto markets are “rife with non-compliance.” Despite last week’s court decision on Ripple that disputed the SEC’s position on what constitutes a security (and as a result is subject to SEC oversight), Gensler maintained that that a majority of tokens have attributes of an investment contract and should fall under the SEC purview. Further, he asserted the SEC has the robust authorities necessary to regulate crypto, implying he does not need a legislative solution.  

House gears up for crypto markup

In a change of plans, the House Financial Services Committee plans to mark up its cryptocurrency legislation next Wednesday, July 26. Markup was originally scheduled for Wednesday of this week, but was pushed back, likely due to the impact of the Ripple decision last week. The committee will consider stablecoin legislation as well as the broader crypto regulatory framework legislation introduced this week by HFSC Digital Assets Subcommittee Chair French Hill and House Agriculture Committee Chair Glenn Thompson. The Financial Services Committee will vote on the bills first, followed by the Agriculture Committee later in the week. Members on both sides of the aisle are working furiously this week to make progress ahead of the planned markup, as HFSC Chair Patrick McHenry said he’s working to address Democrats’ concerns on crypto market structure and stablecoin legislation “to the fullest extent I can.” 

On the Senate side, a bipartisan group of senators introduced legislation this week that would require decentralized crypto exchanges to comply with the same anti-money laundering and economic sanctions rules as other financial companies. To address liability concerns associated with decentralized finance actors, the bill states that if the DeFi platform isn’t controlled by a specific person or entity, liability would fall to venture capitalists that invested $25 million or more in the platform. This bill will likely receive strong pushback from both the crypto and venture communities.

Why it matters:The outcome of last week’s Ripple case has muddied the waters in terms of crypto legislation. As a result, Congress is stepping in and Republican-only bills may now have a better chance to be bipartisan. If that happens, it would unlock negotiations on a path forward, and one that may further empower a more industry-friendly CFTC. And while the Senate bill may not pass, it represents a monumental shift in liability in the DeFi space, holding investors accountable for DeFi platforms. 

U.S. antitrust regulators propose draft merger guidelines targeting tech and PE

The FTC and DOJ released 13 draft guidelines that will guide how the agencies evaluate mergers and acquisitions for compliance with federal antitrust laws. These guidelines clarify previous frameworks used by the agencies to evaluate—and potentially block—anticompetitive behavior. While the guidelines are business-model agnostic, they target roll-up strategies common in private equity and clarifies the agencies can consider a series of transactions, rather than an individual deal. The draft guidelines will be open for public comment for 60 days

Why it matters:The draft merger guidelines will apply across industries, but they will have a significant impact on private equity—a key focus for the antitrust regulators (and the SEC). The new merger rules (in addition to recently proposed pre-merger filing requirements) will enable antitrust regulators to investigate more PE transactions, which will significantly increase burdens—and likely have a chilling effect—on M&A activity. This could negatively impact the startup ecosystem, as some companies view acquisition as a logical endgame and exit strategy. The merger guidelines are not binding on courts but can be persuasive, and the threat of investigation and legal action is enough to deter some transactions. 

Concern with beneficial ownership rollout unites lawmakers

In recent months, FinCEN has pushed forward on several aspects of the multi-faceted beneficial ownership requirements mandated by the Corporate Transparency Act (CTA), which will require startups and small businesses to submit information on their beneficial owners. But a hearing this week showcased lawmakers’ widespread concerns with the agency’s progress. The general consensus among gathered House members and witnesses: small businesses do not have the guidance or head start necessary to comply with the new beneficial ownership requirements when they take effect on Jan. 1. The process for securing the data submitted by small businesses also raised concerns; it previously prompted Chairman Patrick McHenry (R-NC) to introduce legislation that would alter FinCEN’s the treatment of sensitive information. Members noted flaws in one of the proposed rules, citing loopholes that would undermine the database and threaten U.S. national security.

Why it matters:The current compliance date of January 1 is rapidly approaching. And although some lawmakers want to delay it, companies—especially startups—should be aware of this little known change that will have a big impact. Carta is working to get clarity on how companies comply, how intermediaries like Carta can help, and how we can help broader compliance, including through scoping a compliance regime with our partners for covered entities on our platform.

Congress targets venture investments in Chinese tech

While the Biden administration finalizes details on its forthcoming executive order, Congress has joined in the scrutiny of U.S. investments in Chinese tech companies. This week, the Senate is expected to to include a provision in its version of the annual defense bill (NDAA) that would require U.S. firms to notify the government when investing in certain Chinese tech sectors. As originally drafted, the provision would have allowed the government to review and block Chinese investments outright, though it was scaled back to gain bipartisan support. Like the NDAA provision, the outbound investment EO is expected to be narrow in scope. Additionally, the House’s Select Committee on China notified a number of venture capital firms it is investigating their investments in Chinese tech companies involved in semiconductors, AI, and quantum computing.

Why it matters: There is a growing sentiment in Washington that U.S. investments in China have led to technological advancements that threaten national security.There is bipartisan alignment between Congress and the White House, making it more likely new compliance obligations will be implemented. Despite a narrowed scope, new outbound investment screens will introduce compliance burdens and potential divestment risk for private funds. Further, establishing guardrails around emerging technologies like AI will be difficult for the regulators to structure and hard for fund managers and investors to navigate when evaluating potential investments.  

SBA adopts reforms to expand SBIC program

This week, the Small Business Administration (SBA) finalized rules to modernize its SBIC program, which supports small businesses and startups in underserved communities. SBICs are private investment funds that are licensed by the SBA, which allows fund managers to access low-cost SBA financing in return for certain investment restrictions and requirements.

Here are a few highlights of the new rules, which take effect Aug. 17:

  • New borrowing structure (accrual debenture) that better aligns cash flows with longer-term, equity-oriented funds, which could enable more SBIC funds to make earlier-stage investments 

  • New SBIC type (reinvestor SBIC) that uses fund-of-fund model to allow investment in funds with an underserved focus 

  • Reduced barriers to program participation for SBIA funds investing in underserved communities, capital-intensive investments, and technologies critical to national and economic security 

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