SEC conscripts audit firms into crackdown on crypto

SEC conscripts audit firms into crackdown on crypto

Author: The Carta Policy Team
Read time:  7 minutes
Published date:  August 3, 2023
The Carta Policy Team gets into the weeds on expected SEC private fund rules.


  • Carta team dives deep into changing private market regulatory landscape

  • SEC cautions auditors about engagements with crypto platforms

  • IRS offers small taste of crypto guidance, Congress wants the full bite

  • IRS goes green: Yellen announces paperless initiative

  • Ruling on crypto causes Ripple effect

Carta team deep dives into changing private market regulatory landscape

This week, Carta hosted a virtual event to discuss the shifting regulatory landscape and what increasing SEC scrutiny means for VC. In an effort to bring more transparency into the private markets, the SEC has proposed—or is expected to propose—a number of rules that could have a significant impact on how private funds are regulated and how they operate. If adopted, these rules will enhance compliance and disclosure obligations, increase liability exposure, and alter relationship dynamics between funds and their investors, portfolio companies, and service providers. The SEC has also stepped up its examination and enforcement efforts around private fund advisers, including exempt reporting advisers (venture capital) who have traditionally been subject to less oversight.

Private fund adviser: One example of the SEC’s shifting approach to venture capital regulation is the private fund adviser proposal, which the SEC is expected to finalize in the near-term. The proposal would represent the most significant overhaul of private fund regulation since Dodd-Frank and would substantially impact all private fund advisers, including venture capital.

  • For SEC-registered private fund advisers, the proposal would impose a number of new obligations, including quarterly disclosures at both the fund and portfolio company level around fees, expenses, and performance and independent audit requirements. 

  • For all private fund advisers, the proposal would also prohibit certain standard industry practices, such as the use of side letters or indemnification for simple negligence. You can read more about the impacts of these changes on the venture ecosystem here

What’s next:With a 3-2 majority, Chair Gensler will most likely have the support necessary to advance his policy priorities. The Carta team is actively engaged on this issue and will continue to push back on policies that will negatively impact the venture ecosystem and ultimately stifle innovation, job creation, and economic opportunity.

>>Watch the full recording of the event here to learn more about the impact of these SEC proposals that could potentially fundamentally impact the venture capital industry.

SEC cautions auditors about engagements with crypto platforms

The SEC is sending a strong message to audit firms: be wary of taking on work in the crypto-asset space. In a statement, the SEC’s Chief Accountant Paul Munter cautioned that auditors could be held liable under the antifraud provisions of the securities laws for “material misstatements” made by their crypto clients around the scope of work performed. Munter asserted crypto platforms are engaging accountants to review certain parts of the business and falsely suggesting such review is on par with a financial statement audit, echoing concerns by the Public Company Accounting Oversight Board (PCAOB). Munter recommended that accounting firms take steps to prescribe how their clients’ describe services provided, and in the case of misleading statements, make a “noisy withdrawal” and inform the SEC of the issue. 

Why it matters: The SEC has increasingly been focused on holding gatekeepers—auditors, accountants, lawyers—accountable in their roles to prevent misconduct and have pursued more significant sanctions, including bars, suspensions, and monetary penalties. With Munter’s comments, the SEC is laying the groundwork for potential actions against audit firms engaged with crypto asset platforms, broadening the agency’s months-long crackdown on major players in this space. A pattern of such actions could deter the industry from taking on crypto clients, which could make it difficult for crypto companies to find credible accountants—and as Commissioner Hester Peirce pointed out, discourage transparency. 

IRS offers small taste of crypto guidance, Congress wants the full bite

This week, the IRS released guidance providing that cryptocurrency rewards must be included in income.

  • Senators urge Treasury and the IRS to release additional crypto tax regulations by Jan 1, 2024.

  • All signs point to the prediction that long-awaited additional IRS guidance may be soon to come in areas including: marking-to-market for traders and dealers, treatment of digital asset loans, de minimis nonrecognition rules, and reporting for Foreign Account Tax Compliance Act (FATCA) and Report of Foreign Bank and Financial Accounts (FBAR).

Why it matters: Crypto transactions add complexity to taxpayer compliance. While the IRS has issued audit and penalty warnings to remind taxpayers to report crypto transactions, individuals and businesses need additional authoritative guidance to properly comply.

The IRS goes green: Yellen announces paperless initiative

This week, Treasury Secretary Janet Yellen announced a plan for the IRS to digitally process all tax returns by filing season 2025.

  • All paper documents, including correspondence, non-tax forms, and notice responses will be digitally processed by filing season 2026.

  • This would include things like 83(b) elections (!)

Carta and coalition partners have worked tirelessly to support legislation and request IRS relief to enable permanent e-signature and e-filing for 83(b) elections. Enabling permanent e-signature and e-filing for 83(b) elections will make it easier for founders and employee-owners to maximize the value of their ownership.

What’s next: As we await IRS relief, founders and employees on Carta’s platform can easily file an 83(b) election.

Ruling on crypto causes Ripple effect

This week, a judge in New York ruled that the SEC could continue their case against Terra and its founder, Do Kwon.

  • The ruling rejected the outcome of the Ripple case, which made the distinction between public and institutional sales.

  • The Ripple outcome was heralded as a landmark victory for crypto, and severely threatened the authority of the SEC to regulate crypto. This new ruling muddies the waters.

Bottom line: The New York ruling shows that the definition of what constitutes a security is still up for debate. The two conflicting rulings could further embolden lawmakers to step in and regulate (and they took a big step in doing so last week).

New from Carta Policy: QSBS Issue Brief

The QSBS tax break can save stakeholders—including founders and employees—up to $10M in capital gains. Read here to learn more and watch here to see our panel of experts discuss how your business can take advantage of the tax benefit and how Carta is working to protect and expand QSBS.

News to know:

  • SEC charges crypto exec with wide-ranging fraud. The SEC is alleging that Richard Heart, who controls HEx, PulseChain and PulseX, misappropriated at least $12 million in profits to purchase luxury goods. His crypto offerings, which the agency emphasized were unregistered, raised more than $1 billion from investors.

  • Texas court partially blocks CFPB small business rule. The  CFPB’s rule to implement a Dodd-Frank Act requirement that lenders collect and report on small business loan applicants will not apply to members of the Texas Bankers Association (TBA) and American Bankers Association (ABA), as well as a small Texas bank that is also party to the suit. The preliminary injunction would stay the rule until the Supreme Court rules on the constitutionality of the CFPB’s funding structure in 2024. 

  • Fitch lowers US rating, but Treasury and industry dismiss change. Fitch Ratings downgraded the United States’ long-term foreign currency issuer default rating from AAA to AA+, citing uncertainty created by the debt limit standoff and last-minute funding deals. Fitch also highlighted a “steady deterioration in standards of governance over the last 20 years.” Stocks fell, but the Biden administration was broadly critical of the shift.

  • The Federal Reserve, the FDIC, and the OCC plan to roll out new rules in the aftermath of SVB. One expected rule would require banks to hold more reserves so that they are able to absorb losses if they collapse. The agencies are reportedly considering how they treat commercial deposits tied to private equity and venture capital.

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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.