Shutdown all but certain: Here’s the impact on private markets

Shutdown all but certain: Here’s the impact on private markets

Author: The Carta Policy Team
Read time:  9 minutes
Published date:  September 29, 2023
McCarthy still unwilling to compromise with Democrats—or his right flank.


  • Agencies brace for impact as Congress barrels towards a shutdown

  • Democrats begin to join GOP criticism of SEC’s rulemaking agenda

  • FinCEN Proposes to Extend Beneficial Owner Reporting Deadline to 90 Days

  • SEC Small Business Forum recommends loosening restrictions on private market fundraising 

  • Senate committee delivers a win for the cannabis industry

Agencies brace for impact as Congress barrels towards a shutdown

With less than 36 hours of funding remaining, a federal government shutdown is all but certain. A shutdown will have ramifications for operations across the federal government: Congressional offices will shutter and cease many of their operations. Federal agencies will send home large swaths of their workforces—and federal work will go unpaid during the shutdown period, though Congress will most likely make these employees whole, as has been done in previous shutdowns.

Government agencies prepare shutdown plans that detail which activities will continue during the shutdown and which will falter when funding does at midnight on Saturday. Agencies have considerable flexibility in what they deem an “essential” function. Here’s what we expect:

  • With reduced staff, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) will struggle to fulfill their market oversight responsibilities. SEC Chair Gary Gensler noted that the SEC would not be able to fully oversee the markets and approve IPOs. However, trading will not be directly impacted.

  • The Small Business Administration (SBA) is unlikely to issue new loans for the duration of the shutdown.

  • Some financial agencies operate independently of the congressional appropriations process and will not be directly impacted, including the Consumer Financial Protection Bureau (CFPB) and the Federal Reserve, among others.

  • Programs across the federal government that receive mandatory spending allocations or have other stable funding sources will also continue to function.

What happens next: House and Senate leadership are at an impasse: Speaker Kevin McCarthy plans to consider a short-term continuing resolution that would be dead on arrival in the Senate, and he refuses to bring a Senate-passed bill funding patch to the House floor. The bills differ on Ukraine aid and domestic disaster relief funding—and neither side is ready to give. The political pain from a shutdown will force both sides to the table, but it’s not clear how long that will take, and how much will need to be inflicted in order to force the handful of conservative members instigating the shutdown to compromise—or if McCarthy can eventually reach a deal with Democrats. 

Democrats join GOP criticism of SEC’s rulemaking agenda

Testifying before the House Financial Services Committee (HFSC), SEC Chair Gary Gensler answered questions on the SEC’s ambitious rulemaking agenda, as well as the potential impacts of the looming government shutdown on the capital markets. Republicans remain deeply skeptical of Chair Gensler’s approach to the private markets. Crucially, some Democrats also began to pose critical questions suggesting mounting opposition. Some highlights:

  • Disproportionate impacts on small and diverse firms: Democrats, in particular, criticized the potential impact of the recently adopted private fund adviser rules on diversity in the venture ecosystem. The Commission’s own economic analysis seems to suggest that smaller investment advisers (who are more likely to be minorities and women, or operate in lower-income states) should consider reducing their assets under management to avoid SEC registration and thereby mitigate the rule’s impact. But doing so would prevent this more diverse group of managers from graduating into higher, more influential tiers of the private fund industry. Members expressed overarching concerns that larger, institutional players can use their scale to benefit from more onerous regulation, while smaller firms will be disadvantaged and have less access to capital. 

  • Climate disclosures: With CA Governor Gavin Newsom confirming his intention to sign sweeping climate disclosure measures into law, Gensler was pushed on whether the SEC would update its economic analysis. While noncommittal to that point, Gensler did note that the CA laws would change the economic baseline (in other words, make it easier from a cost-benefit perspective for the SEC to justify the rules). When pushed on potential downstream impacts of the SEC’s proposed climate rules on small businesses, Gensler reiterated  that private companies were “not the remit of the SEC” and the agency doesn’t “regulate private companies”— further suggesting the Scope 3 provisions will be substantially modified. Though expected rulemaking actions ( Regulation D and 12(g) holders of record) do seem to contradict Gensler’s stance on the SEC’s remit around private issuers.  

  • Digital assets: Gensler was asked about the status of the spot Bitcoin ETF in the aftermath of the recent federal appeals court ruling that the SEC must reconsider crypto asset manager Grayscale’s application for the first spot Bitcoin ETF. Specifically, he was pressed on whether he will give preferential treatment to the most recent applications rather than those who have been waiting years for SEC approval. Gensler responded that they are still considering both the recent court case and application. Gensler was also asked about the SEC’s recent increased efforts in the crypto markets, to which he responded that the industry is rife with misconduct, and the SEC has a duty to use rulemaking and enforcement to protect the public.

FinCEN proposes to extend beneficial owner reporting deadline to 90 days

Treasury's Financial Crimes Enforcement Network (FinCEN) has proposed to amend the rule regarding beneficial ownership information (BOI) reporting to extend the filing deadline for initial BOI reports from 30 days to 90 days for entities created or registered on or after January 1, 2024, and before January 1, 2025.

  • FinCEN estimates that over 32.5 million companies will be required to file BOI reports in year 1 of implementation.

  • Entities created or registered on or after January 1, 2025, would have 30 days to file BOI reports.

  • Existing companies, formed before January 1, 2024, will have from January 1, 2024 through January 1, 2025 to file BOI reports.

What’s next: Carta is working alongside coalition members to clarify how companies can best comply and how intermediaries like Carta can help support broader compliance. The Corporate Transparency Act’s (CTA) BOI reporting requirements will be a substantial shift in the reporting obligations for companies, mainly startups and small businesses—reporting companies need to start preparing. 

Meanwhile, a lengthy government shutdown will impact FinCEN’s continued work on CTA guidance.

In related news, Treasury and FinCEN are currently requesting public comment on the FinCEN identifier application. Beneficial owners or companies may apply for a FinCEN identifier, rather than submitting personal identifiable information to FinCEN directly, for data security and administrative efficiency.

New Small Business Forum report includes recommendations to improve capital raising

This week, the SEC released a report from its Small Business Forum, which included recommendations to improve access to capital for emerging funds and founders. These recommendations include:

  • Expanding the number of investors who can participate in venture capital funds under Section 3(c)(1)

  • Improving the exempt offering framework to reduce concentration and increase diversity

  • Maintaining the current financial thresholds to qualify as an accredited investor and expanding onramps based on additional measures of sophistication

  • Providing more resources to help emerging founders and fund managers navigate the regulatory framework

Why it matters: The SEC has been increasing its scrutiny of the private markets, with a regulatory agenda that contradicts much of the forum’s report. While these capital formation recommendations are not binding on the Commission, they have historically garnered bipartisan support and could help soften some of the anticipated changes to Regulation D that could increase barriers, reduce access to capital, and limit private market investment opportunities. 

The Carta policy team supports the forum recommendations and will continue working to advance these policies to help emerging funds, founders, and startups continue to build and grow.

Senate committee delivers win to cannabis industry with passage of SAFER Banking Act

The Senate Banking Committee approved a landmark bill, the SAFER Banking Act, that would make it easier for banks to serve the marijuana industry, a major step in resolving state-federal conflicts over cannabis policy.

  • The House of Representatives previously passed similar legislation (SAFE Banking Act) seven times, though the measure never came before the Senate for a vote. 

  • The SAFER Banking Act still faces a tough road ahead, with Democrats bracing for a bigger fight over decriminalization on the Senate floor and key House Republicans already signaling the current legislation is DOA in the House. 

What’s next: While clearing the Senate Banking Committee is an incremental win, we are a long way from a cannabis banking bill being signed into law. And even if the bill does become law, it is unclear how many big banks will agree to service the cannabis industry: Many industry observers believe that the biggest banks are unlikely to get into cannabis until the drug is legal at a federal level.

Weaver x Carta - IRS audits and their impact on VC funds

Carta-Weaver event poster

Venture funds and SPVs are often structured as partnerships. GPs beware: the IRS has recently signaled they will be increasing partnership examinations, which can lead to fines, penalties, and other consequences if an understatement of tax is assessed. Join Weaver and Carta on October 4th at 10:00 a.m. PT / 1:00 p.m. ET for an engaging webinar where we will discuss IRS partnership examinations under the Bipartisan Budget Act (BBA) and the potential impact on venture capital funds and investors. (CPE-eligible)

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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.