Carta Policy: Congress to begin capital markets hearings in February

Carta Policy: Congress to begin capital markets hearings in February

Author: The Carta Policy Team
Read time:  9 minutes
Published date:  27 January 2023
Policymakers posture and differ on crypto.

The Topline

  • House committee focuses on capital formation, while Congress contemplates debt ceiling 

  • Lawmakers and regulators position on path forward on crypto

  • IRS updates guidance on filings for digital assets and Forms 1099

  • FTC updates competition-related thresholds—and shows a willingness to enforce them 

  • Commerce Department unveils AI Risk Management Framework

  • DOJ & states sue Google to break up ad business

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Carta Innovator Forum: Atlanta

Interested in how the SEC is approaching private markets? Curious how founders are navigating raising capital? Join us on Feb. 7, for the Carta Innovator Forum in Atlanta, where we will convene founders, investors, and policymakers for a half-day summit to showcase opportunities, discuss challenges, and suggest ways to bolster the innovation ecosystem. SEC Commissioner Hester Peirce will join us to share her insights into the regulatory landscape for venture capital and how policy can support small business capital formation. 

We will host the event at Atlanta Tech Village. If you’re interested in attending, please register here

House committee focuses on capital formation, while Congress contemplates debt ceiling 

Congress continues to organize, with Democrats announcing Committee assignments in both the House and Senate. We expect the House Financial Services Committee (HFSC) to turn its attention to capital markets policy in the near-term, with hearings focused on expanding access to capital for small businesses and expanding access to private market investments. We anticipate a key focus to be the accredited investor thresholds, both maintaining the current financial parameters and expanding additional sophistication metrics. We are actively engaging the Committee on their capital formation agenda, which aligns with Carta’s policy priorities. More to come on this next week. 

On a macro side, a thin House Republican majority continues to foreshadow governing problems, with the biggest flashpoint being the upcoming debt ceiling debate. Speaker McCarthy and President Biden will meet to discuss the approach to raise the debt ceiling, but the endgame remains unclear: Republicans are requiring spending cuts to raise the cap, and President Biden is insisting he will not negotiate over the issue. Markets have yet to respond, but as we close in on June—the month Treasury predicts it will have exhausted its “extraordinary measures”—expect political posturing and market reactions to intensify.

Why it matters:Legislating will be difficult, especially as macro issues like the debt ceiling further polarize the Congress. But the early focus on capital formation is what we have been pushing for: It could provide the foundation for building bipartisan consensus on driving capital into private markets and increasing opportunities for asset ownership. 

Lawmakers and regulators position on path forward on crypto

Hill previews crypto plans 

Rep. French Hill, who will lead HFSC’s digital asset efforts, provided more insight on his policy goals this week. Acknowledging the FTX collapse the catalyst, Hill sees an opportunity for Congress to move forward on a bipartisan regulatory framework, both with respect to stablecoins and around crypto trading and platforms. Lawmakers made substantial progress developing a stablecoin framework last Congress, which would subject them to bank-like regulation and Federal Reserve oversight. Hill intends to build on these efforts by keeping the topic bipartisan and coordinating with federal financial regulators and other Congressional committees with jurisdiction. Given Senate Banking Chair Sherrod Brown’s recent interest in this issue, Hill is optimistic that he can find consensus on some aspects of a regulatory framework for digital assets. Stablecoin legislation still seems to be the lowest-hanging fruit, but could gain traction as efforts grow to grant more regulatory authority over the crypto spot markets. 

Peirce discusses regulatory role in crypto oversight; Warren presses for stronger crackdown

In a lengthy speech, SEC Commissioner Hester Peirce outlined six lessons for the crypto industry. Among these lessons, she stressed that the focus of the crypto industry should not be on the profit from speculative trading, but on the use of cryptography and blockchain to solve trust issues and create new technological solutions. Peirce urged the industry to find private solutions to root out harmful practices and encourage good behavior instead of waiting for regulators to sort out the weaknesses highlighted by the events over the course of the past year. She also cautioned against strict regulation that could stifle innovation and urged Congress to decide what federal regulation is necessary and which agency should regulate.

Peirce, who has largely been critical of the SEC’s regulation-first approach to crypto oversight, advocated for the agency to conduct a formal notice and comment process for the “thorniest” crypto policy questions, notably a cohesive and comprehensive framework to determine what constitutes a security. 

Meanwhile, Sen. Elizabeth Warren, a longtime crypto skeptic, is praising SEC Chair Gary Gensler’s efforts and encouraging the agency to “double down” on its crypto market crackdown. She is also calling for the Public Company Accounting Oversight Board (PCAOB)to probe audit firms that provided services to troubled crypto companies, which could have a chilling effect on crypto access to audit services.

Why it matters:Officials on Capitol Hill and at various financial regulators are continuing to carve out the path forward for crypto, foreshadowing more activity and, hopefully, more collaboration among both lawmakers and regulators over the course of 2023. Consensus on a comprehensive framework, however, is unlikely, and regulators will face pressure to continue aggressively policing the industry.

See also:White House seeking public comment on research and development agenda for digital assets.

IRS updates guidance on filings for digital assets and Forms 1099

IRS aims to collect taxes on digital asset income

The IRS reiterated that taxpayers must report all digital asset-related income when they file their 2022 federal income tax return on the Form 1040. In the new version of this individual return, the term “digital assets” has replaced “virtual currencies,” a term used in previous years. This is the IRS’s latest iteration to increase reporting around taxable events by ensuring the language brings in NFTs, stablecoins, and other crypto innovations into the scope of tax filing requirements. 

What does this mean? Besides checking the “Yes” box on page one of the return, investors who held a digital asset as a capital asset and sold, exchanged, or transferred it during 2022 must use Form 8949 to figure their capital gain or loss on the transaction and then report it on Schedule D (Form 1040). Taxpayers who merely owned digital assets during 2022 but did not engage in any transactions with those assets can check the “No” box. 

IRS eases business filing with online portal

Businesses are now able to file their Forms 1099 information returns via an online portal launched by the IRS. The Information Returns Intake System (IRIS) is free and will allow businesses to benefit from enhanced security, faster confirmation of IRS receipt, more efficient future filings, and automatic extension submissions. This launch is part of the IRS’s broader efforts to increase adoption of new technology across the agency to reduce paper filings, which are often the focus of criticism around the IRS’s processing delays and lack of online access and e-filing for individuals and small business taxpayers. The new electronic option will be particularly useful for businesses that lack the technology or resources to file electronically through a paid service and currently submit paper returns through the mail.

In line with these efforts, Carta and industry leaders are pursuing a request for the IRS to allow e-filing of sec. 83(b) elections, which currently can only be submitted via paper mail. Meanwhile, Carta has also simplified this process: If you need to file an 83(b) election we now have automated submission for our users.

The FTC updated financial thresholds for competition triggers related to Hart-Scott-Rodino merger notifications, merger filing fees, and interlocking directorates. This is an annual process in which the FTC revises the thresholds to better reflect market realities.

These changes are especially pertinent around interlocking directorates, which occur when an individual concurrently serves as an officer or director for two competing corporations or when one firm has appointed two individuals to sit on competing boards while acting as the firm’s agents. This is not always illegal, such as when the entities fall below the financial thresholds (when a corporation’s capital, surplus, profits, or revenues do not hit certain financial triggers), but interlocking directorates can create opportunities for anticompetitive conduct, such as sharing of sensitive information or colluding on business practices, resulting in harm to consumers that constitutes a violation of Section 8 of the Clayton Antitrust Act. 

Why it matters: Companies, the funds that invest in them, and those who nominate directors should be aware that the FTC and DOJ are more aggressively pursuing corrective actions, most specifically on interlocking directorates. In October 2022, they described the action as the “first in a broader review of potentially unlawful interlocking directorates.” This guardrail has been in place for years, but DOJ is preparing to crack down

Commerce unveils AI Risk Management Framework

The Department of Commerce’s National Institute of Standards and Technology (NIST) has finalized the Artificial Intelligence Risk Management Framework (AI RMF), which provides voluntary guidance for entities that design or utilize AI systems. The AI RMF is divided into two parts. Part 1 outlines pathways for organizations to consider and examine the risks of AI, and it identifies a series of traits that indicate the trustworthiness of a system, such as whether it is valid and reliable, secure and resilient, transparent, and fair. Part 2 is centered on the “Core” of the framework and discusses the four categories of actions, or “functions,” that comprise good AI governance: Govern, Map, Measure, and Manage. Overall, the framework is focused on creating a foundation to help companies adopt trustworthy AI practices as they integrate the technology into their operations. NIST was statutorily required to develop the framework, and has also released several companion resources to guide entities in using the framework, including the AI RMF Playbook.

This comes on the heels of the administration’s earlier  nonbinding Blueprint for an AI Bill of Rights, which led some congressional members to assert these two separate workstreams could force stakeholders to deal with competing guidance. The rules of the road for AI have been slow to emerge; as evidenced by the crypto debate, lawmakers and regulators often struggle to wrangle new and developing technology given its rapid pace of development.

Why it matters: While AI-related guidance has been largely voluntary to date, as the technology becomes more pervasive, policymakers may contemplate mandatory requirements regarding the development, deployment, and use of AI in various manners. Given the growing adoption of AI in a range of sectors, it will be important to avoid creating a patchwork of guidance that can both create gaps and become overly burdensome. And before you ask, no, ChatGPT did not write this.

DOJ & states sue Google to break up ad business

The U.S. Department of Justice (DOJ) was joined by eight state attorneys general in a lawsuit accusing Alphabet Inc., Google’s parent company, of exercising monopolistic power in the digital advertising industry. The suit outlines a track record of “anticompetitive acquisitions” that extend Google’s dominance at the expense of consumers and smaller players. DOJ, eying acquisitions as far back as 2008, is asking a federal court to force Google to break up its advertising holdings to create space for innovation and competition in the market. 

DOJ and Google are already locked in a legal battle over a 2020 case that targets the platform’s behavior in online search markets; the case is expected to go to trial this year after lengthy pre-trial proceedings and negotiations. In 2022, the agency rebuffed an offer from Google that would have seen that tech giant spin off some of its ad holdings into a separate company under the Alphabet umbrella. The case DOJ filed this week seeks more expansive repercussions than those contemplated under the 2020 case, going so far as to ask the court to compel Google to divest itself of specific acquisitions.

Why it matters: Lawmakers and regulators at the state and federal level have ramped up their oversight of Google and other tech giants in recent years, but the legal battles waged by DOJ could set precedents with ramifications for leading players beyond the tech industry.

News to know

Upcoming events

  • CFTC Commissioner Kristin Johnson to participate in ABA Business Law Section Committee Winter Meeting: DeFi & Crypto Developments – Feb. 3 at 12:15 p.m. ET

  • SEC Small Business Capital Formation Advisory Committee Meeting – Feb. 7 at 10:00 a.m. ET

  • President Biden’s State of the Union Address – Feb. 7 at 9:00 p.m. ET

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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.