Policy weekly: SEC’s IAC to scrutinize growth of private markets

Policy weekly: SEC’s IAC to scrutinize growth of private markets

Author: The Carta Policy Team
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Read time:  6 minutes
Published date:  24 February 2023
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Updated date:  30 October 2023
HFSC is slated to consider financial data privacy legislation next week.

The Topline

  • SEC’s Hester Peirce warns of rulemakings that could constrain private markets

  • SEC’s Investor Advisory Council is also going after private markets

  • House GOP gets started on data privacy priorities

  • Republicans lash out against SEC’s equity market structure proposals

SEC agenda and the private markets

SEC IAC expected to scrutinize private markets

Next week, the SEC’s Investor Advisory Committee (IAC) will examine the growth of the private markets, the implications for investors, and whether the private market regulatory framework should be modified as a result. Many panelists have recommended tempering the expansion of the private markets through changes to the 12(g) registration threshold or imposing a public-like disclosure regime on at least the larger private companies. In addition to the private market discussion, the IAC is expected to discuss bolstering oversight of investment advisers, which would include SEC-registered private fund advisers.

Commissioner Peirce discusses SEC agenda at Carta’s ATL Innovator Forum

Earlier this month, Carta convened a group of Atlanta-based founders and investors to showcase opportunities, discuss challenges, and suggest ways to bolster the innovation ecosystem. Speaking on her own behalf, SEC Commissioner Hester Peirce provided insights on the SEC’s current approach to private market regulation and how it could strain private companies and funds, as well as how the ecosystem could engage to help shape these policies. Here are some key takeaways:

  • SEC approach to private markets:As private markets have grown, retail investment opportunities have decreased, as most individuals are only able to participate in the public markets. Current SEC leadership is focused on increasing regulation of the private markets and potentially forcing companies into the public markets.

  • Accredited investor: Commissioner Peirce described the current accredited investor definition as “extremely offensive,” as it largely requires an individual to have a high income or net worth to access investment opportunities.

  • Private fund adviser proposal: Commissioner Peirce believes the SEC’s proposal to impose new requirements on private fund advisers will curb opportunities for venture capital to expand beyond traditional venture hubs on the coasts. The proposal could raise new barriers to entry for emerging managers, as well as place new constraints around the arrangements between private fund advisers and their clients.

Why it matters: Carta believes the IAC discussion is a preview of what’s to come from the Commission on private markets. The Commission is expected to consider proposals that could have the potential to push more private companies into the public markets and impose additional conditions and disclosure requirements on companies seeking to raise capital under Regulation D as early as this spring. As Commissioner Peirce has emphasized, the SEC is considering a number of changes to the private market regulatory framework that could constrain access to capital, particularly among founders and emerging managers outside of Silicon Valley and the East Coast. This is why engagement is so important, and Carta is working with our coalition partners to defend the perimeter where Commission rulemaking could hinder access to capital and investment opportunities. 

Privacy to take center stage at February markup

The House Financial Services Committee will hold its first markup of the new Congress on February 28. The centerpiece of the markup will be Chairman McHenry’s as-yet-unfinished financial data privacy bill, alongside many of the China and banking modernization-related bills. The version of the data privacy bill considered at the markup is not expected to include a private right of action, a change from previous iterations. Some of the legislation advanced by either of the upcoming markups may appear on the floor in the spring as leadership is eager to consider substantive bills.

Why it matters:Enacting data privacy legislation is a priority for both Chairman McHenry and Speaker McCarthy. Any final bill will likely need to include state preemption and a private right of action, but this bill puts a marker down, protects the Financial Services Committee’s jurisdiction, and kicks off the debate. The reality is we are far from resolution, and states and international bodies will drive the compliance regimes for data collection, use, and protection for the foreseeable future.

The Committee is expected to convene in late March to consider capital markets legislation aimed at promoting access to capital, modernizing the accredited investor standard, and proposals to ease the burdens for private companies to go public. 

Republicans highlight impact of SEC market structure reforms on small companies

Rep. Ann Wagner, the Chairman of the HFSC Capital Markets Subcommittee, blasted the SEC’s proposed overhaul of the U.S. equity markets, particularly around reforms to create an auction process for retail market orders. Wagner criticized this “rulemaking experiment” and its impact on smaller, less actively traded companies that already struggle to maintain secondary market liquidity, arguing the SEC’s proposed reforms would further exacerbate these challenges and make it more difficult for small companies to go (and stay) public. HFSC Oversight Chairman Bill Huizenga penned a related op-ed criticizing the SEC’s “experimental” market structure reforms and potential impacts on retail market participation.

Why it matters:The SEC is expected to consider changes to make private markets less attractive or force more private companies to enter the public reporting space. At the same time, other rulemaking efforts will make it more costly and challenging for smaller companies to navigate the public markets. Pushing back against the SEC’s proposed equity market structure reforms may be an area for bipartisan consensus.

In other news, the SEC’s new rules around Rule 10b5-1 insider trading plans take effect February 27, 2023, meaning that any plans adopted or modified after this date will need to comply with the new conditions to rely on the affirmative defense. Compliance with the rule’s new disclosure provisions begins on April 1 (and October 1 for smaller reporting companies).

Court considers platform liability shield with ramifications for targeting content

The U.S. Supreme Court heard arguments in Gonzalez v. Google and Twitter v. Taamneh, both of which concern the use of the platforms to spread support for terrorist causes. The Gonzalez v. Google case may have particular downstream ramifications on the platforms and businesses they serve. The case hinges on a question surrounding the scope of protections afforded to social media companies under Section 230 of the Communications Decency Act: Does Section 230 protect platforms when they exercise traditional editorial functions, or does it include targeted recommendations?. 

Why it matters: A ruling is months away, but it would have ramifications on the underlying algorithms and practices such platforms—many of which are leveraged for paid ads, resources, and broader commercial marketing practices—use in targeting content at users. 

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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.