House to grill Gensler on aggressive agenda, climate, crypto, and private markets
Carta CEO Henry Ward to testify on venture ecosystem as driver of innovation
Lawmakers probe the benefits and arrangements SVB provided major depositors
Bipartisan lawmakers introduce a bill to modernize 83(b) elections
SBA finalizes fintech participation in its primary lending program
Capital markets in focus as Congress returns
Congress returns next week focused on capital markets policy. On Tuesday, April 18, SEC Chair Gary Gensler will appear before the House Financial Services Committee, followed by a capital formation hearing featuring Carta’s CEO Henry Ward on Wednesday, April 19.
Gensler returns to the Hill
Chair Gensler will appear before the Financial Services Committee for the first time in over a year, and for the first time under the new Republican majority. Lawmakers are expected to press the SEC chair on his aggressive agenda, particularly around climate disclosures, market structure reforms, and crypto enforcement. With respect to the SECs’s private market agenda, bipartisan lawmakers have raised concerns around the SEC’s private fund adviser rule proposal and its potential impact on the ability of small and emerging funds to attract capital at a time when entrepreneurs are already struggling to access funding. This proposal, which could be finalized in the coming weeks, has drawn criticism of late, even from the investors it is seeking to protect. Gensler will likely also face questions around anticipated changes that would make it harder for private issuers to raise capital under Regulation D, increasing the accredited investor threshold, and pushing companies to go public through changes to how holders of record are counted under Section 12(g).
HFSC refocuses efforts on capital formation
Following Gensler’s testimony, the Committee is turning its attention back to its capital formation agenda, which was delayed in response to Silicon Valley Bank’s (SVB) collapse. Carta will be testifying to advocate that the venture ecosystem is America’s innovation engine, and it is important that we continue to invest in and support the entrepreneurs, investors, and employees that drive it forward. The testimony will focus on bolstering the private market framework to support growth and innovation, expanding investor access, and increasing opportunities for equity ownership. The following week, we expect the committee to consider and vote on a number of capital formation proposals that would expand access to capital for small businesses, increase investment opportunities, and ease the transition for companies to enter the public markets if it fits their business model.
Why it matters: Capital formation policies have become more partisan as the private market has grown. With the venture industry’s ties to SVB, this scrutiny of the private market will only increase. Many Democrats will align with the SEC’s private market agenda and give Chair Gary Gensler support to push forward on redefining the private market regulatory parameters. If implemented, these changes could have broad implications for entrepreneurs and funds trying to raise capital in the private markets, particularly in underserved markets, which makes it even more important to build the case for bolstering the venture ecosystem.
Also, it matters because Carta is testifying.
Warren, AOC probe venture’s SVB ties
Fourteen of SVB’s largest depositors received letters from Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez in which they were asked a series of questions on the details of their relationship with SVB, including the specifics of any deposit agreements between SVB and the companies, their executives, or board members. The lawmakers focused on whether companies were “required” to hold their deposits at SVB by their investors or whether they did so in exchange for additional services, perks, and funding opportunities for the company and/or its executives. The letters demonstrate continued scrutiny of SVB’s business practices and relationship with the venture industry in the weeks since the bank collapsed.
On the regulatory front, FDIC Vice Chair Travis Hill used his first speech since taking office to discredit efforts to tie SVB’s failure to the 2018 bipartisan rollback of certain Dodd-Frank Act provisions ( S. 2155). He urged policymakers to pursue policy solutions based on gaps, not on conclusions they hope to be true—i.e. the 2018 regulatory tailoring bill caused this—in an effort to undo past reforms. Vice Chair Hill was also lukewarm on deposit insurance changes. CFPB Director Rohit Chopra took the other side, calling for the reversal of S. 2155, the consideration of higher deposit insurance options, and the leveraging “dormant provisions” in existing law that regulators may not be using, though he did not point to specific “dormant provisions.”
Why it matters: Congress will hold additional hearings and regulators are drafting reports (the Fed’s initial report is set for release May 1). These will inform regulatory recalibration and possible changes to supervisory practices, but no new laws will be passed. While this debate unfolds, however, some policymakers are building a narrative that implies SVB’s client base was part of the problem: the client base was more concentrated, riskier in nature, and ultimately compelled to hold large amounts of uninsured deposits at the bank. This made SVB vulnerable. This narrative paints the venture ecosystem as part of the problem, and, if it takes hold, will have ramifications for policymaking.
Bipartisan legislation introduced to provide permanent 83(b) e-signature relief
A group of senior lawmakers reintroduced the Eliminating Paperwork for Startups Act to direct the IRS to permanently allow the electronic signature and filing of 83(b) elections, a tax filing that moves up the tax liability to the grant date of equity issuance. This bipartisan legislation would modernize the highly manual and uncertain 83(b) election process, easing the heavy burden on founders and employee-owners. The existing IRS relief, which Carta and its coalition partners secured, is set to sunset in October 2023, though the IRS has signaled it is exploring extending it.
This is one of many topics newly minted IRS Commissioner Danny Werfel may be asked to discuss during his April 19 appearance before the Senate Finance Committee. The IRS’ fiscal year 2024 budget and the 10-year Strategic Operating Plan will dominate the hearing. The agency reaffirmed in its Strategic Operating Plan its goal to make more submissions digital and recognized the burdens of using handwritten signatures in certain processes.
Why it matters: 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. This congressional action demonstrates lawmakers’ commitment to fixing this antiquated process, and it keeps pressure on Werfel and his staff to enact the change.
SBA finalizes fintech participation in 7(a) loan program
The Small Business Administration (SBA) issued final rules to allow non-depository institutions—including fintech companies—to apply for new Small Business Lending Company (SBLC) licenses, completing a rulemaking initiated in October 2022. The rules reverse a 40-year old moratorium on nonbank lenders’ participation in SBA’s 7(a) program, which is the most common loan program for small businesses. To help lenders better address gaps in capital access, the rules also streamline paperwork requirements, clarify affiliation standards, and provide more flexibility for small-dollar lending.
Why it matters: Traditional bank lending to small businesses has been on the decline. The agency noted that two-thirds of business owners who sought credit in 2022 were unable to access what they needed. SBA’s revisions to the 7(a) program will help nonbanks enhance small businesses’ access to capital.
Financial capability month
Did you just receive your first equity grant? Had employee equity for some time but never fully understood all the nuances? Check out Carta’s Equity 101. Yes, this is the program we released last year, but the lessons still apply. Happy Financial Capability Month.
News to know
Fed expects banking crisis to cause a recession this year. Federal Reserve economists projected a mild recession starting in late 2023, with recovery continuing through 2025, due to the fallout from the banking crisis. The IMF similarly wavered on the path of the U.S. economy.
Schumer lays groundwork for Congress to regulate AI.Senate Majority Leader Chuck Schumer has launched an effort to create an AI regulatory framework that balances transparency and accountability with innovation. On a related note, the National Telecommunications and Information Administration (NTIA) requested public comment on policies and governance metrics that should shape AI development.
DOJ antitrust unit urges caution in SEC stock market revamp. While the DOJ praised the SEC’s attempts to foster greater competition in retail trades, the DOJ’s comment letter urged the SEC to consider how the various market structure proposals interact, a frequent criticism from Congress when it comes to Chair Gensler’s agenda.
House Speaker Kevin McCarthy: Speech on the State of the U.S. Economy at NYSE – April 17
House Financial Services Committee hearing: Oversight of the Securities and Exchange Commission – April 18 at 10:00 a.m. ET
Senate Banking Committee hearing: Pending Nominations – April 18 at 10:00 a.m. ET
House Energy and Commerce hearing: Fiscal Year 2024 Federal Trade Commission Budget – April 18 at 10:00 a.m. ET
House Small Business Committee hearing: Paying Their Fair Share: How Tax Hikes Crush the Competitiveness of Small Businesses – April 18 at 2:00 p.m. ET
Senate Budget Committee hearing: A Rigged System: The Cost of Tax Dodging by the Wealthy and Big Corporations – April 18 at 10:00 a.m. ET
House Financial Services Subcommittee hearing: Understanding Stablecoins’ Role in Payments and the Need for Legislation – April 19 at 10:00 a.m. ET
Senate Finance Committee hearing: The President’s Fiscal Year 2024 IRS Budget and the IRS’s 2023 Filing Season – April 19 at 10:00 a.m. ET
House Small Business Committee hearing: Office of Inspector General Reports to Congress on Investigations of SBA Programs – April 19 at 10:00 a.m. ET
House Ways and Means Committee hearing: The U.S. Tax Code Subsidizing Green Corporate Handouts and the Chinese Communist Party – April 19 at 10:00 a.m. ET
House Financial Services Subcommittee hearing: A Roadmap for Growth: Reforms to Encourage Capital Formation and Investment Opportunities for All Americans – April 19 at 2:30 p.m. ET
Senate Health, Education, Labor and Pensions Committee hearing: Nomination of Julie Su to be Secretary of Labor – April 20 at 10:00 a.m. ET
SEC’s Annual Small Business Forum – April 24-27 at 1:00 p.m ET