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SEC Small Business Advocate for Capital Formation releases annual report

SEC Small Business Advocate for Capital Formation releases annual report

Author: The Carta Policy Team
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Read time:  9 minutes
Published date:  16 December 2022
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Updated date:  5 September 2023
FTX faces the music (not the holiday kind)
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The Topline

  • Crypto fallout: FTX failures on display in testimony from new CEO; SBF faces an onslaught of legal action 

  • SEC Small Business Advocate releases annual report 

  • SEC proposes equity market overhaul; finalizes insider trading rules

  • FinCEN outlines beneficial ownership information system to implement reporting requirements

  • End of year tax outlook: SECURE Act poised for success as extenders sink

  • Chopra faces off with Republicans over CFPB’s fintech oversight plans

  • Carta Policy x DC Small Business Development Center virtual events

As we come up on the end of the year, we want to thank you for your readership and support. The Carta Policy Team appreciates your interest, engagement, and input. We will be taking a break through the end of the year, but returning in January. We hope you all get some much deserved rest, have a great holiday season, and we will see you again in the new year.  

Sam Bankman-Fried (SBF) was arrested in the Bahamas the night before he was scheduled to testify before the House Financial Services Committee. The disgraced FTX founder faces numerous criminal and civil charges from U.S. regulators. An eight-count indictment unsealed by the U.S. Department of Justice alleges crimes including wire fraud, conspiracy, and campaign finance violations. Separate civil charges filed by the CFTC accuse SBF, FTX, and Alameda Research of fraud and material misrepresentations, with related losses in customer deposits topping $8 billion. The SEC’s civil charges of securities fraud outline a three-year spree of mismanaged customer funds that paid for SBF’s political contributions and real estate holdings. While the SEC only levied charges against the FTX founder, SEC Chair Gary Gensler signaled more charges could be coming, as FTX’s unchecked relationship with Alameda is also condemned in the complaint. Gensler also sent a stern warning to other crypto platforms that fail to register and come into compliance with the securities laws. 

The new CEO of FTX, John Ray, testified before the House, asserting that FTX lacked safeguards and basic governance structures, and that the alleged actions boil down to “old-fashioned embezzlement.” The Senate hearing featuring only non-FTX witnesses focused less on the collapse and more on the state of crypto, but lawmakers in both chambers sought to understand what happened, how could interested parties—regulators, investors, customers, and counterparties—have uncovered and prevented this, and where should regulation go from here. 

In broad strokes, supporters of the industry were quick to point out that governance failures and fraudulent behavior does not reflect the entire ecosystem or its promise, and pointed to the need for regulatory clarity. Skeptics, however, viewed the collapse and the inability to prevent it as emblematic of vulnerabilities in the sector and regulatory regime and expressed hesitancy to take action that may legitimize the industry.

No consensus emerged, but these events have shifted the center of gravity and made policymakers much more skeptical and interested in putting guardrails in place. Even though unrelated, bipartisan legislation to address stablecoins and the crypto spot markets had momentum, these efforts have stalled as lawmakers want to step back and reassess their approach; This week, Sens. Elizabeth Warren and Roger Marshall introduced bipartisan legislation to extend Bank Secrecy Act responsibilities, including customer verification, to entities involved in digital asset transactions. 

Why it matters: Significant investor protection concessions will have to be made to get crypto legislation across the finish line. Potential areas where we could see these proposals strengthened include mitigating conflicts of interest, strengthening custody, and additional disclosures and controls. 

See also:

SEC Small Business Advocate releases annual report 

This week, the SEC’s Office of the Small Business Advocate for Capital Formation released its 2022 Annual Report, which provides a detailed overview of the current state of small business capital formation, with a focus on minority- and women-owned founders and investors and rural communities. 

The report provides policy recommendations to help address capital formation challenges based on feedback from small businesses and their investors. The Commission is not required to act on the recommendations, but they can serve as the basis for bipartisan legislation in Congress, which could help drive action. Key recommendations include:

  • Increasing the 100-investor limit for private funds and increasing the investor (250) and size ($10 million) thresholds for qualifying venture capital funds under Section 3(c)(1)

  • Permitting “fund-of-fund” investments to qualify as qualifying investments

  • Expanding the accredited investor definition to include additional pathways to qualify based on financial sophistication as an alternative to a wealth-based test

  • Expanding the ability of SPVs to use crowdfunding

  • Providing regulatory clarity for finders who facilitate introductions between investors and founders

  • Supplying educational resources to help navigate the capital raising process

  • Scaling disclosure obligations for small public companies

Additionally, the report urges the SEC to consider the impacts that some of its anticipated actions would have on small businesses and their investors, likely referring to the Commission’s plans to raise the accredited investor income and net-worth thresholds and make changes to Regulation D that would make the capital-raising process more burdensome. 

Why it matters: The Report’s policy recommendations inform policy work and align with Carta’s policy goals. We will continue to work with our coalition partners to build support and advance these goals, as well as defend the perimeter where Commission rulemaking could hinder access to capital and investment opportunities. 

SEC proposes equity market overhaul; finalizes insider trading rules

The SEC proposed four rules that would have significant effects on equity markets and industry participants, representing the most significant update to market structure in nearly 20 years. Market structure reform has been a key priority for Chair Gensler. The most controversial proposal, the Order Competition Rule, would create an auction process for retail market orders, representing a significant departure from current industry practice. The Commission was also deeply divided on a proposal that would create a new SEC best execution standard for broker-dealers, in addition to existing obligations imposed by FINRA and the MSRB. While the other rules proposed only apply to equities, Regulation Best Execution would also apply to crypto asset securities, the first time the SEC has addressed these assets in a formal rulemaking. The Commission unanimously proposed rules to allow tick sizes to be quoted in tighter increments, and require large exchanges to make monthly execution quality disclosures. 

The proposals drew swift praise and rebuttals from lawmakers and set industry on edge even before their release. Republican Commissioners pushed back, asserting there is no underlying problem to solve, the proposals fail to account for the interconnectedness of other pending proposals, and that any resulting market disruption will harm retail investors. These objections, however, will not impede Chair Gensler’s push, but could help bolster future legal challenges. 

The SEC finalized changes around Rule 10b5-1 insider trading plans that would add conditions to the affirmative defense and impose additional disclosures. The amendments would add a cooling period of up to 120 days for directors and officers to trade under a new or modified 10b5-1 plan, with other persons subject to a 30-day period. The amendments also restrict the use of multiple overlapping plans and limit the use of the affirmative defense for a single-trade plan to one instance per year. While 10b5-1 plans are most relevant to public companies, these rules could have implications for the venture capital industry, who use 10b5-1 plans to exit post-IPO positions. The rules will take effect 60 days after their publication in the Federal Register, but the compliance deadlines begin on April 1, 2023. Smaller companies will have an additional six months to comply with the rule’s enhanced disclosure requirements.

FinCEN outlines beneficial ownership information system to implement reporting requirements

As part of its implementation of the Corporate Transparency Act (CTA), the Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking centered on how it will implement the beneficial ownership database, who may request beneficial ownership information, how recipients may use the information, how they must secure it, and the penalties for failing to follow applicable requirements. 

The underlying CTA would require the majority of LLCs, partnerships, business trusts, and corporations to disclose to FinCEN the name, birthdate, address, and acceptable identification document for individuals who either exercise substantial control over the reporting company or own or control at least 25% of it. The CTA and its reporting requirements will go into effect Jan. 1, 2024. 

Why it matters:CTA compliance will pull in a large swath of entities in the innovation ecosystem, requiring them to compile and report this information. Carta is exploring how to support the implementation process and ease the reporting demands on growth-stage companies and their investors. 

End of year tax outlook: SECURE Act poised for success as extenders sink

Tax extenders face obstacles

An end-of-year omnibus spending deal is on track, but key tax provisions that face obstacles to inclusion in the package are likely to prove insurmountable. Lawmakers attempted to resolve disagreement over a Democrat-backed extension of the Child Tax Credit (CTC) in recent days in exchange for extending a provision that allows businesses to continue to immediately deduct R&D expenses, but no agreement is in sight. Although negotiations continue, these larger tax issues are likely to be omitted from a final package.

SECURE Act is more, er, secure… 

The outlook for the SECURE 2.0 retirement package is more optimistic. Negotiators are confident the package will be attached to the forthcoming government funding bill, although they are continuing to negotiate unresolved discrepancies between the House and Senate retirement bills, and some key items are falling off in the final push. 

Why it matters: The government will fund itself, but one of the provisions, which Carta supports—to make the IRA prohibited transaction penalty rules clearer and less punitive on investing through retirement accounts—is currently at risk of not being included in the final retirement package.

Chopra faces off with Republicans over CFPB’s fintech oversight plans

CFPB Director Rohit Chopra testified for a combined seven hours before House and Senate committees, foreshadowing even more regular and intense appearances before a Republican-controlled House next Congress. Ahead of the hearing, McHenry led other committee Republicans in a letter calling on Chopra to rescind a series of fintech-focused actions, specifically Director Chopra’s move to supervise nonbanks it believes pose a risk to consumers. House Republicans argue this action exceeds the CFPB’s authority and undermines innovation. 

 Though Chopra’s invocation of long-dormant statutory powers to regulate nonbank financial entities drew swift criticism from congressional Republicans, he has not strayed from his plans. During the hearings, he described the CFPB as “tech-forward” and said the agency is considering rulemakings that would bolster competition among fintechs and banks. Despite intensifying congressional oversight next Congress, Chopra will stay the course and continue expanding the agency’s oversight of fintechs. 

Why it matters:Expect more fintech-focused rulemakings, guidance, and other materials from the agency in 2023. One more thing to watch: If the CFPB loses the pending legal challenge to its funding structure, it will likely be brought under the same funding umbrella as other federal agencies, strengthening lawmakers’ ability to influence its activities.

Carta Policy x DC Small Business Development Center virtual events

Raising capital & navigating equity ownership– Jan. 11, 2023 at 10 a.m. ET

Do you know the various ways that your small businesses can raise capital from investors? Understanding these choices and making well-informed decisions can have a significant impact on your access to resources, attraction for talent, and success of your business. Join us live as we cover the opportunities, challenges, and constraints when raising capital. 

Tax planning & policy updates for small businesses– Jan. 24, 2023 at 12 p.m. ET

While you might think of paying taxes as just another cost of doing business, seasoned entrepreneurs understand that annual tax planning is a strategy that can position a business for growth. This session will highlight some incentives that can be really helpful to small businesses. We’ll walk through some strategies that can help lower your tax burden and provide more benefits to your employees—both of which can help your business grow stronger in the coming tax year.

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The Carta Policy Team
Author: 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.