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Topline

• SEC, FinCEN propose new AML requirements for investment advisers

• Carta CEO visits DC to meet with policymakers and stakeholders

• Bipartisan Senate working group releases AI policy guidance

• Innovation Coalition engages on tax policy priorities

• Supreme Court upholds funding for Consumer Financial Protection Bureau

• HFSC advances SEC reform package

SEC, FinCEN propose new AML requirements for investment advisers

The SEC and Financial Crimes Enforcement Network (FinCEN) proposed a joint rule that would impose new anti-money laundering standards on venture capital and private equity fund advisers. These efforts are part of a broader effort by the Treasury Department to crack down on illicit finance, which includes closing perceived gaps in the anti-money laundering and countering the financing of terrorism (AML/CFT) program. 

• The proposed rule would require registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish, document, and maintain written customer identification programs (CIPs). This would require advisers to implement reasonable procedures to identify and verify the identity of each customer and maintain records of the information used to verify. 

• Notably for private funds, the proposal suggests the rule would only apply to the private fund itself as the direct customer of the fund manager, as opposed to the fund investors (though this interpretation seems to be at odds with the broader goal of preventing bad actors from accessing the U.S. financial system).

• The CIP proposal complements a recent FinCEN proposal that would subject private fund advisers to the AML/CFT requirements under the Bank Secrecy Act.

Why it matters: Many private fund managers have some AML/KYC protocols in place, but the application of a formal regulatory regime with prescriptive requirements and recordkeeping obligations will impose significant compliance obligations, particularly for smaller private fund managers who lack the scale and resources of their larger counterparts. The SEC will be responsible for examining for compliance with the new illicit financing rules, which will subject venture capital funds to another level of regulatory scrutiny that the industry has not historically experienced.

In other SEC rulemaking news:

• New consumer data protection requirements: The SEC adopted rules that would require financial firms, including registered investment advisers (RIAs), broker-dealers, and transfer agents, to develop incident response programs and customer notification requirements for unauthorized access to or use of customer information.

• Additional feedback needed: Chair Gary Gensler suggested that the agency’s controversial proposal regarding predictive data analytics, the SEC’s so-called artificial intelligence proposal, as well as the custody proposal could be reopened for public comment and potentially modified. Gensler faced significant backlash from industry and policymakers on both sides of the aisle with respect to the breadth and significant costs of the proposals, among other concerns.

• Increasing scrutiny for private credit: Gensler remains focused on the private fund industry, suggesting the growth and leverage of private funds could raise financial stability concerns. Expect SEC scrutiny to increase, particularly with respect to private credit—an issue that has also been top of mind for FSOC.

Carta CEO visits DC to meet with policymakers and stakeholders

This week, Carta CEO Henry Ward came to DC to meet with lawmakers and regulators to discuss the future of the private markets. The Carta team remains engaged with policymakers to shape rulemakings, improve processes, and support our customers, founders, and fund managers by helping them navigate the regulatory landscape. 

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Bipartisan Senate working group releases AI policy guidance

The Bipartisan Senate AI Working Group released a roadmap for artificial intelligence policy. The working group was formed last year to help the Senate better understand the AI policy landscape.

Policy priorities highlighted in the roadmap include:

• Increasing funding for AI innovation to propel U.S. leadership in AI, maintain our global competitiveness, and perform cutting-edge AI research and development.

• Ensuring enforcement of existing laws for AI, including ways to address any gaps or unintended harmful bias; prioritizing the development of standards for testing to understand potential AI harms; and developing use case-specific requirements for AI transparency and explainability.

• Determining the impact AI will have on our workforce, including the potential for job displacement and the need to upskill and retrain workers.

• Scoping national security threats, risks, and opportunities for AI.

• Addressing challenges posed by deepfakes to fair elections and nonconsensual images.

• Ensuring universities and smaller companies can leverage AI technology and compete in AI innovation, including through funding for the National AI Research Resource (NAIRR).

What’s next: Schumer hinted legislation may move as soon as this year and plans on engaging with the House on the framework. He noted that the Senate will advance individual provisions as they’re ready, rather than wait for a comprehensive bill to come together. In the meantime, states will continue to push forward with their own AI legislation to fill the gaps evident at the federal level.

Carta hosts virtual roundtable on expiring business tax incentives

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Join our expert panelists on Tuesday, June 4 at 10 a.m. PT / 1 p.m. ET for a discussion on the current tax landscape and practical guidance to navigating upcoming changes that will have significant impacts on your business. The panelists will cover:

• An overview of expiring tax incentives and the expected impact on businesses (corporations and pass-throughs)

• Strategies for adapting to the evolving tax landscape and maximizing existing tax benefits

• Pending tax policy issues—and what Carta’s policy team is doing to support the innovation ecosystem

Innovation Coalition engages on tax policy priorities

Carta and its coalition partners submitted a statement for the record to the House Committee on Ways & Means advocating for tax policies to expand the innovation ecosystem, expand employee ownership, and modernize the IRS, including:

• Expanding the qualified small business stock (QSBS) eligibility to more businesses to spur job creation and incentivize long-term investment in startups and small businesses.

• Preserving tax treatment for long-term capital gains and carried interest to incentivize long-term investment in the private market.

• Promoting corporate investment in innovation to restore full R&D expensing costs to boost innovation.

• Aligning taxation to the year that shares are sold to help employees realize the full value of their hard-earned equity, and extending the duration in which former employees can exercise their options following their departure from a company.

• Allowing e-file of section 83(b) elections to ease tax compliance burdens.

What’s next: As 2025 draws near, many important provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire and tax policy will become the focus. Carta and its coalition partners will continue to work to shape tax policies that empower small businesses and strengthen economic competitiveness.

Supreme Court upholds CFPB funding structure 

In a 7-2 decision, the Supreme Court held the CFPB’s funding mechanisms do not violate the Constitution’s Appropriations Clause—a big win for the agency.

• The decision settles a longstanding legal dispute over whether the CFPB’s funding structure—it is funded by the Federal Reserve and not congressional appropriation—was constitutional. Had the Court ruled otherwise, it would have thrown past and future rulemakings, as well as the CFPB’s ongoing operations into question. 

• This ruling was limited to the CFPB’s funding structure, which was directed by Congress, and does not prevent other legal challenges on the CFPB’s various rulemakings, which will continue. And the courts will likely continue to view expansive agency rulemakings with more scrutiny. 

HFSC advances SEC reform package

The House Financial Services Committee advanced the SEC Reform and Restructuring Act, which aims to boost transparency at the agency by increasing congressional oversight and making improvements to the rulemaking process, among other changes.:

• The bill would require the SEC to consider the cumulative impact of each rulemaking, conduct cost-benefit analysis before proposing regulations, and mandate minimum comment periods.

• The bill would also create a public accounting oversight office at the SEC by consolidating the Public Company Accounting Oversight Board with the agency.

What’s next: The SEC reform bill passed along partisan lines, so the prospects of any of these provisions becoming law are dim. But the measures provide signal as to SEC reform priorities Republicans may pursue should there be an administration change after the November elections.

News to know

• Crypto bills to reach the House floor next week. Next week, the full House will vote on the Financial Innovation and Technology for the 21st Century (FIT21) Act, which seeks to establish federal requirements over digital assets, providing the CFTC with new jurisdiction over digital commodities and clarifying the SEC’s jurisdiction over digital assets offered as part of an investment contract, according to the release.

• Senate votes to kill SEC crypto accounting rule. In a 60-38 vote in the Senate, legislation striking down the SEC’s staff accounting bulletin 121, which makes it very expensive for financial institutions to participate in the crypto custody business, has passed.

• Federal court blocks CFPB credit card late fee rule. A federal judge in Texas granted banks’ request for a preliminary injunction blocking the Consumer Financial Protection Bureau’s rule capping credit card late fees from taking effect as scheduled next week.

• FTC’s antitrust case against private equity firm dismissed: A Texas federal district court dismissed an antitrust lawsuit filed by the FTC against Welsh, Carson, Anderson & Stowe, a private equity firm accused of monopolizing the Texas anesthesia market through a series of stealthy acquisitions. However, the case against U.S. Anesthesia Partners, a group established by Welsh Carson that now controls the Houston and Dallas anesthesia markets, is still pending.

• FDIC Chair Gruenberg grilled at oversight hearings on toxic culture at the FDIC. In a series of hearings in front of the House and Senate this week, FDIC Chair Martin Gruenberg was grilled by both Democrats and Republicans on a recent report highlighting findings of a toxic workplace culture at the FDIC, including pervasive instances of sexual harassment and discrimination. 

Upcoming events

• House Ways and Means Tax Subcommittee Field Hearing: Creating More Opportunity and Prosperity in the American Rust Belt - May 20 at 4:00 p.m. ET at the Warner Theatre in Erie, Pennsylvania

• SEC Chair Gensler to speak at the Investment Company Institute 2024 Leadership Summit - May 23 at 5:30 a.m. PT / 8:30 a.m. ET

• Securities Enforcement Forum West 2024 - May 23 at 8:00 a.m. PT / 11:00 a.m. ET

• CFTC Commissioner Commissioner Pham to speak at the Hellenic Capital Market Commission Public Conference at the IOSCO Annual Meeting - May 29 at 5:45 a.m. PT / 8:45 a.m. ET

• OCC to host the Roundtable for Economic Access and Change (Project REACh) Financial Inclusion Summit on May 29-30

• U.S. Department of Treasury: 2024 Conference on Artificial Intelligence & Financial Stability - June 6-7

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Topline

• House turns its attention to crypto

• SEC continues crusade against crypto

• IRS to triple audit rates for corporations with assets over $250 million

• SEC advisory committee pushes for more accredited investor on-ramps

• State of Private Markets: Q1 2024

House turns its attention to crypto 

The House of Representatives approved a resolution to revoke the SEC’s controversial crypto custody accounting guidance (SAB 121). The guidance would require digital assets to be booked as liabilities on the balance sheet, which would impose onerous capital requirements and effectively block banks from providing crypto-asset custody. Despite veto threats from President Biden, 21 Democrats voted with Republicans to approve the resolution. Though it ultimately will not become law, this is the first standalone crypto bill passed by the House—and with bipartisan support. 

The House is expected to remain focused on crypto, with additional actions on the horizon:

• Lawmakers are trying to chart a bipartisan path to pass a revised version of legislation that would establish a regulatory framework for digital assets and divide authority between the SEC and CFTC. This effort is a priority for House Financial Services Committee (HFSC) Chairman Patrick McHenry. McHenry’s package is still undergoing changes (including with respect to whistleblower and congressional trading provisions).

• The House is also expected to vote on legislation to block the Federal Reserve from issuing a central bank digital currency (CBDC).

• Leadership is targeting the last week of May for a floor vote on the digital asset framework and CBDC bills, while negotiations continue on the bipartisan stablecoin bill.

Why it matters: There is a lot of momentum in the digital assets space, but the contours of a crypto package are in flux. While legislation to create a digital asset regulatory framework is unlikely to move in the Senate, a vote could put members in competitive races in a tough spot as crypto becomes a bigger election issue.  

SEC continues crusade against crypto

A series of recent legal victories by the SEC has revived their campaign to police cryptocurrencies. A federal judge recently ruled that the SEC could move forward with their case arguing that Coinbase is operating as an unregistered broker—a huge win for the agency. Bolstered by this outcome, the SEC is pushing forward with new enforcement actions. This week, the SEC served Robinhood a Wells notice, warning that the trading platform could face an enforcement action related to its crypto business in the U.S.

The SEC’s regulatory approach to crypto, however, has faced continued scrutiny on the Hill. The HFSC held a hearing this week examining the SEC’s enforcement practices, primarily focusing on cryptocurrency. Republicans on the committee criticized the SEC for issuing penalties against crypto firms despite an unclear regulatory regime, noting that the current strategy of “regulation by enforcement” is not subject to the Administrative Procedure Act’s notice and comment requirements.

Why it matters: The HFSC will continue pushing for SEC reforms next week during markup. While these efforts likely will not go anywhere, they will provide a roadmap for legislative reform of the SEC should the administration change hands in November.

IRS to triple audit rates for corporations with assets over $250 million

The IRS announced plans to nearly triple audit rates on large corporations in tax year 2026 under a new updated roadmap for spending Inflation Reduction Act (IRA) funds, as well as increase audits on large, complex partnerships.

• The IRA funding will allow for nearly 20,000 new full-time IRS employees to aid in the plan to increase the audit rate for corporations with assets over $250 million to 22.6% in tax year 2026, up from 8.8% in tax year 2019.

• The agency also plans to increase audits on large, complex partnerships to 1%, up from 0.1% (ten times higher).

• The IRS will raise audit rates on individuals earning more than $10 million from 11% in tax year 2019 to 16.5% in tax year 2026.

Why it matters: Increased funding and technology will change the way the IRS can tackle examinations of large corporations and partnerships—and their sophisticated shareholders. Those taxpayers should expect more scrutiny this coming season than in years past as the IRS deploys AI and onboards higher-skilled staff.

SEC advisory committee pushes for more accredited investor on-ramps

The SEC’s Small Business Capital Formation Advisory Committee (SBCFAC) issued recommendations on the accredited investor definition. The committee recommended:

• Leaving the current financial thresholds in place without inflation adjustments (either retroactively or going forward).

• Permitting individuals to invest 5% of income or net worth per year in private market assets upon completion of an educational program.

• Bolstering educational efforts outlining risks of investing in the private markets, including risk of loss and limited liquidity.

Why it matters: The SEC is expected to propose reforms to the accredited investor standard, including increasing the financial thresholds. This would lower the number of individuals who can invest in private markets and reduce an important source of capital for founders and fund managers, particularly in lower-income regions that may lack access to established capital-raising networks. The SEC is not required to act on the SBCFAC’s recommendations, but they could help inform and potentially blunt future rulemaking proposals, as well as drive congressional action to expand accredited investor on-ramps.

State of Private Markets: Q1 2024

The startup fundraising market got off to a cautious start in 2024. After experiencing a pandemic-era surge and subsequent correction, the venture market settled into a quieter place in 2023. So far, that relative tranquility has continued into 2024. Q1 highlights include: 

• VCs look to the West: Startups based in the West census region captured 62% of all venture capital raised by companies on Carta in Q1, the highest quarterly figure since Q1 2019. The Northeast, South, and Midwest all saw their market share decline.

• The Series C market bounces back: Series C startups raised $4.6 billion in new capital in Q1, a 130% increase from the previous quarter. The median primary Series C valuation was $195.7 million, up 48% from the prior quarter.

• Layoffs still linger: Companies on Carta laid off more than 28,000 employees in Q1. But job cuts have grown less frequent since January, with March seeing the fewest monthly layoffs in nearly two years.

Check out the full report here.

News to know

• FDIC investigation finds culture rife with sexual harassment, discrimination. A a damning independent report was released highlighting findings of a toxic workplace culture at the FDIC, including pervasive instances of sexual harassment and discrimination. The report called for “cultural and structural change” and questioned whether FDIC Chair Martin Gruenberg is the right person to lead those reforms. Gruenberg is scheduled to testify before Congress next week.

• TikTok sues U.S. government, saying potential ban violates First Amendment. TikTok is suing the U.S. government to stop enforcement of a bill passed last month that seeks to force the app’s Chinese owner to sell the app or have it banned. The lawsuit, filed Tuesday in the DC Circuit, argues that the bill violates constitutional protections of free speech.

• Bipartisan senators urge SEC to reissue stock buyback rule. The SEC’s buyback rule, which would have required companies to disclose information around share repurchases, was struck down by the Fifth Circuit last year. Sens. Tammy Baldwin and Marco Rubio are urging the SEC to re-propose to benefit investors and improve price discovery.

• CFTC to vote on election betting. The CFTC commissioners voted to issue a rule banning event contracts that allow traders to speculate on the outcome of specific events, such as elections. Republicans on the panel argued that the proposal may actually end up creating “more uncertainty and confusion” around event contracts, and could stifle innovation and push trading overseas. 

• Fed Governor Lisa Cook argues that it is too early to regulate private credit. In a speech this week, Federal Reserve Governor Lisa Cook commented that private credit “has not materially adversely affected the financial system's resilience,” noting that private credit funds appear well positioned to hold the riskiest parts of corporate lending.

• FTX creditors to be made whole. FTX announced this week that all of their creditors, except the government, will get 100% of their money back in cash plus interest, pulling from a pool of between 16.3 billion to distribute to customers and other creditors from the assets it has collected.

Upcoming events

• CFTC Commissioner Commissioner Goldsmith Romero to participate on an artificial intelligence panel at the Asian Pacific American Institute for Congressional Studies’ Legislative Leadership Summit - May 13 at 8:15 a.m. PT / 11:15 a.m. ET

• Carta event: Startup Fundraising 101: Building Strategic Partnerships - May 21 at 11:00 a.m. PT / 2:00 p.m. ET

• Carta event: Private Equity Firm Operations: In-House v. Outsourced - May 30 at 10:00 a.m. PT / 1:00 p.m. ET

• House Financial Services Committee hearing: Oversight of Prudential Regulators - May 15 at 7:00 a.m. PT / 10:00 a.m. ET

• House Committee on Appropriations budget hearing: Fiscal Year 2025 Request for the Federal Trade Commission - May 15 at 7:00 a.m. PT / 10:00 a.m. ET

• SEC’s 2024 Conference On Emerging Trends In Asset Management - May 16 at 6:00 a.m. PT / 9:00 a.m. ET

• House Financial Services Committee markup - May 16 at 7:00 a.m. PT / 10:00 a.m. ET

• Senate Committee on Banking, Housing and Urban Affairs hearing: Oversight of U.S. Financial Regulators: Accountability and Financial Stability - May 16 at 7:00 a.m. PT / 10:00 a.m. ET

• SEC Chair Gensler to speak at the Investment Company Institute 2024 Leadership Summit - May 23 at 5:30 a.m. PT / 8:30 a.m. ET

• CFTC Commissioner Commissioner Pham to speak at the Hellenic Capital Market Commission Public Conference at the IOSCO Annual Meeting - May 29 at 5:45 a.m. PT / 8:45 a.m. ET

• U.S. Department of Treasury: 2024 Conference on Artificial Intelligence & Financial Stability - June 6 - 7

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Topline

• Republicans continue groundwork for 2025 tax package

• Gensler under fire while justifying budget

• Privacy push remains stalled

• California accelerates AI regulation

Republicans continue groundwork for 2025 tax package

The Tax Cuts and Jobs Act (TCJA) of 2017 was the last major overhaul of the tax code, and it is set to expire in 2025, setting the stage for a partisan fight over another broad tax package. Revamping the tax code will trigger far-ranging policy debates to complicate an already difficult legislative process—no matter who is in charge. 

The process thus far: Republicans on both the House and Senate tax-writing committees have stood up internal working groups focused on key specific areas. Carta and our innovation coalition partners will engage holistically but with a specific focus on working groups including: Individual Taxes; Business Measures; New Economy, U.S. Innovation, and Global Competitiveness.

Democrats have not officially organized working groups, though the President’s Budget and the coming campaign platform will provide additional signal. Outside specific plans, the Senate Budget Committee convened a hearing focused on “Making Wall Street Pay Its Fair Share,” in which carried interest and capital gains tax came under fire. 

The issues: The debate will center on headline issues around the individual tax rate; corporate tax rate; long-term capital gains rate; global tax issues; how to invest money in families and the economy; and how we pay for it all. Importantly, in addition to those headline issues and even beyond the scope of the expiring TCJA provisions, there will be a debate about issues specifically meaningful and attached to the innovation economy. 

Carta is already engaging lawmakers on the policies critical to small businesses and innovation, including:

• Expanding the qualified small business stock (QSBS) eligibility to more businesses to spur job creation and incentivize long-term investment in startups and small businesses.

• Preserving tax treatment for long-term capital gains and carried interest to incentivize long-term investment in the private markets.

• Promoting corporate investment in innovation to restore full R&D expensing costs to boost innovation.

• Aligning taxation to the year that shares are sold to help employees realize the full value of their hard-earned equity, and extending the duration of the post-termination exercise period to better enable former employees to exercise their options and own the equity they earned following their departure from a company.

• Allowing e-file of section 83(b) elections to ease tax compliance burdens.

Why it matters: Taxes affect almost every aspect of commerce. This debate may not be concluded until the end of 2025, but it starts now. Every industry will be fighting for their tax policy priorities, and Congress will need to find ways to pay for it. This means provisions such as QSBS, carried interest, and more will come under fire. The private capital ecosystem needs to begin making its case to not only defend key provisions, but also to play offense, pushing for tax reform that drives more capital and talent to this sector, incentivises investment and innovation, and makes ownership possible and meaningful to more people. 

To get engaged, contact us at policy@carta.com.

Gensler defends ambitious agenda and crypto posture amid recent setbacks

SEC Chair Gary Gensler and CFTC Chair Rostin Behnam testified before the Senate this week on their respective agencies’ FY 2025 budget requests. Chair Gensler was undoubtedly the focal point, with much of the focus on the SEC’s aggressive rulemaking agenda and recent setbacks in court.

• PFA rules: In response to multiple questions on the private fund adviser rules struck down by the Fifth Circuit, Gensler defended the agency’s efforts to provide private fund investors with quarterly reports on fund fees and performance and information around side deals with other investors. While he believed the agency was acting within the law in issuing the rules, he respected the court’s interpretation. 

Takeaway: The SEC is still assessing the decision, its impact on other rulemaking initiatives, and whether or not to appeal. Gensler suggested the agency is likely to re-propose, or at least reopen for comment, proposed rules around predictive data analytics and safeguarding assets.

• Crypto: The turf war for crypto oversight between the SEC and CFTC was also on display. The crypto regulatory framework bill that recently passed the House would grant more regulatory responsibilities to the CFTC, and senators expressed concern as to whether the agency was up to the task. 

Takeaway: Chair Gensler—crypto’s biggest foe—suggested the SEC and its disclosure-based oversight regime was the more appropriate regulator. Gensler did suggest, however, that spot ether ETFs could begin trading this summer, though he did go so far to declare ether a commodity. 

Why it matters: As the SEC has pursued more contentious rules and enforcement postures, industry has  increasingly turned to sympathetic courts to strike them down—and they have been successful. But the impact of these judicial decisions can extend beyond the challenged actions. The PFA decision will have significant implications for SEC rulemaking authority, which will affect how the agency proceeds on several private fund-related proposals, as well as existing obligations. This makes it likely the SEC will appeal. Depending on election outcomes, the SEC could also be constrained by Congress through budget reductions and efforts to shift authorities to other agencies, notably in the crypto space.

Privacy push remains stalled

The relevant House Committee decided not to vote on the American Privacy Rights Act (APRA) which would replace the existing patchwork of state data privacy laws by establishing national data privacy rights and protections for Americans. Federal privacy legislation was always a long-shot, but this is likely the end of a viable shot this Congress.

• Discussions between party leadership and Chairwoman Cathy McMorris Rodgers have reportedly broken down, further dimming the draft’s prospects.

• The draft also continues to face staunch opposition; key congressional stakeholders, including Senate Commerce Committee Ranking Member Ted Cruz, and the tech community, as well as law enforcement, have raised concerns about the bill as well.

What’s next: Privacy legislation is often mentioned in a long list of issues that could, theoretically, attach to a larger legislative package destined to become law. But APRA is not progressing and several unresolved policy debates, including over its application to certain financial entities, indicate it’s not going anywhere this year. In the meantime, states will continue to enact their own data privacy laws.

California accelerates AI regulation

As the federal government grapples with how to regulate AI, states are continuing to step in and fill the gap. California has been leading the charge, introducing 30 new pieces of AI legislation in the last month. The legislation proposed in California covers a wide swath of concerns associated with the emerging technology, seeking to target intellectual property infringements, eliminate deep fakes, lessen AI-related discrimination in the housing and health care industries, and ensure that jobs will remain safe as AI adoption grows. 

These bills, if passed, will constitute the most restrictive AI regime in the US, and have spurred many in the Silicon Valley tech scene to lobby against their adoption, citing that the laws would severely stifle innovation. 

California’s legislature is set to vote on these laws by August 31.

Why it matters: While Senate Majority Leader Chuck Schumer remains positive that some AI legislation could move in Congress after the publication of his AI regulation road map, AI experts remain skeptical on the chances of federal AI regulations passing this year, and some in House leadership are now signaling they oppose legislating in the near-term. Similar to privacy legislation (another policy area where California took the lead in the absence of federal cohesion), we will likely see the AI regulatory landscape be composed of fragmented pieces of policy coming from different levels of government for quite some time as the federal government continues to debate the best way to regulate the emerging technology.

News to know

• PCAOB expands liability for auditors involved in firm violations (WSJ)

• Biden taps CFTC commissioner Goldsmith Romero to lead scandal-hit FDIC (Reuters)

• FTC Chair Lina Khan is pursuing the ‘mob bosses’ in Big Tech (TechCrunch)

• Tech industry groups push for trade dispute over Canada’s digital services tax (Politico)

• SEC charges founder of AI hiring startup Joonko with fraud (SEC)

• Elon Musk wins Tesla shareholder approval for $56 billion pay package (Reuters)

• The SEC reaches $4.5 billion deal with TerraForm over stablecoin scam (Fortune)

Upcoming events

• June 17 - The Washington Center for Equitable Growth event: The Promise of Equitable and Pro-Growth Tax Reform

• June 18 - Carta event: First Close: From Managing SPV’s to Launching a Fund

• June 21 - The Brookings Institution event: Supporting Black-owned businesses to drive economic development

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The Topline:

• Senate legislation would lower 12(g) threshold to force more private companies to go public

• GOP leaders question authority of SEC and CFPB rulemakings and other agency actions

• Treasury requests comment on plan to address illicit financing risks of digital assets, and lawmakers close in on deal to task Fed with stablecoin oversight

• FTC issues policy statement to bolster protections for gig workers from unfair practices

Macro matters

Congress likely to reauthorize programs for small businesses working on public sector challenges

With midterm elections looming, Congress continues work toward a resolution to prevent a government shutdown, as funding expires on September 30. Congress is also moving to reauthorize the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (SBTT) programs, both of which expire September 30. These programs incentivize small enterprises, including startups, to undertake R&D directed at federal and public sector needs by investing federal funds into these companies. The Senate passed a bill this week that would reauthorize the programs for three years while adding controls to mitigate national security risks related to the R&D. The House is expected to take up the bill next week and pass the authorization before the deadline.

Interest rate hikes continue

The Federal Reserve’s Federal Open Markets Committee (FOMC) announced its third consecutive 75 bps interest rate increase. After the meeting, Fed Chair Jerome Powell reiterated that the Fed will continue to raise interest rates until inflation abates, setting up further rate hikes at the FOMC’s November and December meetings.

Carta data report: Median net IRR for most VC fund vintages declined in H1 2022

Median net internal rate of return (IRR) for most VC fund vintages declined in H1 2022, with 2017 and 2020 vintages seeing the largest drops, according to new Carta data. After returns rose in 2021, most vintages are currently in decline. Learn more about the latest trends here: “Early 2022 data shows a drop in median IRR across funds.”

Capital markets

Legislation introduced to force private companies into a public reporting regime

As referenced in last week’s update, Sen. Jack Reed introduced S. 4857, the Private Markets Transparency and Accountability Act, which would lower the SEC registration triggers for larger private companies. Democratic policymakers, including SEC leadership, have become increasingly concerned with the growing number of private companies opting to remain private instead of entering the public markets. Section 12(g) sets the threshold for when companies must register their securities with the SEC and become subject to a public reporting and disclosure regime. Generally, private companies do not run afoul of 12(g) unless they surpass 2,000 “holders of record” or have more than 500 non-accredited investors on their cap table. 

This legislation would add additional triggers, requiring private issuers to register their securities with the SEC if their valuation (minus affiliate shares) exceeds $700 million or the company has more than $5 billion in revenue and 5,000 or more employees (including independent contractors). 

Such reforms have the potential to push a substantial number of private companies into a public reporting regime much earlier in their lifecycle, which could could have a chilling impact on capital formation, as private market investors will recognize that any growth in private markets will be capped when the company is forced to go public, at which time the fund may need to divest shares; this weakens the investment rationale in late stage growth companies. It would also likely lead to more consolidation through mergers and acquisitions and decrease competition

It is unlikely that the Reed proposal will become law. However, its support from prominent senators gives the SEC political cover to pursue policy changes to push more private companies into the public reporting space, which is consistent with the SEC’s regulatory agenda and the sentiment of Commission leadership. Chair Gary Gensler’s regulatory agenda includes potential 12(g) reforms, which could change the way holders of record are determined under 12(g) by looking through certain investment structures (such as special purpose vehicles, or SPVs) to count beneficial owners as shareholders.

McHenry pushes Gensler on statutory authority for rulemaking proposals

Rep. Patrick McHenry, the lead Republican on the House Financial Services Committee, was joined by other House GOP committee leaders in a letter to SEC Chair Gary Gensler requesting the agency’s statutory justification for pending and expected rulemaking proposals. The request comes after the recent Supreme Court decision that limits the ability of federal agencies to take major action without explicit congressional authority, and the letter specifically questions the SEC’s authority to promulgate a number of controversial proposals, including its climate disclosure proposal, SPAC proposal, and proposal to expand the definition of “exchange,” which some believe could capture digital asset platforms. These proposals will almost certainly be subject to legal challenge if finalized, and inquiries questioning congressional intent could help bolster the case for agency overreach, especially given the Court’s recent actions to narrow the power of the administrative state. McHenry, who is expected to become Chairman should the Republicans retake the House majority (as predicted), may not have the ability to stop the SEC from moving forward on its rulemaking agenda, but he can use aggressive oversight to require the agency to justify its actions and slow down the process. A similar letter was sent to the CFPB as well. 

Crypto & digital assets

New Form 1040 crypto question highlights IRS enforcement 

The IRS released its draft 2022 Form 1040 (used by individual taxpayers to file their taxes with the IRS) with an amended version of the cryptocurrency reporting question. This is the IRS’s latest iteration to increase reporting around taxable events on digital assets.

• The 2021 Form 1040 read: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

• The new draft 2022 Form 1040 currently reads: “At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

Replacing “virtual currency” with “digital asset” changes the question to bring NFTs and other crypto innovations into the scope of tax filing requirements. However, taxpayers and stakeholders continue to urge the IRS and Treasury to provide a long-awaited definition for “digital asset,” along with authoritative tax guidance to supplement the informal guidance currently available in IRS’s online FAQs.

Treasury seeks input on action plan following framework release

The Treasury Department released its Action Plan to Address Illicit Financing Risks of Digital Assets, which outlines proposals on monitoring emerging risks, improving global anti-money laundering/combating the financing of terrorism (AML/CFT) regulation and enforcement, impacts of central bank digital currencies, and engaging with the private sector, among other steps. Treasury has requested comment by Nov. 3.

Lawmakers inch closer to deal on legislation that would task Fed with oversight of stablecoins

The House Financial Services Committee leadership moved closer to a bipartisan deal on stablecoin legislation that would subject both bank and non-bank issuers to regulation from the Federal Reserve. The proposal also includes a two-year freeze on the issuance of new “endogenously collateralized” (a broad term that may refer to any token backed or partially backed by other tokens from the same issuer) stablecoins. Existing stablecoins would be protected, within limits, from the moratorium. Next week is the last time Congress is in session before the elections; however, negotiations are expected to continue with the goal of passing a final bill before year-end.

Banking & financial products

Bank CEOs testify on economy, lending, consumer protections, and digital assets

The heads of the largest U.S. banks testified before Congress this week. Among the various macro issues discussed, the rise of the non-bank and fintech sector was a primary focus of the hearings. The CEOs of Bank of America and Wells Fargo cautioned lawmakers that growing levels of non-bank private credit financing are in part attributable to the regulatory burdens imposed on banks. JPMorgan Chase’s Jamie Dimon was concerned that with a possible recession on the horizon, smaller companies will struggle to access financing and achieve securitizations. 

On digital assets, Dimon, long a crypto skeptic, likened them to “decentralized Ponzi schemes,” while suggesting stablecoins be regulated in a manner similar to money market funds, a potential regime with growing support. The CEOs of Citigroup, Bank of America, and Wells Fargo said their banks have no plans to finance crypto mining; miners have struggled to raise capital in recent months as their operations face deepening scrutiny. 

Taxation & accounting

Inflation Reduction Act doubles small business R&D credit

Passed into law on Aug. 16, the Inflation Reduction Act (IRA) doubled the small business R&D credit to $500,000, which eligible businesses can claim against their payroll tax liability beginning in tax years after 2022. Payroll tax is comprised of social security and medicare taxes. To be eligible for the small business R&D credit, a startup must have generated revenue for less than five years and have less than $5 million in annual gross receipts. Current law allows those eligible startups to apply a $250,000 credit against the employer’s 6.2% portion of Social Security tax, and the IRA has expanded the rules to allow small businesses to apply an additional $250,000 credit against the employer’s 1.45% portion of Medicare tax. A reverse calculation of these values reveals that to qualify for the full $500,000 credit, a startup would need $2.5 million in R&D expenses and approximately $17 million in annual payroll tax—a threshold small businesses would struggle to max out. 

Antitrust, privacy, & technology

FTC wants more staff, DoJ to release antitrust draft guidelines in coming weeks

During the Judiciary Committee’s oversight hearing of federal enforcement of antitrust laws, discussion focused on ways to enhance enforcement to improve competition, as well as staffing and morale issues at the Federal Trade Commission (FTC). FTC Chair Lina Khan pushed for more resources to keep up with the size of the economy, noting the FTC has fewer staff than it had in the 1980s.  At a separate speech, Fellow FTC Commissioner Alvaro Bedoya called for the FTC to use Robinson-Patman Act, a 1936 price-discrimination law, to combat anticompetitive practices. The head of the DOJ’s Antitrust Division, Jonathan Kanter, said the division is revising guidelines to better reflect case law on horizontal and non-horizontal mergers and hopes to have an initial draft in the coming weeks.

DOJ proactively enforcing interlocking directorates

The DOJ has reportedly sent letters to various public companies, investors, and individuals indicating it may pursue lawsuits against them for violating Section 8 of the Clayton Antitrust Act. The section on “interlocking directorates” prohibits any person from simultaneously serving as an officer or on the board of directors of competing companies. The agency has previously signaled its intention to ramp up its enforcement of Section 8 to break up interlocking directorates. Section 8 enforcement is typically seen during merger reviews but the DOJ is reportedly sending these letters proactively based on publicly available information such as SEC filings and earnings calls. If accurate, the DOJ’s actions would represent a notable expansion of antitrust enforcement. 

FTC prioritizes gig workers in policy statement

The FTC issued a new policy statement to bolster gig worker protections, noting it will focus on ensuring information provided about the costs and benefits of gig work is accurate, addressing unlawful constraints imposed on independent contractors, and identifying anticompetitive practices that disadvantage gig workers. Gig workers are also awaiting the Department of Labor’s reworked final rule on the classification of individuals as independent contractors or employees; the Biden administration revoked a lenient Trump-era rule on the matter shortly after taking office.

Upcoming events

• OCC Minority Depository Institutions Advisory Committee Meeting – Sept. 27 at 10am (ET)

• CFTC Market Risk Advisory Committee meeting – Sept. 28 at 9:30 am (ET)

• SEC Chair Gensler at MIT AI Policy Forum – Sept. 28 at 12:15 pm (ET)

• SEC Chair Gensler at Investment Adviser Association’s 2022 Policy & Leadership Forum – Sept. 28 at 1:20 pm (ET)  

• OCC Innovation Office Hours – Sept. 28-29

• FHFA Public Listening Session on Fintech in Housing Finance – Oct. 06 at 2:30pm (ET)

• DC Fintech Week – Oct. 11-12

Notable SEC proposed rules and comment deadlines

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Topline

• HFSC advances bipartisan bills to bolster and broaden VC ecosystem

• House unanimously approves accredited investor examinations

• FinCEN (finally) delays implementation date for AML rules for investment advisers

• White House advances AI goals with action plan and EOs

• Quick hits

HFSC advances bipartisan bills to bolster and broaden VC ecosystem

With strong bipartisan support, the House Financial Services Committee (HFSC) advanced several bills this week that could significantly expand access to capital for founders and fund managers across the country.

Developing and Empowering our Aspiring Leaders (DEAL) Act: Expands the category of qualifying venture investments to include fund-of-fund and secondary investments. 

• Why it matters: Today, VC funds are largely limited to direct investments in portfolio companies. Expanding the ability for funds to invest in other VC funds could help drive capital to emerging managers, as well as increase diversification and returns for investors. Expanding secondary investments could help ease liquidity pressure, recycle capital back into the ecosystem, and help startup founders and employees monetize their equity compensation. 

Improving Capital Access for Newcomers (ICAN) Act: Increases the size and investor limits for qualifying venture capital funds.

• Why it matters: Under Section 3(c)(1), private funds have long been barred from raising capital from more than 100 beneficial owners. In recent years Congress created a “qualifying venture capital funds” exemption to allow smaller fund managers to raise capital from up to 250 investors, but fund size was capped at $12M, limiting the utility of this provision. The ICAN Act would expand the fund size to $50M and increase the investor limit to 500, enabling smaller funds to assemble competitive funds and raise capital from more investors.

Bigger picture: The venture capital ecosystem powers American innovation and economic growth, but unless we modernize our policy infrastructure, the benefits of this economic and innovation engine will be limited. These bipartisan solutions will not only help bolster the VC ecosystem, but will broaden its benefits to more investors, more entrepreneurs, and more communities.  

Engagement matters: These legislative proposals are not new ideas, but in recent years, they have failed to attract bipartisan support. Carta and our coalition partners have not only been educating policymakers on both sides of the aisle on the merits of the proposals and the VC industry more broadly, but directly engaged to negotiate the contours of the bills to reach a favorable, bipartisan solution. Once we agreed on text, we also delivered on the politics: In advance of the markup, Carta led a coalition of 13 innovation-focused organizations—both at the national and regional levels—to show unified support of these measures. And these efforts made a difference: The committee advanced these measures with a nearly unanimous vote. 

What’s next: Advancing these bills out of HFSC is only the first step; they still need to pass the full House, and pass the Senate with 60 votes to be signed into law by the president. This will require broad bipartisan support—the strong HFSC vote set that foundation. This is an incredible first step to getting these policies across the finish line, but there is more work to do. We have to keep the momentum going.

House passes bipartisan accredited investor legislation…now to the Senate

The House advanced legislation by voice vote that would expand the ability for individuals to qualify as accredited investors by passing an SEC-developed exam. Expanding on-ramps based on knowledge rather than wealth and income thresholds could enable more investors to invest in private capital. This is an area SEC Chairman Paul Atkins has signaled the agency would focus on as well. 

FinCEN delays implementation date for AML rules for investment advisers

The Carta Policy team has been predicting this for some time, but a formal announcement has finally happened. The Financial Crimes Enforcement Network (FinCEN) provided private equity and venture capital fund managers the clarity they have all been waiting for—the Jan. 1, 2026 compliance date for the new AML rule for investment advisers will be postponed until at least Jan. 1, 2028. FinCEN also expects a broader review of the scope of these requirements to ensure compliance burdens for private fund advisers reflect the risk profile of the industry.

Why it matters: While many advisers have AML/KYC protocols in place that incorporate some of the required elements of the new rule, this formal regulatory regime would have drastically shifted the standard, imposing significant compliance obligations on private fund advisers—both SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs). The rule’s requirements—customized programs, independent testing, staff training and dedicated compliance resources, suspicious activity reporting (SARs)—would have increased compliance time and costs. The requirements would have applied across all funds, despite the size or registration status: Venture capital and smaller private fund managers would have had to bear the same compliance burden as larger, well-resourced RIAs, potentially creating a disproportionate compliance cost and burden for smaller fund advisers. These are all areas that will likely be revisited as FinCEN conducts a broader review of the rule’s requirements.

What’s next: While the rules may be delayed and undergo substantive change, private fund advisers will likely be subject to a formal AML regime in the future. However, the industry has an opportunity to shape what that program looks like through the future comment process. In the meantime, financial institutions will likely require funds to have AML/KYC policies in place, and funds will continue to be subject to global-sanctions screening requirements. Carta can help funds meet these requirements, and the Policy Team will continue to track developments and engage regulators to shape compliance in a way that is reflective of the private capital ecosystem. 

White House advances AI goals with action plan and EOs

On Wednesday, the White House published Winning the AI Race: America’s AI Action Plan, a roadmap for how the administration plans to secure U.S. leadership in artificial intelligence. At a high level, the plan focuses on prioritizing deregulation and innovation, while advancing AI infrastructure development. Within its approximately 90 federal policy actions, the directive calls for expediting permitting for AI infrastructure, workforce training for high-demand roles, and the development of regulatory sandboxes at the SEC and other regulators. The plan also directs agencies to evaluate how state AI regulations interfere with federal authority or may impose liability that could unduly burden AI development. 

This is the Trump administration’s most comprehensive action on AI policy to date, and the president signed three news EOs to support its implementation: “Promoting the Export of the American AI Technology Stack,” “Accelerating Federal Permitting of Data Center Infrastructure” and “Preventing Woke AI in the Federal Government.”

 Quick hits

• Senate Republicans issue crypto market structure framework draft. Senate Republicans released their own crypto market structure framework draft, the Responsible Financial Innovation Act (RFIA). The RFIA deviates from the House-passed CLARITY Act, granting primary regulatory authority to the SEC as opposed to the CFTC, but creates a new category—ancillary assets—to exclude certain tokens from the securities law. The RFIA would also direct the SEC to replace the Howey test with a new investment contract rule, introduce a streamlined framework for token offerings, and create a micro-innovation sandbox to encourage experimentation by startups in a controlled regulatory environment. The framework is open for public feedback until August 5. 

• House Small Business Committee unanimously approves legislation to promote access to capital for small businesses in critical tech and underserved markets. The Investing in All of America Act would expand access to capital for small businesses in rural and underserved areas or those operating in national security or critical tech sectors by excluding those investments from the SBIC leverage cap. ICYMI: Carta’s head of policy Anthony Cimino testified in favor of this legislation as a means to increase access to capital outside of traditional funding hubs.

• SEC Small Business Capital Formation Advisory Committee discusses Regulation A improvements and the role of finders. Both of these topics will likely be part of Chairman Atkins’s capital formation agenda, where we could see a focus on enhancing liquidity and improving the utility of Regulation A, as well as efforts to enable finders to engage in limited capital-raising activities without registering as broker-dealers. 

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