The SEC is open for business

Topline

• SEC permits self-certification for 506(c) accredited investors

• Marketing Rule guidance forthcoming

• Senate Banking Committee advances stablecoin bill

• Carta Policy joins Morgan Stanley for event on employee ownership

• Senate Dems blink in government funding fight

SEC eases fundraising path for funds, companies

This week, the SEC made it easier for private funds and companies to raise capital from a broader group of investors. The SEC staff issued guidance to allow investors to self-certify their accredited investor status under Rule 506(c) of Regulation D if the offering’s investment minimums are at least $200K for individuals and $1M for entities.

Rule 506(c) background: Regulation D is the primary means through which capital is raised in the private markets. Prior to the JOBS Act, companies and funds raising capital under this exemption could not broadly market or advertise fundraising efforts; a pre-existing substantive relationship with the investor was necessary. To help emerging managers reach a broader investor base, Congress directed the SEC to adopt a rule that permitted issuers to use general solicitation to raise private capital under Regulation D if all of the investors are accredited and the issuer takes “reasonable steps to verify” that accredited investor status. Whether an issuer has taken “reasonable steps” is based on facts and circumstances, though the SEC has provided a non-exhaustive list of ways to satisfy this requirement, including income verification (tax returns), asset verification (bank and brokerage statements), or written verification from the investor’s attorney, accountant, or investment professional.

Why it matters: Despite its promise, only a small portion of capital is raised under 506(c). Many funds have been reluctant to use this exemption to raise capital because of the additional burdens and intrusive steps associated with providing “reasonable” verification of an accredited investor’s status. The new SEC guidance provides clarity for funds and companies who rely on high investment minimums to solicit and raise capital from a broader pool of investors, unlocking more capital that can be deployed into the ecosystem.  

Bigger picture: The SEC is open for business and has demonstrated a willingness to solve regulatory friction points even before Paul Atkins—President Trump’s nominee to lead the SEC—is confirmed. Acting Chairman Mark Uyeda has also directed staff to look at ways to expand access to private market investment opportunities, including changes to expand the accredited investor thresholds and allowing more retail participation in private funds.

Speaking of solving friction points…

New Marketing Rule guidance forthcoming

At an industry conference, the SEC’s Investment Management Director announced that staff will update guidance to help funds better comply with the Marketing Rule. Private fund advisers have been grappling with these requirements since they took effect in late 2022, particularly around how gross and net performance are reported on an extracted basis. The SEC is working to address these challenges, and the anticipated guidance is expected to allow fund managers to advertise performance of individual investments as well as portfolio and investment characteristics on a gross basis so long as net and gross performance of the entire portfolio is also prominently featured. 

Net/net: Engagement matters, and this is the time to do it. The Carta Policy team has been engaging with policymakers both in Congress and at the SEC to shape the private capital regulatory regime to bolster the private capital ecosystem and expand its reach in a responsible manner. We want to hear from you on friction points to address or other ideas to expand capital formation. 

Check out our Policy Outlook virtual event, "Implications for the Private Markets Ecosystem," for more information about the broader capital formation agenda, as well as what to expect on tax reform and tech regulation this Congress.

Senate Banking advances bipartisan stablecoin legislation 

With strong bipartisan support, the Senate Banking Committee advanced legislation, the GENIUS Act, to create a stablecoin regulatory framework. The GENIUS Act would provide a path for banks and nonbanks to issue stablecoins, ensure stablecoins are sufficiently backed with highly liquid reserves on a 1:1 basis, and implement disclosures around composition and redemption policies.  The bill was amended to expand anti-money laundering, bankruptcy, and consumer protection measures to garner additional Democratic support. Five Democrats voted in favor of the legislation over the strong objection of Sen. Elizabeth Warren, the party’s leader on the panel.

What’s next: Support from five Senate Banking Democrats and expected support from others from the Democratic caucus (including Sen. Kirsten Gillibrand, the lead Democrat on the bill and head of the party’s Senate campaign arm) almost ensures the measure will pass the upper chamber. 

The House is working on a similar stablecoin framework (STABLE Act), so any differences between the two approaches would need to be addressed before the measure could be signed into law (a deeper dive on the bills and their differences can be found here). But momentum is strong, and all signs point to Congress enacting a regulatory regime for stablecoins, potentially in the next few months.

Virtual event: What Equity Plan Managers Need to Know

Over 75% of vested equity was not exercised before it expired; 50% of vested employee options revert back to the pool. Employee ownership matters, and policy will affect it. 

Want to learn more? Carta's Head of Policy Anthony Cimino joins Sinead Kelly, Partner at Baker McKenzie, and Dee Crosby, Executive Director at Morgan Stanley at Work, to discuss how policy—coming tax modernization, capital markets changes, liquidity opportunities, and path to IPO—will affect growth-stage companies and employee ownership.

Join us Thursday, March 20, at 10 am PT/1 pm ET.  Register here.

Shutdown surrender

Congress needs to pass a government funding bill by midnight on Friday to prevent a government shutdown. The House passed a seven-month agreement over widespread Democratic opposition. But the Senate (unlike the House, which only needs a simple majority) needs at least seven Democrats to join Republicans to meet the 60-vote requirement. Thursday night, Democratic Leader Chuck Schumer blinked and agreed to support funding, noting that a shutdown would further fuel the dismantling of the federal workforce and services—an outcome he and the party oppose. Despite widespread party outrage, enough Democrats are expected to join Schumer and pass the measure and fund the government through the end of September.

Why it matters: First, the government is not shutting down. Second, this decision pulled forward questions about Democratic positioning in the new political era. Government funding is unique, but as some in the party call for broad opposition to the Trump Administration, it will be key for private-markets advocates to engage on a bipartisan basis to carve out alignment on innovation-related issues. 

Quick hits

• Bank regulator publishes guidance on crypto-related activity : The OCC published guidance clarifying that banks can engage in certain crypto activities, including custodying crypto assets, holding stablecoin reserves, and using distributed ledger technology and stablecoins to facilitate payment activities are permitted in the banking system. 

• SEC overhauls enforcement operation. The SEC adopted rule amendments to require commission approval before the enforcement division can issue formal orders of investigation. In recent years, the agency had delegated this authority to the division. As a result of the new process, investigation may take longer to initiate and complete, and the SEC will likely be more selective in the types of cases it pursues.

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