Congress scrutinizes SEC and private markets

Congress scrutinizes SEC and private markets

Author: The Carta Policy Team
Read time:  9 minutes
Published date:  22 March 2024
Fifth Circuit puts SEC climate rules on ice.


  • Congress finalizing funding bills, but tax deal teeters

  • Corporate Transparency Act challenged in Maine

  • SEC climate rules halted as litigation moves forward

  • HFSC discusses potential SEC reforms and private market policy priorities

  • Europe moves first on AI

Congress finalizing funding bills, but tax deal teeters

A $1.2 trillion deal to fund the remainder of the federal government through the end of the fiscal year is moving through Congress. The bill passed the House primarily with Democratic support and is expected to clear the Senate. The final vote may slip past the Friday midnight deadline, but a short-term lapse would not have a substantive impact on government operations. The deal came together over the opposition of many House Republicans, which could further divide the fractured caucus. 

Tax Package: As the funding package came together, the threads of the bipartisan tax deal continued to fray. Senate Democrats initiated a process to consider the package on the floor after the Easter recess despite steadfast opposition from several Republicans. The tax package will need support from at least nine Republican senators to pass, a threshold that will be difficult to reach. If that attempt fails, it is likely that R&D expensing—and the broader package—will likely be shelved until a year-end negotiation. 

What’s next: Lawmakers will head into the recess with the government funding debate resolved and an attempt underway to break the stalemate on the tax deal. After their return, however, election politics will creep more heavily into the day-to-day business of Washington, and it will become even harder to forge the bipartisan consensus necessary to pass laws.

Call to action: The Carta team has been closely following the tax package and pushing for the restoration of full R&D expensing. Join the effort by contacting your U.S. senators to let them know that R&D matters to the innovation community. 

Download the email template here.

Corporate Transparency Act challenged in Maine

This week, a Maine resident sued the U.S. Department of the Treasury, asserting that the Corporate Transparency Act (CTA) is unconstitutional.

  • This is now the second lawsuit questioning CTA’s constitutionality. A federal court in Alabama ruled last month that CTA was unconstitutional, which has created uncertainty surrounding the filing obligations for businesses. In response, the U.S. Department of Justice filed a notice to appeal the ruling.

  • A Treasury spokesperson stated that “other than for the named plaintiffs [in Alabama suit]… there is no change to the reporting obligations of the vast majority of reporting companies, who are still required to comply with the law.”

New businesses formed in 2024 are still bound by the CTA and should plan to file with FinCEN until further notice. Businesses should discuss their filing obligations with their legal counsel.

The Carta team has developed a free CTA-compliance tool on our Launch platform, which supplies early-stage founders with free resources to help raise funds and issue equity.

SEC climate rules halted as litigation moves forward

The Fifth Circuit Court of Appeals has stayed the SEC’s climate change disclosure rules for public companies pending further judicial review. The SEC has been challenged in at least nine different actions on both sides of the rule: environmentalists argue the SEC violated procedure by scaling back the rules, while the business community and Republican state attorneys general argue the agency exceeded its authority by mandating disclosures based on climate-specific factors as opposed to materiality-focused standards.

What’s next: The Eighth Circuit Court of Appeals, a more conservative-leaning court, will hear the challenges on a consolidated basis. Reporting obligations under the rules do not begin until 2026. The prospects of litigation and upcoming presidential election will likely cause some companies to take a wait-and-see approach to implementation.  

Bigger picture: Challenging your regulator in court was once seen as a last resort, but the financial services industry has increasingly turned to the courts to challenge the SEC on its policy agenda. In addition to the climate disclosure rules, the SEC has been sued to block a number of policy priorities enacted under Chair Gensler, including a successful challenge to the stock buyback rules and pending actions from the private funds industry to vacate the private fund adviser rules and new dealer rule. The crypto industry has sued the agency for failing to engage in rulemaking to provide clarity to the industry. Courts have traditionally been deferential to regulators, though this posture is shifting particularly as agencies have become more active in implementing political policy agendas that were traditionally driven by Congress. 

HFSC discusses potential SEC reforms and private market policy priorities

The House Financial Services Committee held a hearing to discuss proposals aimed at reforming the SEC and its rulemaking process. Republicans blasted the SEC’s aggressive agenda and pushed reforms to rein in the regulator, while Democrats defended the agency and pushed policies to increase transparency in the “unregulated” private securities markets. The SEC has a number of items on its regulatory agenda through which it could subject larger private companies to public disclosure requirements, including:

  • 12(g) holders of record: The SEC is expected to propose changing the way “holders of record” are counted under Section 12(g). If underlying investors in private funds or pooled investment vehicles were counted as beneficial owners, more private companies could be pushed into the public markets.  

  • Regulation D: The SEC is expected to propose reforms to Regulation D, the primary vehicle through which companies and funds raise capital in private markets. Such reforms may include requiring more disclosures from private issuers on Form D, requiring pre-filing or closing amendments, and conditioning the use of the exemption on a Form D filing. 

Why it matters: The SEC has increased its scrutiny of private fund advisers and the private markets more broadly. The SEC has imposed new requirements for venture capital and private equity fund advisers that will fundamentally change how the industries operate and are regulated, but there is support from Democratic leaders to go much further. This includes subjecting larger private companies to a public disclosure framework and preventing private companies from raising capital from investors without additional disclosures. 

Europe moves first on AI

The European Parliament approved the EU’s AI Act, triggering a series of changes to the continent’s AI landscape that will begin to take effect in May and are set to be fully in effect by 2027. These include:

  • Requiring companies to label deepfakes, AI-generated content, chatbots, or other AI systems;

  • Placing safeguards around AI development in certain “ high risk” sectors, like banking and health care, and of general purpose AI models; and

  • Creating a European AI Office responsible for overseeing compliance, implementation, and enforcement, in addition to receiving AI-focused complaints from citizens.

The statute will also ban a narrow set of AI use cases that pose an “unacceptable risk” and restrict uses focused on sensitive characteristics, like facial recognition.  

Why it matters: This is the first major framework for regulating AI, putting Europe ahead of the United States on both AI and privacy. Similar to GDPR, the rules would apply to U.S.-based companies that market or provide AI-based technology in the EU. And like the GDPR, the EU’s AI statute will likely serve as a motivator—or a cautionary tale—for policymakers across the United States. 

New from Carta: State of startup compensation, H2 2023

This week, Carta published the biannual “State of Startup Compensation” report, detailing trends from the second half of 2023. Notably, for the first time in at least 5 years, there were more total job departures from companies on Carta than there were total new hires. Some other key takeaways include: 

  • Hiring halved last year: Companies on Carta made 267,818 new hires in all of 2023, a far cry from the 523,487 hires made in 2022 and 525,827 hires from 2021. 

  • 32% of new hires from 2022 departed their companies: Even among very recent hires, employee turnover has been considerable. About 32% of employees hired in 2022 are no longer with the company, and about 23% of new hires from 2023 have already moved on. 

  • Equity packages have stabilized: The average amount of equity issued to new hires increased by 0.2% in January 2024 compared to September 2023. That’s a small change, but it’s an abrupt shift from recent history: Previously, equity benchmarks had declined by 37% between November 2022 and September 2023. 

>>Read the full report here.

News to know

  • McHenry maintains stablecoin push. At an event, Chair McHenry reiterated his intent to enact a bill this year to create a stablecoin regulatory framework. He emphasized that progress is continuing on bipartisan discussions to produce updated legislation but did not provide a specific timeline for release.

  • SEC sanctioned in Utah crypto case. A federal judge said the SEC committed a “gross abuse of power” and misled the court in its legal proceedings against DEBT Box, a Utah-based crypto company. The agency is facing several court-imposed consequences, including payment of DEBT Box’s legal fees, and increasing scrutiny from Congress for overstepping its authority.

  • SEC focuses enforcement actions on AI, continuing crusade against “AI washing. The SEC charged two investment advisers with making false and misleading statements about their use of artificial intelligence. SEC Chair Gensler reiterated the dangers of “ AI washing” and outlined the SEC’s responsibility when it comes to protecting investors from false claims surrounding AI. The Commission has also published an Investor Alert about AI and investment fraud.

  • Interest in IRA clean energy tax incentives continue to grow. Treasury and the IRS released data showing a surge in registration for the Inflation Reduction Act’s (IRA) clean energy tax credits, which make it easier for more businesses to benefit from clean energy tax incentives, finance projects, and deploy clean power. And while the latest data shows growing business interest in leveraging the incentives to reshape financing for clean energy projects, Republicans remain critical of the law's increasing price tag, with former President Trump pledging to undo the green tax provisions if elected.

  • Independent contractor rollback clears committee. The House Education and Workforce Committee advanced a Congressional Review Act resolution that would nullify the Department of Labor’s revised rule on independent contractor classification. The resolution is likely to clear the House, but it would be vetoed by the president if it reaches his desk. 

  • California’s climate regulator says it will enforce climate disclosures. California’s top climate regulator said Tuesday that the state plans to implement its first-in-the-nation corporate emissions reporting law despite legal and funding obstacles. The Chair of California Air Resources Board  said they expect to receive funding to require large corporations doing business in the state to publicize their greenhouse gas emissions, although it was not clear if they would be able to enforce it starting in 2026. Notably, California’s climate rules are also the subject of legal challenge. California’s requirements would go further than the SEC and apply to public and private companies, as well as include Scope 3 supply chain disclosures. 

  • Reddit shares surge in stock market debut. In their long-awaited IPO debut, Reddit shares rose 48% from their offer price, which is being seen as an encouraging sign for other companies that have been waiting to go public.

  • FDIC proposes extra scrutiny for bank mergers over $100 billion. The FDIC's board of directors voted 3-2 to issue a proposal that would heighten scrutiny on mergers that would result in banks with more than $100 billion in assets. If finalized, the proposal would update the agency's merger guidance for the first time in 16 years.

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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.