Carta Policy: Weekly Brief for June 24

Executive summary

• Congress narrowing parameters of Bipartisan Innovation Act and Build Back Better, trying to reach deal by August

• SEC releases regulatory agenda signaling action on private markets, equity market structure, and ESG, while Commissioner Peirce raises concerns on process and substance

• SEC agenda does not enumerate crypto assets, but they’re likely to be incorporated into other rulemakings as the agency continues with regulation through enforcement

• Rep. McHenry releases discussion draft on financial data privacy legislation for consumer protections

Macro matters

Congressional agenda

Congress is focused on economic conditions, gun safety, and imminent Supreme Court opinions on a range of issues. Meanwhile, negotiators are finalizing legislation on the Bipartisan Innovation Act (BIA) and a revised Build Back Better Act (BBB).

Party leaders are narrowing the scope of the BIA, legislation to improve U.S. competitiveness relative to foreign countries by investing in the supply chain for critical technology as well as research in emerging tech. The latest items on the chopping block: climate provisions included in the House package and the SAFE Banking Act, a bill that would authorize banks to transact with cannabis businesses. Policies on expanding the R&D tax credit, the immigration process for H1-B visas, and language on export controls remain under consideration. Proponents are concerned that if a deal is not reached by August, the bill falls apart. Sens. Chuck Schumer and Joe Manchin are working to finalize a smaller version of theBBB, which would focus on health provisions, energy, and deficit reduction. The focus on deficit reduction means progressive efforts to curtail qualified small business stock are real. Carta continues to engage lawmakers and our coalition partners to preserve the current treatment.

Whether Congress passes a year-end tax bill will depend on the outcome of efforts to pass BBB and BIA. Either package could carry several tax extenders, including industry-favored extenders such as immediate expensing of research and development costs, a tax benefit many growth-stage companies would leverage. With both pieces of legislation undergoing significant cuts, it’s increasingly likely that a separate package will be necessary after the election. 

Powell testimony

On the economy, tensions ran high during this week’s congressional hearings with Federal Reserve Chair Jay Powell, which were dominated by concerns of rising inflation and the intensifying risk of recession. Powell parried sharp criticism from several lawmakers over the Fed’s response to inflation, but he reiterated predictions that further interest rate increases will be necessary. Powell’s message: The U.S. economy is strong enough to weather the ongoing turbulence, but there is a realistic likelihood of recession. 

Raising capital in this economy??? 

For private issuers raising capital, knowing the rules is key. Holli Heiles Pandol published a piece outlining the parameters of 506(b) and 506(c), two critical—and nuanced—avenues to raising capital for companies and funds in private markets.

Capital markets

SEC’s Spring 2022 regulatory priorities released 

This week, the SEC released its spring regulatory agenda. While there are a few new items, the agenda largely reflects areas previously outlined. At a high level, the SEC is expected to move forward on proposals aimed at bringing more transparency to the private markets; implementing an ESG disclosure framework for public companies and funds; and revamping the regulatory framework for equity markets. In addition to an ambitious policy agenda, we expect an aggressive and complementary enforcement and examination agenda focused on many of the same policy priorities.

Commissioner Hester Peirce described the agenda as the “regulatory version of a rip current” that can make for dangerous conditions in the capital markets. Peirce’s concerns not only hit on substance, but also process; she criticized the pace at which the Commission is rushing to implement complex proposals that have far-reaching impacts without providing sufficient opportunity for stakeholder input and engagement. With a 3-2 majority, Gensler will most likely have the support necessary to advance his policy priorities, though there is opportunity to shape the proposals through engagement and the comment process.

Private market reforms

On private markets, the SEC is expected to propose rules that would impose additional burdens and disclosures on companies seeking to raise capital in the private markets. These actions, if implemented, would have a widespread impact on the entire private market ecosystem, in terms of both access to capital and investment opportunities. 

Specifically, the SEC is expected to consider reforms to Regulation D, which is the main exemption private companies use to raise capital. Possible reforms could include conditioning the use of the exemption on a Form D filing, requiring pre-filing or closing amendments, and expanding the information collected. The Commission is also expected to consider raising the financial thresholds to qualify as an accredited investor, which would limit investor access to the private markets and likely have a disproportionate impact on lower-cost regions that often lack access to traditional capital-raising networks. The SEC may also consider changes that could push more private companies into the public market by amending how “holders of record” are counted under Section 12(g) of the Securities and Exchange Act of 1934, which could have impact on investors within special purpose vehicles (SPVs) and other fund structures.

The SEC is also expected to finalize its private fund advisers rule proposal, which would fundamentally change how the private fund industry operates and how it is regulated by the Commission. These rules would impose a number of new obligations on SEC-registered private fund advisers and prohibit all private fund advisers—including those in venture capital—from engaging in certain activities, such as the use of side letters or indemnification for simple negligence (a significant departure from common industry practice). Carta submitted a comment letter highlighting our concerns about the potential negative impacts the proposal could have on small and emerging fund managers.

ESG disclosure framework

The Commission will focus on finalizing its public company disclosure framework around climate risk and is expected to propose new disclosure requirements around board diversity and human capital metrics. While these rules are expected to only apply to public companies, there could be downstream effects for the private markets: Private companies that want to eventually go public will have to have these reporting systems in place; institutional investors are increasingly demanding more ESG data to inform capital allocation decisions; and reporting companies will likely require more information from private business partners in their value chains. In addition, the agency is finalizing ESG disclosures for registered funds and investment advisers.

Other priorities:

• Finalizing SPAC reforms to expand disclosure requirements and investor protections. 

• Proposing equity market structure reforms with respect to best execution, pricing increments, and the practice of payment for order flow.

• Proposing rules related to digital engagement practices for investment professionals, including the use of predictive data analytics, differential marketing, and behavioral prompts.

• Corporate governance reformsaround 10b5-1 insider trading plans, stock buybacks, and the proxy process.

Cryptocurrency

SEC agenda on digital assets

Despite calls from industry for more regulatory guidance and clarity, there is no specific item on the SEC’s proposed regulatory agenda that references crypto, even though we expect the agency to continue to aggressively assert its jurisdiction in this space without further direction from Congress or the work stemming from the president’s Executive Order on digital asset regulation. A number of rulemaking items, however, could impact crypto regulation. The SEC’s proposal to expand the definition of “exchange” could potentially scope in crypto protocols or platforms. This would require them to register with the SEC as an exchange or broker-dealer—a move that could deter innovation and new entrants, and disrupt operations of existing platforms. In addition, SEC agenda items related to custody and exchange-traded products could have implications for the digital asset industry, including by addressing the SEC’s numerous denials of approval for Bitcoin exchange-traded funds or products. In the meantime, the Commission will continue to use its existing authority and enforcement tools to oversee the industry.

Himes publishes white paper in support of a digital dollar

Rep. Jim Himes published a white paper urging Congress to authorize a digital dollar to (1) leverage the full faith and credit of the U.S. government, (2) preserve the dollar’s reserve currency status, and (3) encourage the unbanked and underbanked to participate more comprehensively in the financial system. According to the proposal, a U.S.-backed CBDC could be more trusted than other types of cryptocurrencies and privately issued stablecoins while offering better support to underbanked individuals. Himes, a policy leader for Democrats, is building political cover for the Federal Reserve to issue a CBDC, as it has noted it wants clear support from Congress. President Biden’s March executive order tasked the Attorney General and Treasury Secretary to determine what legislation, if any, would be necessary.

Taxation

IRS issues update on paper backlog; Carta pursues 83(b) e-file

IRS Commissioner Chuck Rettig provided an update on his agency’s progress in digging out of the backlog of paper tax returns, with individual paper returns filed in 2021 expected to be completed this week and business paper returns filed in 2021 next up in priority. Rettig also encouraged taxpayers to file electronically in order to avoid delays. The National Taxpayer Advocate’s midyear report to Congress this week highlighted the IRS’s abysmal customer service and outdated technology, recommending the agency identify and minimize e-filing barriers—a recommendation that Carta and industry leaders continue to pursue in our request for the IRS to allow e-filing of sec. 83(b) elections.

Antitrust, privacy, and technology

McHenry releases financial data privacy discussion draft

House Financial Services Ranking Member Patrick McHenry released a discussion draft on financial data privacy. The draft bill would broaden the Gramm-Leach-Bliley Act to include data aggregators and financial institutions, requiring them to inform customers when their nonpublic personal information is being collected, not just when it’s being disclosed to third parties. The bill would also expand the definition of personally identifiable nonpublic information, and enable consumers to opt out of data collection if it isn’t necessary to provide service. The discussion draft builds a foundation for future action, assuming the GOP wins a majority in the House.

FTC signals greater scrutiny on merger and acquisitions

In the latest FTC listening forum on mergers and acquisitions, FTC Chair Lina Khan laid the groundwork for a more exhaustive merger review, convening a panel of market participants to assess the impact on various industries. Khan and the other Democratic commissioners signaled a desire to exercise greater scrutiny of vertical mergers in particular, arguing that they can pose a larger threat to competition. Although Republican commissioners disagreed, noting mergers and acquisitions can spur innovation, lower prices, and provide financial stability to smaller firms, expect Chair Kahn to pursue this more expansive review process.

Upcoming events

• House Financial Services Committee hearing, “ Where Have All the Houses Gone? Private Equity, Single Family Rentals, and America’s Neighborhoods” – June 28 at 12:00 pm (ET)

• House Financial Services Committee Task Force on Financial Technology hearing, “ Combatting Tech Bro Culture: Understanding Obstacles to Investments in Diverse-Owned Fintechs” – June 30 at 12:00 pm (ET)

Notable SEC proposed rules and comment deadlines

*60-days after publication in the Federal Register, which has not occurred

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