Policy Weekly: A House divided | Carta

Policy Weekly: A House divided

Author:
The Carta Policy Team

Read time:
8 minutes

Published date:
January 6, 2023

SEC regulatory agenda turns to private markets

The Topline

Help wanted: House seeking Speaker
New year, new crypto concerns
Treasury rolls out interim CAMT and stock buyback guidance, delays 1099-K thresholds shift
SEC rulemaking priorities released with focus on private market reforms
FTC unveils an noncompete proposal

Help wanted: House seeking Speaker

Four days, twelve ballots, no Speaker. Despite constant negotiations, House Republicans remain deadlocked and unable to elect a Speaker, as a faction of Republican Members continue to vote against Representative Kevin McCarthy, preventing him from reaching the required 218 votes.

Team McCarthy’s most recent offer successfully eroded a portion of the opposition, lowering his votes against from 20 to 7. This did not get him over the threshold, but signals he has a path forward.

Possible scenarios: This fluid dynamic can lead to a few possible scenarios.

McCarthy reaches a deal with his detractors: He has met nearly all demands—allowing the mechanism to recall him as Speaker; restructuring committee makeup; staying out of Republican primaries. As we saw today, this has increased his support and decreased the opposition. The goal will be to continue to exert pressure on the final holdouts. This is the increasingly likely outcome.
McCarthy steps aside: If they remain deadlocked after all the concessions, Team McCarthy may decide there is not a path to 218. Although his allies will not want to capitulate to the minority preventing his path, McCarthy and his allies may decide to put forth another candidate. If not resolved by this weekend, expect more chatter on this, though positive movement in McCarthy’s favor likely gives him more runway.
Rule changes: Difficult to execute, but House Republicans could seek to change the election rules, for instance enabling the Speaker to be elected by plurality rather than the current 218 vote threshold. This is dangerous for Republicans, as the Democratic Leader Hakeem Jeffries is garnering more votes than McCarthy with a united Democrat front. Changing the election to a plurality would be daring the Republican detractors to vote against McCarthy, thereby electing a Democratic Speaker. Let’s call this the “nuclear option,” and remains most unlikely.
Democrats help: Highly unlikely, but Democrats—in exchange for some concessions—could help Republicans resolve this by crossing the aisle to vote for more McCarthy or “consensus candidate” (unlikely) or the more plausible scenario, voting “present,” thereby lowering the total votes McCarthy needs to win. Highly unlikely both because Democrats do not believe this is their problem to solve and because the level of concessions McCarthy would have to give them may alienate more of his Republican base.

Why it matters: This uncertain and prolonged process will delay further organizing and the actual policymaking and oversight agenda. It will also likely harden feelings between House Republicans in an already razor-thin majority, making legislating even more challenging. We continue to believe there are bipartisan paths forward on areas such as capital formation, but this makes all things harder.

New year, new crypto concerns

Washington kicked off 2023 with more crypto activity, continuing a trend accelerated by the FTX collapse. Agencies are lining up to confront a range of crypto-related uncertainties:

Banking agencies scrutinize risks: The Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) released a joint statement on the risks posed by crypto-assets to banking organizations. The trio highlighted a series of “key risks,” such as questions around custody practices and the threat of run risk, and indicated that reviews of crypto assets are ongoing across the agencies.
Tax guidance for digital asset transactions: Treasury and the IRS released transitional guidance for brokers that will be subject to new digital asset reporting requirements, granting them a reprieve from reporting additional information on the dispositions of digital assets until new regulations are finalized. This transitional guidance applies only to information returns filed by brokers as taxpayers are still required to report any income they receive from transactions involving digital assets and answer the digital asset question on page 1 of Form 1040 (used by individual taxpayers to file their taxes with the IRS).
CFIUS and others scrutinize Binance acquisition plans: Treasury’s Committee on Foreign Investment in the United States (CFIUS) may review Binance’s attempted acquisition of Voyager Digital. The SEC has also objected to the deal in Voyager’s bankruptcy proceedings seeking more information around Binance’s ability to “consummate a transaction of this magnitude.”

Efforts are not exclusive to the federal government: New York state regulators flexed their enforcement muscle, reaching a settlement with crypto platform Coinbase requiring them to pay a $50 million penalty to settle anti-money laundering and know-your-customer (AML/KYC) deficiencies and spend $50 million to improve its compliance program over the next two years.

Why it matters: A legislative solution may not be imminent, but regulators at a federal and state level are only getting more aggressive.

Treasury rolls out interim CAMT and stock buyback guidance, delays 1099-K thresholds shift

Over the break, Treasury and the IRS released interim guidance for two of the Inflation Reduction Act’s (IRA) corporate tax increases and announced a delay on the $600 reporting threshold for Forms 1099-K.

Stock buyback: IRS issued interim guidance on the application of the corporate stock repurchase excise tax (which imposes a 1% excise tax on the aggregate fair market value of stock repurchased by certain corporations). IRS’s interim guidance includes a set of exceptions that will effectively exclude most mergers, acquisitions and complete liquidations from the excise tax. Although there is no specific carveout for special purpose acquisition companies (SPACs) or de-SPAC transactions, Treasury and the IRS did clarify that SPACs completing a liquidation and dissolution would be exempt from the excise tax. ( Notice 2023-2)
Corporate alternative minimum tax (CAMT): The latest guidance clarifies that the new 15% CAMT regime generally applies to companies with financial statement income above $1 billion. This will be effective for tax years beginning after December 31, 2022. Stakeholders are urging Treasury to supply immediate guidance as companies struggle to report the impact of the CAMT in filings that need to be disclosed in 2023 Q1 financial statements, but IRS’s latest notice outlines 20 outstanding implementation issues where they seek further comments. ( Notice 2023-7)
1099-K reporting: The IRS delayed the implementation of the new Form 1099-K (an IRS information form that reports certain payment transactions to the IRS and taxpayer) reporting rules originally scheduled to take effect in early 2023. The American Rescue Plan Act lowered the threshold for reporting payment card transactions and third-party payment network transactions from 200 or more transactions totaling at least $20,000 to a single transaction exceeding $600. The $20,000 threshold will now remain in effect until further notice, and calendar year 2022 will be treated as a transition period. When the new $600 rule goes into effect, more gig workers, users of online marketplaces, and payment apps should expect to be issued Forms 1099-K. ( Notice 2023-10)

SEC rulemaking priorities released with focus on private market reforms

The SEC’s latest regulatory agenda has been released, which reflects Chair Gary Gensler’s rulemaking priorities over the coming year. The agenda reaffirms previous priorities, and proposals aimed at bringing more transparency to 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. With a 3-2 majority, Gensler will most likely have the support necessary to advance his policy priorities, though he will now face aggressive oversight from House Republicans. While this is not likely to stop the SEC from moving forward, it could slow down the process.

Specific private market reforms on the SEC’s agenda include:

Regulation D: The Commission expects to propose reforms to Regulation D, the main exemption private companies and private funds 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.
Accredited investor criteria: The Commission may 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.
Holders of record: The SEC may 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 an impact on investors within special purpose vehicles (SPVs) and other fund structures.
Private fund advisers: The SEC is 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.

Why it matters: The SEC is moving through its ambitious agenda and likely turning its attention towards private markets. The Commission has telegraphed its skepticism of private markets and is likely to put forward proposals (on a 3-2 party line vote) that limit investor access to private markets and make it more cumbersome to raise capital, as well as force more private companies to go public.

FTC unveils an noncompete proposal

After years of circling the issue, the Federal Trade Commission (FTC) is considering a rule ( fact sheet) to ban the use of noncompetes broadly, though exemptions are contemplated in the questions included for public comment. The carveouts posited for public feedback could cover franchisees and senior executives, and a diverging framework for low- and high-wage workers is also floated. On the latter, four scenarios combining a mix of the following factors are outlined for feedback: banning noncompetes for workers below a certain threshold ($100,000 in annual income is used as an example), applying a rebuttable presumption for either all workers or those above the set threshold, or broadly allowing noncompetes for workers above the threshold. The agency is also open to thresholds tied to job function or other non monetary factors.

The Biden administration signaled its intent to review noncompetes in a 2021 Executive Order on promoting competition. The agency contends that noncompetes drive down wages and stifle innovation by driving stagnation in the workforce, estimating a $300 billion yearly increase in workers’ earnings and significant boost in new businesses if the rule is finalized.

The proposed ban would also extend beyond employees to all independent contractors, a group facing an overhaul in classification procedures from the Department of Labor.

Why it matters: The FTC estimates that approximately one in five American workers sign noncompete agreements, potentially spelling implications for a wide range of industries and individuals. Noncompetes are especially prominent in the tech sector, and such a final rule will change labor dynamics.

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