SEC gearing up for major private market rulemakings

Author:
The Carta Policy Team

Published date:
June 15, 2023

Topline

• SEC’s regulatory agenda has private market reforms in focus
• Courts side with CFTC in landmark crypto case
• Economic package heads for the House floor with QSBS expansion
• Republicans grill CFPB director on junk fees, small business lending

SEC’s regulatory agenda has private market reforms in focus

The SEC’s latest regulatory agenda was released this week, and private market reforms will remain an area of focus for rulemaking activity over the coming year. Here are a few highlights and potential implications for the ecosystem:

• Private fund advisers: The SEC is expected to finalize its private fund adviser proposal, which would impose a number of new obligations on SEC-registered private fund advisers, including disclosure and audit requirements. The rule would also prohibit all private fund advisers— including VC fund advisers—from engaging in certain activities, such as the use of side letters or indemnification for simple negligence. Additionally, the Commission is expected to finalize a number of other proposals that would impose a host of new compliance obligations on SEC-registered private fund advisers, including with respect to cybersecurity risk management, vendor due diligence, custody, ESG disclosures, and enhanced Form PF reporting.

• Regulation D: The SEC is expected to propose Regulation D reforms, which could 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.

• Accredited investors: The SEC is expected to consider raising the financial thresholds for individuals to qualify as accredited investors, which would limit private market investment opportunities and reduce an important source of capital for founders and fund managers, particularly in lower-cost regions that may lack access to traditional capital-raising networks.

• 12(g) holders of record: The SEC is expected to propose changing the way “holders of record” are counted under Section 12(g), which could push more private companies into the public markets before they are ready, reduce competition, and constrain investor access if the use of SPVs and other fund structures are constrained.

Why it matters: These actions, if implemented, would represent a sea change in how the agency regulates private fund advisers and would have a widespread impact on the entire private market ecosystem, in terms of both access to capital and investment opportunities.

Courts side with CFTC in landmark crypto case, while Congress debates crypto framework

A U.S. District judge sided with the CFTC in a ruling against Ooki DAO, a decentralized cryptocurrency collective, finding them liable for violating commodities exchange rules. The ruling was one of the first cases concerning decentralized autonomous organizations (DAOs) and constituted a big win for the CFTC. The outcome confirmed that regulators will have the ability to sue decentralized finance (DeFi) actors moving forward. The judge ordered Ooki to pay a $643,542 fine, but it’s unclear how the Commission will collect the fine, as members of DAOs are often anonymous and informally organized.

House continues to debate crypto framework

The House held a hearing this week on the future of digital assets. Democrats criticized the draft crypto regulatory framework released by the Republican leaders of the House Financial Services and Agriculture Committees last week, arguing that the proposal puts power into the wrong hands by redirecting authority that was previously held by the SEC and giving it to the CFTC.

Why it matters: There does not seem to be a clear path forward for a comprehensive crypto regulatory framework in the United States, from either a legislative or regulatory perspective.

Economic package heads for the House floor with QSBS expansion

The House Ways and Means Committee’s economic package, the American Families and Jobs Act, advanced out of committee along partisan lines. Notably, it includes modifications to expand the scope of businesses eligible for the QSBS, a change Carta and its coalition partners have been working to secure. The provision would make several updates, including:

• Expanding the section 1202 exclusion eligibility to include investments in S corps
• Allowing for partial gains exclusion if you hold the stock for more than three years but less than five years
• Creating a new “tacking rule” to alter the calculation of the holding period for the exclusion by changing the treatment of convertible debt in certain circumstances

Why it matters: While the markup did not feature many changes to the underlying package, there were attempts from Democrats to limit the proposed QSBS expansion. These efforts will recur when the package passes through the Rules Committee and is taken up on the House floor.

Senate begins AI hearings, seeks privacy framework

The Senate Judiciary Committee held a hearing on artificial intelligence this week, and Democrats quickly honed in on privacy concerns related to generative AI.

Why it matters: The U.S. is certainly playing catch-up in terms of regulating AI technology. While both Congress and the White House want to build a policy framework, they are realizing some foundational legislative pieces need to be put in place to regulate AI, namely provisions surrounding privacy.

News to know

• The Federal Reserve’s policy committee decides to pause rate hikes.
• McHenry sends a letter to Treasury on FSOC guidance.
• Tax regulations no longer reviewed by OMB under new administration plan.
• McHenry introduces legislation to protect small business data.
• CFPB Director Rohit Chopra testifies on the Hill.
• Fed, SEC probing Goldman Sachs’s role in SVB’s final days.
• The outcome of a Washington state lawsuit could block Democrats’ proposals to tax wealthy Americans.
• SEC issues risk alert around marketing rule compliance.

Upcoming events

• House Financial Services Committee hearing: The Federal Reserve’s Semi-Annual Monetary Policy Report – June 21 at 7:00 a.m. PT / 10:00 a.m. ET
• House Financial Services Committee Oversight & Investigations Subcommittee hearing: Oversight of the SEC – June 22 at 6:00 a.m. PT / 9:00 a.m. ET
• House Financial Services Committee Capital Markets Subcommittee hearing: Oversight of the SEC’s Division of Trading and Markets – June 22 at 7:30 a.m. PT / 10:30 a.m. ET
• SEC Investor Advisory Committee – June 22 at 7:00 a.m. PT / 10:00 a.m. ET
• House Committee on Small Business hearing: Reviewing the SBA’s Office of Advocacy Report on the Regulatory Flexibility Act – June 22 at 7:00 a.m. PT / 10:00 a.m. ET
• Senate Committee on Banking, Housing, and Urban Affairs hearing: The Semiannual Monetary Policy Report to the Congress – June 22 at 7:00 a.m. PT / 10:00 a.m. ET
• Carta QSBS Virtual Event: How To Save Up to $10M in Capital Gains: Qualified Small Business Tax Exemption – June 27 at 10:00 a.m. PT / 1:00 p.m. ET