Private markets champion Patrick McHenry to retire from Congress

Author:

The Carta Policy Team

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Read time:

8 minutes
Published date:

December 9, 2023

The House Financial Services Committee chairman supported entrepreneurs and investment opportunities; SEC signals renewed assault on private markets

Topline

Financial policy leader Patrick McHenry to retire from Congress
Private market reforms remain focus for SEC
Gensler warns of ‘AI washing,’ signaling potential enforcement efforts
Supreme Court case could have broad implications for passthrough taxation
Carta joins group of small business advocates regarding SBA’s revised rule on affiliation

Patrick McHenry, HFSC Chairman and innovation champion, to retire from Congress

House Financial Services Committee Chairman Patrick McHenry announced he will retire from Congress at the end of this term. McHenry’s departure is an immense loss for the institution. He is respected by lawmakers across the political spectrum and has earned the reputation of being a thoughtful, pragmatic, bipartisan dealmaker. This Congress, he helped broker deals to prevent national default and guided the House through the turmoil of electing a new speaker after Kevin McCarthy—who also announced his departure from Congress this week—was ousted.

During his career and as HFSC Chairman, McHenry has been a champion of the venture ecosystem and broader innovation in the financial services sector, driving efforts to support entrepreneurs, promote capital formation, and boost investment opportunities. His work has facilitated more effective equity crowdfunding, access to capital for growth-stage companies, and private market liquidity. Put simply, Chairman McHenry has sought to steer policy to ensure that regulation contains appropriate safeguards while enabling innovation.

The committee has advanced a number of policy proposals to this end, including:

Investor access: Increasing accredited investor on ramps, including through tests and other qualifications
Bolstering venture capital: Expanding the ability for venture capital funds to invest in secondaries and fund of funds and increasing the size and investor caps for qualifying venture capital funds to help drive capital to emerging ecosystems and fund managers
Digital assets: Creating a regulatory framework for digital assets and stablecoins

While McHenry’s departure is a loss for the ecosystem, it could provide an opportunity for some of these policy priorities to gain momentum and advance. The Carta Policy Team will continue working to support these efforts, and we thank Chairman McHenry for his leadership and work to support the startup ecosystem.

Private market reforms remain focus for SEC

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

Private fund advisers: On top of the sweeping private fund adviser rules that the Commission adopted earlier this year, the SEC is expected to finalize proposals that would impose a host of new compliance obligations on SEC-registered private fund advisers related to cybersecurity risk management, vendor due diligence, custody, ESG disclosures, and enhanced Form PF reporting.
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.
Accredited investors: The SEC is expected to consider reforms to the accredited investor standard, including increasing the financial thresholds. Any increase in the threshold would lessen the number of individuals that would qualify and be able to access private market investment opportunities.
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 is constrained.

Why it matters: We are seeing a sea change in the way the SEC approaches private market regulation. These anticipated actions, alongside the new private fund advisers rules, will have a widespread impact on the entire private market ecosystem, in terms of both access to capital and investment opportunities.

Gensler warns of “AI washing,” signaling potential enforcement efforts to come

In remarks this week, SEC Chair Gary Gensler cautioned companies and funds against “AI washing,” or making exaggerated or unfounded artificial intelligence claims to investors. Gensler’s warning comes as the increasing use of AI has led to concerns that marketing claims might not match what companies are delivering to customers.

Why it matters: Gensler has been outspoken around the potential risks that AI poses to financial markets. Gensler’s latest comments signal we could see the SEC take a similar approach to “AI washing” as it has taken on greenwashing.

Supreme Court case could have broad implications for passthrough taxation

The U.S. Supreme Court heard arguments this week on Moore v. United States, a tax case to determine whether an individual or business can be taxed on unrealized gains. The case could also have broader implications as Amy Miller discussed with Accounting Today.

What’s next: During the hearing, the justices’ inquiries indicated their apprehension about making a sweeping decision in favor of the Moores that could either exempt all unrealized gains from taxation or grant excessive authority to Congress to impose broader taxes on unrealized gains. The final decision is expected next year.

Carta releases annual equity report for 2023

Every year, Carta examines equity ownership across race, gender, geography, and ethnicity. Here are a few takeaways:

Younger founders are more diverse. For founders in their 20s, just 42% are white. Whereas 74% of founders aged 60+ are white.
Over the past 11 years, 34% of new hires who received equity were women.
Overall, women-only founding teams raised less capital this year, but for priced seed rounds, the percentage of funding raised by women-led and mixed-gender teams improved.

Carta joins group of small business advocates in support of SBA’s revised rule on affiliation

This week, Carta joined a group of signatories on a letter to the House Small Business Committee expressing support for a recent rule change that impacts SBA loan programs. This clarity is particularly helpful for venture-backed companies. Traditional lenders are pushing to rescind aspects of the rule, and Carta and our innovation partners want to ensure startups, small business, and venture-backed firms have clear rules of the road to access capital.

News to know

Upcoming events

The Atlantic Council: Debating the Dollar: Who Wants It, Who Doesn't, and What Comes Next? - December 12 at 6:30 a.m. PT / 9:30 a.m. ET
House Committee on Small Business hearing: A Year in Review: The State of Small Business in America - December 12 at 7:00 a.m. PT / 10:00 a.m. ET
The Federalist Society webinar FSOC’s Updated Approach for Responding to Financial Stability Risks: New Guidance on Nonbank “SIFI” Designations - December 12 at 9 a.m. PT / 12:00 p.m. ET
House Financial Services Committee hearing: Examining the Agenda of Regulators, SROs, and Standards-Setters for Accounting, Auditing - December 12 at 11:00 a.m. PT / 2:00 p.m. ET
The Peterson Institute for International Economics discussion: The U.S. Debate About the Final Basel III Accord - December 13 at 6:00 a.m. PT / 9:00 a.m. ET
Federal Open Market Committee Press Conference - December 13 at 11:00 a.m. PT / 2:00 p.m. ET
Senate Judiciary Committee hearing: The New Invisible Hand? The Impact of Algorithms on Competition and Consumer Rights - December 13 at 12:00 p.m. PT / 3:00 p.m. ET
SEC Open Meeting - December 13 at 7:00 a.m. PT / 10:00 a.m. ET
CFTC Commission Open Meeting - December 13 at 6:30 a.m. PT / 9:30 a.m. ET
Brookings Institution: The importance of financial data collection and standardization - December 14 at 6:00 a.m. PT / 9:00 a.m. ET

Author: The Carta Policy Team

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.