Capital formation to dominate House agenda in December

We hope everyone is gearing up for a nice and relaxing Thanksgiving holiday. The Carta Policy Team is coming to you with a special edition of Policy Weekly to preview some of the anticipated capital formation efforts in December.

House readies bipartisan package to drive access to capital and investment opportunities 

In the next few weeks, the House is expected to consider bipartisan legislation that would help expand access to capital, increase private market investment opportunities, and ease the burdens for companies to transition to public markets. The package is expected to include many of the measures that have passed the House Financial Services Committee (HFSC) with strong support, including provisions that would:

• Expand qualifying venture investments to include fund-of-fund and secondary transactions, helping drive more capital to emerging managers and easing liquidity pressures across the startup ecosystem. (DEAL Act)

• Increase the size and investor limits for qualifying venture capital funds, enabling smaller managers to assemble competitive funds and reach more investors. (ICAN Act)

• Modernize the accredited investor standard by adding new on-ramps based on education, experience, or examinations, not just financial metrics. 

• Enhance retail access to private markets through professionally managed funds, permanently removing barriers on how much closed-end funds can invest in private funds.

• Streamline pathways for companies to go public, lowering barriers and reducing costs for companies to enter and remain in the public markets.

Why it matters: The venture capital ecosystem powers American innovation and economic growth, but unless we modernize our policy infrastructure, the benefits of this engine will be limited. These bipartisan solutions will not only help bolster the VC ecosystem, but will broaden its benefits to more investors, more entrepreneurs, and more communities.

Bigger picture: Capital formation has historically been a bipartisan area of interest—and many of these proposals are not new ideas—but legislative efforts over the past few congresses have fallen short and failed to attract bipartisan support. Carta and our coalition partners have not only been educating policymakers on both sides of the aisle on the merits of the proposals and the VC ecosystem more broadly, but we have directly engaged to negotiate the contours of many of these bills to reach a favorable, bipartisan solution. 

These efforts made a difference: HFSC advanced these measures with a nearly unanimous vote. But we must continue these efforts to get a strong bipartisan vote in the House and drive momentum in the Senate to push these policies across the finish line.

What’s next: The final contours of the package are expected to be finalized and released next week, with a House vote in the following weeks before the end of the year. In the interim, Carta and our ecosystem partners will be engaging policymakers to drive awareness and support for this legislation, as well as engaging the broader innovation community to get involved to increase support for these efforts.

Engagement matters: As details become final, we will circulate an open letter for the innovation ecosystem—founders, investors, accelerators, support organizations, employees—to sign in support of these efforts. Please reach out to policy@carta.com if you want to get involved, and stay tuned to innovatoralliance.org for more details. But it’s never too early to engage if you want to weigh in with policymakers on why these provisions are so critical to bolster and broaden the private capital ecosystem. 

House to consider key provisions to bolster innovation economy

In addition to the capital formation package, the House is expected to consider a number of bills to expand access to capital for fund managers and small businesses, particularly in underserved areas.

• Developing and Empowering our Aspiring Leaders (DEAL) Act: Expands the category of qualifying venture investments to include fund-of-fund and secondary investments. 

Why it matters: Today, venture capital funds are largely limited to direct investments in portfolio companies. Expanding the ability for funds to invest in other VC funds could help drive capital to emerging managers, as well as increase diversification and returns for investors. Expanding secondary investments could help ease liquidity pressure, recycle capital back into the ecosystem, and help startup founders and employees monetize their equity compensation. 

• Improving Capital Access for Newcomers (ICAN) Act: Increases the size and investor limits for qualifying venture capital funds.

Why it matters: Under Section 3(c)(1), private funds have long been barred from raising capital from more than 100 beneficial owners. In recent years Congress created a “qualifying venture capital funds” exemption to allow smaller fund managers to raise capital from up to 250 investors, but fund size was capped at $12M, limiting the utility of this provision. The ICAN Act would expand the fund size to $50M and increase the investor limit to 500, enabling smaller managers to assemble competitive funds and raise capital from more investors.

• Investing in All of America Act: Expands access to capital for small businesses in rural and underserved areas or those operating in national security or critical tech sectors by excluding those investments from the SBIC leverage cap. 

Why it matters: The Small Business Investment Company (SBIC) Program enables venture capital and private equity funds to leverage additional capital from the Small Business Administration to deploy into the ecosystem. This public-private partnership leverages professional investment managers to invest in more entrepreneurs across the country and broaden the innovation ecosystem. Carta’s head of policy Anthony Cimino testified in favor of this legislation as a means to leverage professional investment managers to invest in more entrepreneurs across the country and broaden the innovation ecosystem beyond traditional funding hubs.

What’s next: All of these measures passed their respective committees with near unanimous support, so we’re expecting them to pass the House with strong bipartisan support next week. Several of these provisions (DEAL Act and ICAN Act) are also expected to be included in the capital formation package as mentioned above, but House action on these individual measures in addition to the broader effort increases the potential pathways to pass the Senate and ultimately be signed into law.

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