The U.S. startup ecosystem recently suffered a setback with the failure of Silicon Valley Bank, which is an important business partner to many companies. However, the genuine concern for the startup sector is the potential wave of tighter regulations directed not just at midsize banks like SVB, but also at private companies and funds. Policymakers and regulators have been scrutinizing the private markets, and if more lawmakers become convinced that Silicon Valley companies require more excellent supervision, the SEC could accelerate its agenda for increased regulation in the private markets, which could fundamentally alter venture as we know it.
The SEC has proposed reforms that will increase barriers to capital for companies and funds, constrain investor access, and potentially push more companies from private to public. This could slow down innovation in the industry. The SEC is considering changes to Regulation D, which allows private companies and funds to raise capital without registering their securities or going public. The Commission may require companies that raise capital under Reg D to disclose more financial and company information, which will carry significant financial costs for small, private companies and expose sensitive financial information to competitors and large corporate incumbents.
Moreover, the SEC has proposed rules that could make it harder for emerging fund managers to raise capital by introducing new prohibitions for venture capital advisers, who are not typically regulated by the SEC. The SEC is also likely to propose raising the income threshold for accredited status, potentially indexing them for inflation and limiting what assets qualify for the wealth test, which would exclude a large swath of the population from private market investment.
Finally, the SEC is considering changes to Section 12(g) under the Securities Exchange Act of 1934, which defines the number of “holders of record” a company can have before it is pushed into the public markets. While the SEC won’t be able to change the fixed number, it is considering changing how “holders” are counted or adding new triggers.
Overall, the SEC’s proposed reforms could have a significant impact on the startup sector. The venture community needs to pay attention to these changes and take steps to protect its interests. The sector needs to work together to engage policymakers and regulators and ensure that any new regulations are balanced and designed to support innovation and growth, rather than stifle it.