What I Learned on our Trip to Washington DC – the Week after the Inauguration of Donald J. Trump

By David Verrill, Chair of ACA’s Public Policy Committee

Ten days ago, I took a trip to Washington, DC with ACA executive director Marianne Hudson and our government affairs team of Chris McCannell and Greg Mesack from Eris Group.  It was an interesting three days, with a combination of planning our policy work for the year, meeting with other associations with overlapping interests, and ten meetings on Capitol Hill.  This was the week after the inauguration of President Trump, and you could see a lot of change in our nation’s capital.  Here is what I learned:

Comprehensive Tax Reform

Comprehensive tax reform is coming (after Congress deals with the repeal and replacement of Obamacare), with the goal of having it done by August 1.  Most believe that the House will follow blueprints by Paul Ryan and former Ways & Means chair Dave Camp as the basis to build on, with the following features:

  • 20% corporate tax rate
  • Allowing businesses to expense 100% of their capital investment
  • Eliminating the deduction of interest
  • Shift toward a territorial system, where American companies would only owe tax on domestic profits
  • Border adjustment, in which the US taxes the gross value of any imports into the country 

The Senate is expected to have a lot of changes to the House proposal, which is likely to push the timeline into Q4 2017.  The ultimate tax policy will be SIMPLER, PRO BUSINESS, and REVENUE NEUTRAL.  Simple in terms of fewer categories of tax rates, pro-business in terms of a flat 20% corporate tax rate, and revenue neutral in that many loopholes will be closed and policies changed to “pay for” the lower rates.  It appears that most tax exemptions could be on the chopping block, and that might include the 100% exemption of 1202 gains.  It will be a big victory to keep 1202.  Most of the conversations related to corporate taxes, so the tax reform for individual filers is less clear (aside from fewer tax brackets).   

Financial CHOICE Act

This act includes a number of otherwise independent bills that are meant to foster new and/or small business creation.  It includes items such as the HALOS Act which exempts business plan competitions and other gatherings from engendering treatment as General Solicitation – which brings with it onerous verification of accreditation and other Regulation D filings.  The CHOICE Act is not likely to make it through the legislative process, perhaps passing the House, but not the Senate.  Should that be the case, a separate opportunity to move the HALOS Act through Congress will be undertaken, and we also discussed having separate bills for several other ACA priorities so that these issues can eventually pass both Congressional chambers.

ACA Public Policy Priorities

In meeting with members of Congress, the SEC, and our potential partners on the Hill, we have developed the following approach:

  • Consistency and Constancy: We implore Congress and the SEC to take an approach of consistency and constancy such that early stage investors can continue their behavior of investing in the startup companies that drive innovation and job growth in America.
  • Comprehensive Tax Reform: ACA’s tax position is ”simplification is good” and “pro-business is good,” but “don’t throw the baby out with the bathwater by killing 100% 1202 QSBS, R&D tax credits, and treatment of carry as pay-fors.” A bi-partisan House team is willing to introduce legislation that promote this concept to better ensure the chance of continuing this benefit on a permanent basis, and to include some additional improvements.
  • Accredited Investor Definition: Keep the current measures of wealth and income “as is.”  The second priority is to add measures of “sophistication” so that more US citizens can be deemed to be accredited.  If there is a proposal to increase the levels of wealth and income, then do it on a going forward basis via an index (e.g. CPI).  Republican staff did not seem to have an appetite for removing the requirement for the SEC to study the definition every four years from Dodd-Frank.
  • 1202 Qualified Small Business Stock: Keep the current permanent 100% exemption from capital gains on QSBS.  If the opportunity for changing the treatment of 1202 stock arises, consider reducing the holding period from 5 to 3 years, consider including LLCs (less previously filed losses), consider increasing the enterprise value maximum from $50M to $150M (or something agreed to among several associations), and make the language more “administrable” by cleaning up the language and creating a Form for filing.  If QSBS is considered to be on the chopping block for “pay-fors”, don’t throw the baby out with the bathwater – early stage investors and the companies they fund represent most of the net new jobs created in the US over the last 20 years.  Cutting QSBS would do more harm than good to innovation and job creation.
  • 99 Investor Problem: Currently (venture) funds are limited to 99 investors, an historic and arbitrary number largely influenced by the mutual funds industry.  We propose increasing the number of investors in a fund to 500 investors (and a maximum fund size from $10M to $50M, and it appears that majority staff are interested in making these increases in the Financial CHOICE Act and other related legislation).
  • JOBS Act: While the JOBS Act was well-intentioned, there were some unintended consequences.  The HALOS Act provides a nice fix to General Solicitation.  For those deals that are part of General Solicitation, the proposed Advance Form D rule should be removed and membership in an Existing Angel Group should suffice as a mechanism of verification.  We heard interest on this issue from legislative offices in both parties.

Coalition With Like-Minded Groups

ACA has a compelling story to public policy officials, but not every cause is a primary focus of ACA.  In those instances, we are happy to join a coalition (e.g. write letters of support) for public policies that might affect some ACA members. For example, the treatment of carried interest, the 99 investor rule, or limits on immigration.  In particular, we talked with the National Venture Capital Association (NVCA) and Biotechnology Innovation Organization (BIO).

We have a Public Policy Committee, a Grass Roots Committee, and a lobbying firm (Eris Group) as our organizational assets.  If you are interested in learning more, getting involved, and supporting the Public Policy efforts of ACA, please reach out to Marianne Hudson.