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| Presented By S&P Global |
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| Axios Pro Rata |
| By Kia Kokalitcheva ·Oct 30, 2021 |
| 🎃Welcome to Halloween weekend. - Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.
- Playing on my Spotify: Stromae's "Santé" and Barbra Streisand's "Woman In Love."
Today's Smart Brevity™ count is 879 words ... 3 minutes. |
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| 1 big thing: How Congress could bring big changes to U.S. deal-making |
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| Photo illustration: Sarah Grillo/Axios. Photo: Tom Brenner/Bloomberg via Getty Image |
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| The "Build Back Better" reconciliation bill being negotiated in Congress — narrowed by President Biden's last-minute "framework"— has the potential to make big changes to carried interest, stock treatments and how companies do M&A. Why it matters: As is, the bill could eat into some of President Trump's corporate-friendly tax changes from 2017, although Sen. Kyrsten Sinema (D-Ariz.) blocked a reversal of his biggest corporate tax cut. The big picture: Democrats have included a litany of changes to business and investment taxes: Details: - Carried interest: BBB would extend from three to five years the holding period for carry to qualify for long-term capital gains treatment, with some exceptions, and the "clock" would start once "substantially all" of a fund is deployed, even further extending the period in practice.
- Naturally, private equity, venture capital and other investors are chafing at this, as it would directly affect their profits.
- Qualified Small Business Stock: Under the bill, the tax exemption would revert to 50% for those earning above $400,000 (it's been 100% since 2009), taxing qualified stock sales as capital gains.
- Entrepreneurs, investors and even employees of startups and other small businesses could find themselves with tax bills they didn't plan for if the effective date remains Sept. 13, 2021.
- Mergers: How businesses conduct M&A could be affected by increases in corporate tax rates, changes in taxable liquidations, securities exchanges and dividends from acquired foreign corporations.
- Higher corporate tax rates can affect the value of an acquisition target's tax attributes, for example. Some of the provisions could affect how certain deals are structured (or whether they're even a good idea).
- A 1% stock buyback tax in Biden's framework could also indirectly affect M&A decisions.
What to watch: Whether Congress passes any of this — the ball is still in play. |
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| 2. Zooming in on VC and startups |
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| Illustration: Aïda Amer/Axios |
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| BBB's changes to carried interest and qualified small business stock could have the biggest impact on venture capital and the startups they back. What they're saying: "[T]axing carried interest at ordinary income rates will harm new venture capital (VC) fund formation in emerging technology regions in the United States," Justin Field and Michael Chow, of the National Venture Capital Association, wrote in a blog post. - According to a new study by professors Yael Hochberg (Rice University) and John Barrios (Washington University in St. Louis), funded in part by the NVCA, the change would lessen the attractiveness of forming new VC funds in most states outside of the big hubs of California, New York and Massachusetts.
- VC funds outside those locations tend to be smaller and newer, as the local startup ecosystems are less mature.
- Then again, carried interest is the income of professional investors, yet it's getting preferential treatment.
Qualified Small Business Stock: As mentioned above, this could lead to some entrepreneurs and startup employees finding themselves with unexpected tax bills. Yes, but: The bill also includes some potentially helpful provisions for startups. - A direct pay mechanism for the energy tax credits and its expansion to storage tech would make it easier for qualifying startups to get cash back sooner.
- A Small Business Investment Company program could be a source of capital for some emerging VC fund managers.
- A number of other funding programs are included for sectors like manufacturing and climate-related tech, as well as research and development.
Sidebar: While the shelved "billionaires tax" proposal would have only applied to about 700 people and their liquid assets, the simple whisper of taxing unrealized gains set off alarms for investors and entrepreneurs alike. - In short, the idea that investments in startups — or even ownership itself — would be taxed before it actually turned into cash horrified them.
- Again, the proposal would have only applied to a small number of ultra-wealthy folks, but many feared that it would have become a slippery slope, one that soon led to taxing the paper equity of the average startup employee toiling away.
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| 3. Meanwhile, the crypto industry... |
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| Illustration: Sarah Grillo/Axios |
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| Since an August uproar over new tax provisions in the Senate's infrastructure bill, which aims to generate nearly $28 billion by expanding reporting requirements, the cryptocurrency industry has mostly focused on ramping up its D.C. lobbying. The big picture: The sudden addition of the proposal three months ago was a wake-up call for the industry. - The ensuing back-and-forth between trios of senators seeking to add an amendment — just to be shut down by another senator for not getting backing for his amendment — highlighted just how much politics superseded policy.
- It's still in the bill, so it still could become law.
Zooming in: At the core of the issue is the definition of a "broker" and who would fall under the reporting requirement. - The current language is such that it could be interpreted to include participants like token miners, even though they clearly cannot collect and report information on other parties to a transaction.
What to watch: There's still a chance for the bill to be amended in the House. |
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| A message from S&P Global |
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| 📚 Due Diligence |
- Big Hires, Big Money and a D.C. Blitz: A Bold Plan to Dominate Crypto (NYTimes)
- Biden lays out $1.75 trillion "framework" before Europe departure (Axios)
- A taxing proposal (Axios)
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| 🧩 Trivia |
| The Qualified Small Business Stock tax exemption doesn't make as many headlines as, say, carried interest, but it's popular among entrepreneurs. - Question: When was the QSBS exemption first enacted? (Answer at the bottom.)
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| 🧮 Final Numbers |
 Reproduced from Pitchbook; Note: 2021 data through Q3; Chart: Axios Visuals |
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| A message from S&P Global |
| SPAC activity up in Q3, equity issuance dips |
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| Access our complimentary infographic to see data visualizations for Q3 and 2021 YTD capital markets activity, including SPAC and non-SPAC IPOs, and global equity capital markets issuance by type, region, and sector. Learn more about SPAC activity. |
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| 🙏 Thanks for reading! See you on Monday for Axios Pro Rata's weekday programming, and please ask your friends, colleagues and billionaire friends to sign up. Trivia answer: 1993. |
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