Wall Street lawyer Walter “Jay” Clayton hasn’t been officially appointed to the head of the Securities and Exchange Commission yet. But given the finite amount of political capital that Democrats wield right now, it’s easy to imagine that he’ll be confirmed and fairly easily when it’s his turn on Capitol Hill.
That’s probably welcome news for startup founders and investors who’d seen greater interest in their affairs by the SEC over the last year and will now most likely be left to their own devices.
If haven’t read about him yet, Clayton is the “insider’s insider — a deal maker,” as Dealbook noted earlier this month, when then President-elect Trump selected him to run the agency. A Washington lawyer at the white-shoe firm Sullivan & Cromwell, Clayton has spent his career focused on public and private M&A (including advising Goldman Sachs on various acquisitions), capital markets offerings (including working on Alibaba’s 2014 IPO), and enforcement proceedings (including to help clients settle some mortgage related securities claims after the financial crisis of 2008).
What does that background mean for Silicon Valley? Two things, says political strategist and investor Bradley Tusk, who advises startups on how to navigate changing regulations. For starters, Clayton has “some tech experience, which should be appealing to the tech industry,” he says.
Tusk acknowledges that working on the Alibaba IPO isn’t akin to managing the “deal flow you’d see at Wilson Sonsini,” a law firm that has long and famously worked with startups. “But he’s not a total stranger to the sector; he understands its impact on the economy.”
Perhaps more notably, says Tusk, Clayton “isn’t a policy activist. I don’t think this is someone with an ideological view about how security regulation should be expanded.”
That’s in stark contrast to Mary Jo White, a former litigator who stepped down as the head of the SEC at the end of the Obama administration. White had visited Silicon Valley nearly a year ago and put investors and founders on notice that the SEC was becoming concerned by spiking valuations in the private sector, among other things. As we wrote back in October, the SEC seemed to be using an investigation into troubled Theranos specifically to expand its mandate into Silicon Valley’s startup ecosystem.
Clayton, meanwhile, may be more inclined to leave startups and investors to their own kind of trust fall. That may include those cases that were mid-stream under White’s leadership. Among the companies that were reportedly talking with the SEC last year: vegan food company Hampton Creek, the online lending outfit LendingClub, and the micro-VC fund Rothenberg Ventures.
The SEC doesn’t comment publicly on its investigations. But “going forward, it seems likely the view will be, ‘This is a world of sophisticated investors who can fend for themselves,’” says Shriram Bhashyam, founder of the secondaries marketplace EquityZen and a former securities attorney.
That begs the question of what Clayton will be focused on. No one can know, of course, but there seems to be plenty of hope that he’ll focus more of the agency’s attention on capital formation, which Republicans have criticized the SEC for focusing on too little in recent years.
Bhashyam thinks it’s highly likely, for example, that the pace of deal-making will accelerate on Clayton’s watch, including on crowdfunding platforms, where companies are currently limited to raising $1 million from individual investors in any one 12-month period. (Bhashyam expects this will eventually be adjusted to $5 million.)
Bhashyam further anticipates that the definition of “accredited” investor might be changed in the not-too-distant future. Whereas today, “accredited” applies to people with more than $1 million in net worth (not including their homes), or more than $200,000 in annual income, Bhashyam thinks we “might see movement on it where the definition would be revised in a way that broadens its scope. You might see people with certain financial credentials like CFAs included regardless of the income level or net worth.”
In the end, it will come down to who is pushing for what.
As Tusk notes, “You might well have crowdfunding platforms saying, ‘We want to be unregulated,’ but they have little political muscle and most of tech isn’t going to focus on the issue because if you’re a real VC or a real startup, you don’t care that much about crowdfunding. You want retail investors to have to wait for your company to IPO and for them to give your stock a pop.”
Meanwhile, Senate Banking Committee Chairman Michael Crapo tweeted on Tuesday he and Clayton had a “great conversation” about the SEC’s role in facilitating capital formation and ways to reduce “unnecessary burdens” for small, regulated companies.
According to Reuters, Clayton’s hearing could come as early as the week after next.