Changes in the White House and Congress could signal a revision of taxes, regulations and policies that can affect technology and investment in Silicon Valley and beyond.
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Democrat Joe Biden will become the 46th President of the United States tomorrow and his party will control both branches of Congress. Issues such as a possible increase in capital gains tax, antitrust control over “big tech” and new priorities in the entire sector is being closely monitored by investors and industry representatives as the political environment has influenced the Democrats for the first time since 2009/10.
Without a doubt, one of the biggest changes could be in capital gains tax. According to Biden’s proposal, long-term capital gains taxes for high earners would rise from 20 percent to 39.6 percent. While some fear this could impact venture finance investments – the lifeblood of many tech startups – venture capitalists say it is unlikely to have much of an impact.
“I don’t think people fully understand QSBS,” said Brian Gaister, co-founder and managing partner of SaaS Ventures in Maryland. “But right now it is important for investors to continue their education.”
Section 1202 of the IRS Code was signed into law under the Clinton administration and expanded under the Obama White House. Tax law stipulates that those who invest in qualified small business stocks (QSBS) – which include tech startups as long as they are C companies – foreclose 100 percent of the capital gains from those investments if the stocks are held at least too five years and is being questioned.
QSBS exclusion is capped at $ 10 million or ten times the base of stocks sold, whichever is greater.
The QSBS rules should greatly help individual investors stay in the investment cycle even if capital gains tax is increased, Gaister said. For larger funds with investments that would not qualify for QSBS, Gaister points out that many of these funds draw their money from pension funds and foundations that would not be affected by a tax increase.
“Many investors in large funds don’t pay these taxes anyway,” he said.
There’s also the problem of a shrinking Democratic majority in the House of Representatives and a split among the Deaf in the Senate – with Vice President-elect Kamala Harris holding the tie – that could prevent sweeping tax changes, said former venture-venture political strategist Bradley Tusk.
“I don’t think there will be any tax hikes,” said Tusk, adding that even if they do, he doesn’t see any significant changes in the investment market.
“It wouldn’t put off short-term investments, either,” he said. “That’s how people make money. Maybe you do a little less. Also, you need to invest the money raised. “
Regulation and politics
At the end of last year, the Justice Department filed an antitrust lawsuit against Google – the first such lawsuit by the federal government against a technology giant since the lawsuit against Microsoft two decades ago.
While many expect Biden may not pursue the suit any further, it could be the first step in shedding big companies like Google, Twitter, Facebook, and Amazon.
“I think there is a real possibility that these companies will be examined more closely,” said Tusk, adding that he sees such an examination as good for innovation and disruptive technology.
“There’s no doubt that Facebook, Google, and the rest are putting a lot of research and development into research, but it’s hard to know which (startup) technologies are being killed because they just weren’t feasible to go up against,” said he.
Umesh Padval, Venture Partner at Thomvest Ventures, hopes Harris – with her strong ties to California and its tech community – can help strike a balance between regulating some tech giants and making sure they don’t monopolize smaller businesses to manufacture.
“Scaling is important,” said Padval. “When big companies like Amazon (and) Facebook are cut to pieces, they can’t scale and ultimately compete against world leaders.”
Padval said his perspective is that these big companies don’t have to worry about monopoly as they have global competition.
“We need to make sure that US companies are able to scale and compete on a global scale,” he said. “Regulation can have national implications for global scalability and innovation in the US.”
Other laws like Section 230 of the Communications Decency Act, which allow companies like Twitter and Facebook to moderate content on their websites while protecting them from lawsuits, are likely to be reviewed. While this seemed inevitable no matter which party was in power, Democrats see it as too much protection for tech companies, and Republicans see it as discrimination against conservative language.
There’s also a belief that Biden would like to enact federal law to mimic California’s AB5 law, which extends employee classification status to some gig workers, despite Harris’ brother-in-law Tony West, currently Uber’s chief legal officer. Uber was strong against AB5.
Even so, Tusk said he saw this lower down on the priority list.
“I can’t see anyone putting a lot of bullets on it,” he said.
The market and invest
Tighter regulation could also lead to more innovation and investment areas, Gaister said.
“Regulations can also give startups an opportunity to solve problems,” he said, citing the explosion of regtech companies as data protection laws came into effect.
Cleantech / Greentech and telemedicine should arouse increased interest from investors in the new political environment, said Tusk.
Autonomous driving technologies could also see renewed interest in the new administration, Tusk said. The SELF DRIVE Act was passed unanimously out of the House in 2017 but remained standing in the Senate, which in turn brought the industry to a standstill, Tusk said. That will likely be re-examined by Pete Buttigieg, Biden’s candidate for Secretary of Transportation.
“The DOT doesn’t usually get a lot of attention, but it’s progressive and likes technology,” he said.
While investing may go undisturbed, questions about mergers and acquisitions remain unsettled.
Law firm Morrison & Foerster recently unveiled its annual Tech M&A Leaders’ Survey, which found that most dealmakers are optimistic about an ongoing “COVID comeback,” as Tech M&A spending first last year Times since the dotcom bubble is expected to be more than $ 600 billion.
That uptick was not propagated by Biden’s election, as 43 percent of respondents said the election results would have no impact on tech dealmaking and 37 percent expected a positive impact. Still, 82 percent expect corporate tax policy to become more important to tech dealmaking this year.
Obviously, tighter regulations could also hinder the M&A market.
“If regulations tighten, some mergers and acquisitions could be hampered,” said Tusk. “But I think we’ll have to wait and see what happens before we can finish anything.”
Illustration: Dom Guzman
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