Why hello there…

Welcome back to Highly Regulated! Hope everyone had an amazing summer filled with sublime rejuvenation. Or hustled the heck outta their time in warm weather. Whatever floats your boat and works for whatcha wanna do in life. Just get it!

I took a few months off over the summer to figure out what I wanted to do with the newsletter (including the growing community of folks around it) and how I best wanted to interact with all of y’all. I also was deep in gettin’ shit done mode for Vol. 1 Ventures fundraising. I’ve been talking pretty much nonstop to fantastic LPs all over the world for the fund. I sincerely love this part of running a fund. So many amazing people to meet and learn from (and yes, make money for…that’s the job at the end of the day. (BTW—if you’d like to learn more about possibly becoming an LP for the fund feel free to fill out this rather snazzy form and we can chat!)

I really enjoy doing content that helps folks understand topics that can be opaque and confusing, which is initially the sole reason why I started Highly Regulated. When I launched this lil’ newsletter I didn’t expect folks to respond so enthusiastically…but I am flattered and super excited to see where this community goes. Thank you all for being such amazing readers. Here are some thoughts on where I’m at with things and where I see those things going…basically this is the equivalent of a DTR (determine the relationship) chat for us all.

What you can expect going forward…

• More and more of the content on Highly Regulated will be exclusively for paid subscribers moving forward. Why? I want to scale up my written and visual content. I want things to look good and have a deeper impact to the reader/viewer. That said, scaling isn’t cheap. I also want to value my own time. If I don’t value my time, I can’t expect others to do so either. So paid it is, for about 50% of the content. I also want to save sponsorship opportunities for other stuff (more on that in a bit.)

• I want to do more educational video content on YouTube and other platforms. I think video content might be a better way to convey complex themes in the regulatory space, so expect more on that front too!

• I enjoy doing in-person meetups with folks, and so do companies I’m close to. I’ll be working with a few sponsors to plan some IRL meetups in the coming months and into early 2024.

• I want to help with job searches and open positions in our ecosystem. I constantly get asked how people can secure their first job in a regulated industry or in compliance. I want to do more work that helps connect companies and job seekers as more and more folks look for their next job in this challenging market.

MORE IS MORE WITH THE SEC

The SEC is back to lay the smackdown on errant venture fund managers.

I discussed the venture fund regulatory climate earlier this year in my newsletter. And spoiler alert: lots of folks rushed to tell me that the SEC didn’t care about Venture Capital or fund managers in this asset class. Feel free to take a look at the essay here for some insight into my earlier thoughts on VC regulations. Almost immediately after I wrote that essay, word came down that the SEC was hot on the heels of fund managers. Sorry to everyone who wrote me convinced that they could do whatever they wanted without the SEC batting an eye.

I’d recommend everyone take a look at the SEC’s press release on the changes for a feel for what they’re trying to accomplish here as well.

So now here we are. Updating y’all on more regulations and what you need to stay out of trouble. Now let’s get to brass tacks. Here is what you should and shouldn’t do to be compliant with the new regulatory structure…and I’ll keep it short and sweet so you don’t get bogged down waaay into the weeds (or for those who are most definitely not reading everything.)

 Do’s

• Do an annual audit. The whole point of this overhaul is to increase transparency between LPs and GPs. Most funds will need to disclose more activities, conflicts of interest need to be openly discussed with LPs…basically, it’s time for everyone to talk about all the hard things they don’t wanna talk about with their LPs.

• Do provide all investors with the same quality and quantity of information on portfolio companies. Essentially, no more playing favorites. All your LPs are now your favorite children.

• Do take your fiduciary responsibilities seriously. You can no longer waive or contract around these responsibilities in any way. Also, make sure you are educating everyone on your team about fiduciary responsibilities. What they mean. What they entail. Why they should be respected. In the past few years, folks got too sloppy with other folks’ money and now everyone needs to learn responsibility.

  

Dont’s

• Be clear, open, and honest in your communications with LPs. Don’t bury the lede. No more small print or convoluted math when communicating with LPs.

• I hate that I have to say this again and again, but…Don’t act negligently. Don’t be a dumbass. Don’t say dumbass things. Don’t make dumbass investments with other people’s money. LPs can sue fund managers for being negligent. If you had an agreement in place that said you couldn’t be sued for negligence, that agreement is now void.

• No more secret agreements. Don’t make secret agreements or give special deals to LPs without being open and honest about these deals. All side letters must now be disclosed.

  

More than a couple of people in the startup ecosystem have written on this subject recently. Halle Kaplan-Allen at Sydecar wrote a great piece recently. Take a look here. I’d also recommend checking out all the information the Institutional Limited Partners Association has available on the subject as well.

THINGS YOU SHOULD KNOW TO SOUND SMART

Treasury and IRS Proposed Broker Rulemaking

Y’all know I love a good IRS proposal. And this one has piqued my interest more than most do. Here’s a quick TL;DR so you can have water cooler content this week.

What’s Up?

My absolutely favorite government entities - The US Treasury Department and the IRS have now proposed a rulemaking change related to the Infrastructure Investment and Jobs Act’s amended definition of “broker.” Ohhhhhh boy! Get out the dictionaries y’all.

The new proposed definition is “Anyone responsible for regularly facilitating transfers of digital assets for another person.” DeFi protocols and frontends would be included in this definition.

The term “effect” would also be redefined to include those who:

• Provide facilitative services

• Are in a position to know customer identity or could potentially obtain such information

Proposed regulations would require brokers to report:

• Customer details: names, addresses, taxpayer identification numbers

• Transaction details: digital asset type and units, sale date and time, gross proceeds, transaction hash, wallet address, and what was received in return

Why you should care?

For some, this proposal is seen as an overbroad redefinition of “broker.” The rule would aim to label entities as brokers even if they only provide facilitative services or can potentially collect third-party information.

The proposal also acknowledges that only wallet users can effect transactions for themselves but it still tries to find third parties responsible for these transfers.

There's still a running debate on whether "effect" can have two meanings in the same rulemaking. (I really do love nitpicking at this level.) Concerns will obviously be raised to the Treasury and IRS about the proposal so let’s strap in and see where this goes everyone!

Grayscale’s Moment

Grayscale’s battle with the SEC has been a hot topic of conversation in the crypto community for waaaay longer than I expected. But after that long wait has come a moment of truth…

What happened?

Our second favorite Court, the US Court of Appeals for the DC Circuit, has ruled in favor of Grayscale regarding its proposed Bitcoin exchange-traded product (ETP). The SEC had previously approved Bitcoin futures ETPs but had also denied spot ETPs. Grayscale then challenged the SEC's inconsistent treatment, arguing that the SEC "failed to treat like cases alike."

The Court has now sided with Grayscale, labeling the SEC's actions as…drumroll please…“arbitrary and capricious” (a.k.a. without rational and legal basis.) Grayscale's main argument was surveillance arrangements for bitcoin futures ETPs should also apply to spot ETPs since both rely on bitcoin's underlying price.

The Court emphasized the "materially similar" nature of Grayscale's proposed bitcoin ETP and the approved bitcoin futures ETPs. They also said that surveillance sharing agreements with the Chicago Mercantile Exchange (CME) for both ETPs were found to be "identical."

Soooo…where are we now?

The judicial panel has unanimously deemed the SEC’s actions against Grayscale as unlawful. Okay, so now we’re getting somewhere

The next steps and implications of this ruling will be clearer in the upcoming weeks when the SEC responds. I would hate to be an SEC lawyer right now… lots of big things being set on their plates.

Sidebar Time

I started reading a loooot more for pleasure over the past few months. I’m also carrying my book du jour with me everywhere (which isn’t great for my back, but it is great for my reading list.) For the next 12 months, I’m going to try to read more and be on my phone less. I want to make the most of the time I have left on this planet and do things that make me happy and feel fulfilled. I’ll also be sharing my reading lists every month for everyone to follow along. Look at us having good habits!

September 2023 Reading List

Iacocca: An Autobiography (Lee Iacocca & William Novak)

Some people are obsessed with Travis Kalanick. Some people are Elon Musk acolytes. I am the President of Lee Iacocca’s fan club. I think the stories I have heard about this man became the foundation of my investment strategies, so reading his own words has been incredibly fulfilling.

The Clarity Cleanse (Habib Sadeghi DO)

It seems that I am now a Goop-Girl (TM pending) because I bought this book after seeing a summary on Goop. My brain is constantly going and I’m always searching for clarity in decision-making and how I choose to ultimately live my life. This book hasn’t disappointed me and even though some things it discusses seem simple in hindsight, I still needed to read it within these pages to make positive changes within.

How to Invest (David M. Rubenstein)

I was lucky enough to get to work at length with David Rubenstein when I was at Johns Hopkins University. He was always a trusted source for students and faculty learning to invest. Recently, I’ve been thinking a lot about why I’ve invested in the things I’ve invested in, and this book gave me even more food for thought. It’s really interesting to learn how storied investors make their decisions. This book has inspired me to write an essay this month on what my public stock portfolio looks like and why I decided to make those investments. I am really proud of my investing in both the private and public classes, so hopefully this essay gives some insight into how my brain works for y’all (and Vol. 1 Ventures LPs.)

The Council of Animals (Nick McDonell)

This fable hooks me every single time I pick it up. The Council of Animals has become one of my favorite books—so much that I’m on read number 5. Every time, I’m reminded of Planet of the Apes and each time I read it, the characters find more and more ways to showcase little-known animal behaviors. Must read for all animal lovers y’all.

Marie Antoinette: The Journey (Antonia Fraser)

Okay, so this might not be very politically correct for me to admit, but I love Marie Antoinette so much. I find her to be utterly captivating as a historical figure. I also think the fractured time she lived in was very similar to where we’re ending up as a republic. I hate to admit that but alas, it’s how I see things going. This book by Antonia Fraser was also the source material for Sophia Coppola’s beautifully shot film. Great historical autobiography for a cozy fall day read!

Grimm’s Fairy Tales (The Brothers Grimm)

Yes, this is a children’s book. But ya know how you watch a movie as a kid and then re-watch as an adult and just side-eye your parents for letting you watch it when you were that young? I’m reading this book now and it is filled with so many timeless stories about human nature that I would be remiss not to tell everyone to reread this book as an adult.

How to Be the Love You Seek (Nicole LePera)

Pre-order my therapist’s new book on relationships. She’s amazing and most likely you need to hear what she’s saying. Love. Love. Love. This. Book. I got a copy from her of this book and I absolutely devoured the words held within.

Keep Looking Up (Tammah Watts)

As some of you know I started birdwatching early in my legal career as a way to connect with folks who I was representing who were older, retired, and looking for hobbies that got them out of their house. I started taking clients birdwatching as a way to learn about them and as a way to see really cool birds that are sitting right under our noses every day. For birdwatchers, the pinnacle of your birdwatching career is a big year. (The Big Year is also a very good and very funny movie starring Jack Black and Owen Wilson. I completely recommend you check out this movie while you’re at it.) This is where you see as many unique birds as you can in the span of one calendar year. Since I’ll be traveling all over the world in 2024 to fundraise for Vol. 1 Ventures I am planning on trying for my very own big year. I’m very thankful I picked up this book to help reignite my love of birdwatching. It’s such a calm and peaceful habit. If you’re looking for a nice way to lower your blood pressure and ease into meditation pick up this book and look up at the birds.

Nine Stories (J.D. Salinger)

I was a big fan of Catcher in the Rye as a child, as most home-schooled kids end up being lol. As a result, I periodically pick up Salinger for a re-read. I know I have read this classic collection of short stories before but I really had no memory of doing so when I opened the book. I started reading this after two recent traumatic losses in my life so some stories were an interesting start for me in processing my losses. Some stories held within these pages are Salinger’s best works and even though I now solely recognize Salinger as the ex-boyfriend of Charlie Chaplin’s child bride…it was still nice to see his voice at his most emotionally stunted and raw.

Let me know what y’all think about these books and if you have any recommendations for me for the coming months.

Thanks for reading this week and looking forward to sharing future topics with y’all!