The Big Story: FTC study scrutinizes small tech deals
The Federal Trade Commission is hinting that it may take a harsher view of tech companies’ acquisitions of startups. At an open meeting on Wednesday, the commission discussed a staff report on acquisitions by five companies—Alphabet, Amazon, Apple, Facebook and Microsoft—that were not required to be reported to the agency, and withdrew the vertical merger guidelines issued by the Commission in 2020. The developments are part of a broader effort to dial back mergers and acquisitions in the technology sector.
Led by the FTC’s Office of Policy Planning, the study found that the companies had made 616 unreported transactions of more than $1 million from the beginning of 2010 to the end of 2019. Chair Lina Khan said the study prompts the need for further scrutiny of transactions that don’t meet thresholds under the Hart-Scott-Rodino Act, which requires companies to report deals valued over $92 million. Commissioner Noah Phillips, however, reminded his colleagues that the study makes “no conclusions about the competitive effects” of the firms’ acquisitions.
As we’ve explained, acquisitions are a critical part of our startup ecosystem and support innovators, especially in areas outside of Silicon Valley. They serve as a key part of the investment lifecycle by delivering return on investment for founders and investors and providing incentives to innovate. The data shows a strong, positive relationship between acquisitions and investment in startups. Acquisitions are a more common and accessible method of exit in those smaller, still-developing ecosystems and enable virtuous cycles of capital inflows, supporting ecosystem growth and the spread of technology entrepreneurship. As policymakers across government scrutinize the acquisitions of large technology firms, they must be cognizant of the impacts of policy changes that could harm the startup ecosystem.
Policy Roundup:
House advances tax, tech in reconciliation bill. This week several House committees made progress toward advancing the $3.5 trillion reconciliation bill. At the markups committee Democrats supported reducing the corporate rate for small corporations, boosting it for corporations over a certain size, and increasing the capital gains tax. Of note for startups and investors, the proposed bill includes a change to the Qualified Small Business Stock (QSBS) exclusion, which could reduce investment in startups by cutting the 75% and 100% exclusion rates for those earning over $400,000. In a marathon markup, Energy and Commerce approved several provisions, including one setting aside $1 billion for the FTC to create a privacy bureau and another to provide $4 billion to the Emergency Connectivity fund to support connectivity outside of school and libraries. The bill could change as it moves forward in the House and to the Senate, where Democrats are in talks to tweak the bill on health care entitlements, climate, and tax.
Engine Submits feedback to UK government on Online Safety Bill. Engine shared feedback with the UK government regarding their draft Online Safety Bill, which would drastically change how user-generated content online is handled in the country. The draft bill includes vague standards and leaves thresholds for compliance yet-to-be defined, creating uncertainty for startups and threatening to undermine a startup-friendly environment and could keep U.S. startups from entering the UK market.
Security and Exchange Commission's plan to regulate cryptocurrency. Securities and Exchange Commission Chairman Gary Gensler testified before a Senate Banking Committee hearing this Tuesday, arguing that digital assets traded over crypto exchanges must register with the SEC for protection against abuse. This is the latest in the Chairman’s efforts to reconfigure a new set of standards for the crypto space, and it could create costly obligations for startups in the crypto ecosystem.
Startups are waiting for Congress to move privacy legislation. Despite bipartisan agreement about the need for a federal privacy law, startups are still waiting for Congress to advance a privacy bill. Instead of Congress, state governments—and potentially the FTC—are taking the lead, creating a patchwork that will be difficult for startups to navigate. As we explained in a recent blog post, both consumers and startups can benefit from consistent privacy protections that allow for greater choices in transparency and prohibit abusive data practices.
Ten years since America Invents Act. This Thursday marked ten years since the enactment of the America Invents Act (AIA), a bill that improved the patent system, including by establishing regional patent offices across the country so innovators can more easily connect directly with the agency and creating the Patent Pro Bono Program to help under-resourced small businesses that are new to the patent system. The AIA also created mechanisms that promote patent quality and combat abuse of the system—such as inter partes review (IPR), a more efficient, affordable mechanism to weed-out patents that never should have issued in the first place. Each of these changes has helped open access for startups who deserve to benefit from the full scope of the patent system and the patent office’s services, and we hope the next ten years continue this momentum.
Join us next Friday for an event on state tax policy and the startup ecosystem. We are hosting our final event in our Nuts and Bolts: State Innovation Policy Series on state tax policy and the impact financial incentives can have on startup creation and growth. From digital ad and data taxes, to angel investor tax credits, to investments in women and minority-led businesses, we will be exploring with an expert panelist on how state tax policies impact the growth of the startup ecosystem and how they intersect with federal policymaking. Join us next Friday, September 24th at 12 pm ET. Register here.
Startup Roundup:
#StartupsEverywhere: San Francisco, California. WithClutch is a software company working to provide access to easily refinance car loans through credit unions. Based in San Francisco, Calif., Nicholas Hinrichsen—Co-Founder and CEO—told us how he founded WithClutch, the challenges he’s faced while navigating the immigration system as an entrepreneur, and how his company has benefitted from the innovative environment provided by a regulatory sandbox in Arizona.
