👋 Edition 10: 🚀Featured Story: How Federal Regulatory Changes are Impacting the Venture Capital Landscape

“The venture capital landscape is undergoing a fundamental shift,” wrote Yaniv Jacobi, co-founder and Managing Partner of Horizon Capital, in CTech this spring, asking the headline question, “Is the existing VC model disappearing?,” in an OpEd discussing the rise of AI-driven efficiency.

As we continue to track changes to the VC model to adapt to today’s technological and market realities, the federal government has been making recent headlines for its role in this dynamic evolution as well.

This 4th of July, while most of us were watching fireworks or enjoying beaches and barbecues, President Trump signed the “One Big Beautiful Bill” into law, which the White House described as “a once-in-a-generation piece of legislation.”

As Holland & Knight wrote in an alert following the passage, “With 870 pages of provisions, the One Big Beautiful Bill Act will reshape federal policy across nearly every major sector of the American economy through significant policy shifts, funding reallocations and regulatory changes. “ Analysts will debate the impact of the bill on everything from healthcare to education.

For startups and venture capital, changes made in the One Big Beautiful Bill Act or “OBBBA” were part of a series of shifts in the federal regulatory landscape, which also include potential changes to SPAC rules, crypto currency and more.

For this week’s edition of Venture Legal, I wanted to take a look at how these changes are impacting the Venture Capital ecosystem.

OBBBA, QSBS and a “major win for VCs”

While some pointed to the squelching of an effort in the proposed bill to prevent states from regulating AI as having a potentially detrimental impact on big tech and some VC firms, many of the changes which made it into the Act were viewed positively for venture capital and startups.

Of particular significance are the OBBBA changes around Qualified Small Business Stock rules, or QSBS.  Writes Pitchbook: “IRS Section 1202, the qualified small business stock tax exemption, has been expanded—a major win for venture capitalists.”

Writing in late June, ahead of the OBBBA passage, Bloomberg called QSBS “Silicon Valley’s favorite tax break” and noted it “may be getting an upgrade” with the Act.

As context on QSBS,  Bloomberg reported, “Taxpayers claimed $51 billion of QSBS gains in 2021, a record year for venture capital deal activity, according to a Treasury paper earlier this year, with the benefits skewed to a select group. While about 33,000 people reported QSBS to the Internal Revenue Service annually over the decade studied by Treasury, 90% of the total income went to individuals reporting more than $1 million of gains on eligible stocks.”

Some of the key changes relevant to VCs and startups under OBBBA include:

●       Expanded definition of a small business: Startups benefit from an expanded definition of a small business, which now includes companies with less than $75 million in gross assets, up from the previous $50 million cap.

●       Raising the tax-free cap: As Pitchbook reports, the tax-free cap has also been raised from $10 million to $15 million or 10x the gains, whichever is higher.

●       Tiered schedule replaces previous five-year holding period: Plus, the Act made changes to the previous five-year minimum exit, introducing what  Pitchbook described as “a tiered gains-exclusion schedule.”  As Business Insider writes, “Previously, startup founders and investors were exempt from capital gains taxes on any profits from the company only if they got that profit five years after the stock was issued. That restriction could dissuade founders from taking an M&A deal or secondary sale in a startup's early years to avoid a massive tax hit. Now, those profits will be 50% tax-free after three years, 75% after four, and completely tax-free after five.”

●       Changes to R&D deductions: In addition to the above changes related to QSBS benefits, the OBBBA also made changes to R&D deductions. Writes Pitchbook, “In a win for startups, the bill mostly reverses the recent changes to R&D deductions, or IRS Section 174. Trump’s Tax Cuts and Jobs Act of 2017 included a provision that required startups to amortize R&D costs over five years (15 if overseas) instead of deducting them upfront. This provision came into effect in 2022. The new law reverts the changes for domestic R&D spending, and even allows startups to recover previously amortized costs after 2022.”

Possible changes to SPAC rules

Meanwhile, beyond the OBBBA changes, the federal government is exploring changes to SPAC rules.

As background, special purpose acquisition companies, known as SPACs, are companies formed for the specific purpose of raising capital through IPOs.  As PwC explains, "This approach offers several distinct advantages over a traditional IPO, such as providing companies access to capital, even when market volatility and other conditions limit liquidity. SPACs could also potentially lower transaction fees as well as expedite the timeline to become a public company."

As Reuters wrote, the government’s interest in SPAC changes are “... part of a broader deregulatory push by the administration, which has said it wants to spur economic growth by slashing government oversight…”

Some easing of SPAC regulation is already in motion, with the SEC in talks with exchange operators to loosen some regulatory requirements, Reuters reported in June, and earlier this month, Reuters also reported that DOGE officials at the SEC, have sought meetings “...to explore relaxing what some companies have described as burdensome and unnecessary regulations, including reworking Biden-era rules adopted last year on so-called Special Purpose Acquisition Companies, or SPACs..."

The interest in revising SPAC regulations comes as Bloomberg reported earlier this month that the SPAC IPO market is having its busiest year since 2021. The article cited recent deals including Cantor Equity Partners’ $3.6 billion combination with Tether and SoftBank Group Corp.-backed Bitcoin treasury company Twenty One Capital Inc.; Ares Acquisition Corp. II’s $2.5 billion union with driverless truck tech firm Kodiak Robotics Inc.; and the announced merger of Michael Klein’s Churchill Capital Corp. IX with another driverless truck tech firm, Plus Automation Inc. The article also referred to SPAC “success stories” like Hims & Hers Health, RocketLab, Vertiv, SoFi Technologies and DraftKings “all turning into market favorites.”

According to The Motley Fool, “Since 2003, SPACs have made up 30% of total U.S. IPOs,” noting that “While there's no dominant market sector for SPACs,” tech, energy, and healthcare are the most prevalent industries for SPACs.  

With a continued push for deregulation, SPAC activity may continue to rise.

Potential crypto policy changes 

Last week Reuters reported that “crypto investors are betting that a slew of long-sought policy wins for the industry … could invite new investment in the asset class.”

“Those hopes helped propel bitcoin to another high on Friday and gave a boost to U.S.-listed crypto stocks,” wrote Reuters, noting that, this week, the House of Representatives is debating a series of crypto bills in what‘s being dubbed “crypto week.”

The “crypto week” agenda includes  the Clarity Act, the Anti-CBDC Surveillance State Act and the GENIUS Act, and while CNBC cautioned that “the industry may not get everything it wants,” and the “crypto week” agenda didn’t encounter a smooth sail so far on Capitol Hill, there is a continued effort to relax regulations on the sector.

As  brief overview of the proposed new laws:

●       The Clarity Act, short for the Digital Asset Market Clarity Act of 2025, seeks to define digital commodity as a digital asset whose value is "intrinsically linked" to the use of the blockchain, and would give the CFTC a central role in regulating, while preserving certain aspects of SEC authority.

●       The Anti-CBDC Surveillance State Act, seeks to prohibit the “issuing of a Central Bank Digital Currency (CBDC).”

●       The Genius Act,“ establishes a regulatory framework for payment stablecoins (digital assets which an issuer must redeem for a fixed monetary value).”

While the crypto market has experienced losses in 2025, largely attributed to two major security incidents, a survey of institutional investors released in March by EY-Parthenon and Coinbase reported "strong investor enthusiasm for digital assets, with 83% planning to increase allocations in 2025," noting that, "Much of this newfound excitement was driven by the expectation of regulatory clarity around digital assets, which investors surveyed saw as the number 1 catalyst for growth. 

This week, Figure Technology Solutions, a startup that makes home loans on its blockchain and runs a crypto exchange, was reported to be planning to go public this fall. 

“Figure is part of a wave of crypto companies taking advantage of a more crypto-friendly White House and surging investor interest in the industry,” wrote The Information.

Watch for potential increased IPO activity in the space, with The Information noting, “Crypto exchanges Kraken and Gemini, which faced lawsuits from financial regulators under Biden, are also betting the new regime will give them a blessing to go public.”

What it all means for investors

Regardless of which side of the political aisle you’re on and debates on other aspects of the Act, the OBBBA changes have largely been seen as beneficial for the VC industry, with the Wall Street Journal naming  “Silicon Valley investors” and “private equity” on its list of “winners” set to benefit from the bill’s changes.

As Business Insider reported last week, “The ‘One Big Beautiful Bill’ Act includes changes that could mean big gains for startup investors,” noting “investors will overwhelmingly benefit from the QSBS expansions, since they hold nearly 60% of all qualified small business stock, according to Carta data from August 2024. “

Plus, the Wall Street Journal wrote that the new law "sweetens secondary deals in venture capital," by allowing investors in startups to sell more of their holdings early without paying capital-gains taxes. Javier Avalos, CEO and co-founder of secondary trading platform Caplight, told the Journal that “These changes go hand-in-hand with AI and will result in a big boom in secondary trading,”

From a broader perspective, these changes may have the long-term effect of further democratizing the already highly competitive VC space.

In a contributed piece this spring for VentureBeat about their model, Alumni Ventures wrote about the "democratization of venture capital," stating "For a long time, a select group of firms controlled the venture capital industry, handling billions of dollars for institutional investors and operating essentially as an exclusive club... Today, the industry is changing. Individuals are able to invest in startups more easily thanks to new investment models such as rolling funds, private syndicates, and equity crowdfunding platforms."

The evolving VC model, coupled with these newly revised government regulations, may also make it easier for solo GPs to compete, a trend which has already been well underway.  

As Bloomberg reported this spring, “solo-led funds accounted for more than half of emerging funds last year, marking a notable departure from traditional multi-partner firm models. Those are numbers from Decile/VC Lab and its 2025 data show the proportion of solo GPs in fund leadership growing this year, with particular dominance in fintech and health care-focused funds.”

The rise in solo funds has also been noted as ancillary to the rise in “zombie funds,” a trend noted in a past Venture Legal edition.  In a report on “zombie funds,” PitchBook listed "setting up their own shop,” as a potential path forward for VCs being pushed out of traditional firms, noting, “For the daredevils, there’s yet another option: raising their own fund.”

Plus, the move towards solo GPs has been accelerated by AI technology, which enables GPs to work more efficiently and effectively on their own – a topic also explored in depth in a previous edition of Venture Legal.

Former Bain Capital Ventures partner Sarah Smith, who launched a solo GP firm in 2022, recently told The Information, “I’ve built a ton of my firm on AI, and I intend to be a solo GP forever,” and last week noted to TechCrunch that she’s “stunned” by what AI can unlock for firms like hers.

It is possible the push toward VC-friendly regulatory changes, coupled with the proliferation of AI technology, will further democratize venture capital and lead to a greater number of solo GPs.

What it means for founders

As Business Insider wrote, “Experts say the changes could help founders take M&A and secondary deals earlier.”

The BI piece also cited Milad Alucozai, cofounder and general partner at Pamir Ventures, as cautioning there's also the potential for brain drain if employees get a chance to cash out and decide to leave the company. The article noted, however, that Alucozai thinks the  “changes will encourage more capital flow in the venture ecosystem overall, and perhaps give founders and employees staying for the long haul a boost along the way.”

Fortune cited investor Kevin Kwok as writing on X  that the changes are so significant that companies should consider reincorporating to reap the benefits, while also noting that, while the “changes are widely regarded as a substantial boost for small businesses and their investors… some critics note that the benefits may be concentrated among higher-growth firms and investors.”

For startups, while the outlook appears positive, time will tell if the changes yield a net gain.

In summary, some of the recent federal regulatory changes include:

●       OBBBA changes to QSBS including expanding the definition of a small business, raising the tax-free cap, and replacing the five-year holding period;

●       OBBBA changes to R&D deductions;

●       Some easing of SPAC regulation in motion, with more being discussed; and

●       Pending crypto legislation, anticipated to be industry-friendly.

 ➡️ Going forward

Bloomberg quoted Bobby Franklin, president and CEO of the National Venture Capital Association, as saying in a statement regarding QSBS changes, “It tells investors and founders alike: building something new in America is still worth it.”

We’ll continue to monitor the impact of the evolving legislative and regulatory landscape – and track the resulting impact to investors and startups alike.

 🎙️ Podcasts & Thought Leadership

I recently had the delightful opportunity to join Charlie Uniman on the Legal Tech StartUp Focus Podcast. Charlie and I discussed my journey as a seven-time founder and LegalTech pioneer  for nearly three decades. We also discussed my evolution from creating one of the earliest ALSPs, to founding early LegalTech ventures, to investing in and advising the next generation of LegalTech startups.

Listen to the episode here.

💬 Let’s Connect!

What are your thoughts on the impact that the recent and pending federal regulatory changes may have on investors and startups? Also, do you think we’ll see SPACs in LegalTech? Drop a comment, share your insights, or suggest a topic for my next issue!

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