QSBS Gets Supercharged Under New Tax Law
The qualified small business stock (QSBS) rules can be a powerful tax planning tool, and, following the recent enactment of a signature tax law, they have become even more potent.
The 2025 tax law, Public Law 119-21, also known as the One Big Beautiful Bill Act (OBBBA), quietly enhanced the already-powerful Internal Revenue Code Section 1202, which was originally designed to encourage growth in start-ups. Section 1202 permits capital gain exclusion on all or a portion of the sale proceeds of QSBS. The OBBBA lowers the threshold for qualifying as QSBS, while simultaneously increasing the tax exclusions. These changes may make C corporations a more attractive entity form for small and mid-size businesses. They also make the possibility of “stacking” the QSBS gain exclusion more appealing to companies that are expected to grow substantially over time.
Prior to the OBBBA’s enactment, the three major requirements for QSBS treatment for stock were that (1) the business could not have more than $50 million in aggregate gross assets, (2) the taxpayer had to hold the stock for more than five years, and (3) the business had to be a C corporation. Additional requirements applied as well, including in relation to the timing of the stock issuance date, how the stock was acquired, the business of the corporation and its assets, and stock redemptions by the corporation around the time of the QSBS issuance, among others. The OBBBA increased the $50 million aggregate gross asset limitation to $75 million, adjusted for inflation beginning in 2027. It also replaced the five-year holding period with a phased-in holding period of three years for a 50% exclusion, four years for a 75% exclusion, and five years for a full 100% exclusion.
Additionally, pre-OBBBA, the eligible gain exclusion was the greater of $10 million or 10 times the adjusted basis of the corporation’s stock (with special rules governing the determination of that basis). The OBBBA increases the minimum eligible gain exclusion to $15 million (although the 10-times adjusted basis threshold is unchanged). This amount is also now adjusted for inflation beginning in 2027. The OBBBA left the other QSBS rules and requirements largely untouched.
The OBBBA changes to the QSBS regime apply only to stock issued on or after July 5, 2025, and generally are effective for tax years beginning after that date. Any stock issued prior to July 5 is still subject to the old rules, including the hard five-year holding period and the lower $10 million exclusion amount, with no adjustments for inflation.
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GENIUS Act Enacted, Establishing a Regulatory Framework for Payment Stablecoins Issued or Sold in the United States
Go-To Guide
On July 18, 2025, President Donald Trump signed the “Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025” (the GENIUS Act or the Act) into law. The House of Representatives passed the Act on July 17, 2025, by a vote of 308-122, following Senate passage on June 17, 2025.
The GENIUS Act will establish a regulatory framework for payment stablecoins and their issuers, with federal oversight of issuers with over $10 billion in consolidated stablecoin issuance and state oversight of smaller issuers.
At the federal level, the GENIUS Act carves out stablecoins from the definitions of a “security” or “commodity”, removing Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) jurisdiction, establishing instead that payment stablecoins are subject to regulation by, inter alia, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve Board.
The GENIUS Act provides stablecoin issuers a regulatory framework that imposes among other things, authorization, reserve requirements, audits, and consumer disclosure requirements.
The GENIUS Act contains amendments to the Bankruptcy Code to provide protections for payment stablecoin holders in the event of a permitted payment stablecoin issuer’s insolvency, including a priority claim that is senior to any other claims against the stablecoin issuer against reserves, and, to the extent the reserves are insufficient, a superpriority claim against the stablecoin issuer for any deficiency, senior to all other claims, including administrative claims.
Background
On July 18, 2025, President Trump signed the GENIUS Act into law. The GENIUS Act, which passed the Senate on June 17, 2025, and the House of Representatives on July 17, 2025, is the first major piece of crypto legislation in the United States.
The GENIUS Act establishes a comprehensive regulatory framework for payment stablecoins, limiting their issuance to “permitted payment stablecoin issuers” (federal or state-qualified entities), that must maintain a 1:1 reserve backing,1 satisfy public disclosure obligations, and operate under federal or qualifying state regulatory supervision, as described below. The GENIUS Act will take effect on the earlier of (i) Jan. 18, 2027 (18 months after enactment) or (ii) 120 days after the primary federal payment stablecoin regulators issue final rulemaking to implement the GENIUS Act.2 Once in effect, issuers of payment stablecoins in the United States must abide by the requirements of the GENIUS Act. Digital asset service providers such as cryptocurrency exchanges, custodians and wallet providers, and payment apps will have a three-year transition period to comply with the GENIUS Act. As of July 18, 2028, these providers will be required to restrict their activities to only payment stablecoins that have been issued by an issuer approved under the GENIUS Act.
Key Provisions
Definition of Payment Stablecoins
The GENIUS Act regulates “payment stablecoins,” which are defined as digital assets3:
1.
that are, or are designated to be, used as a means of payment or settlement; and
2.
the issuer of which:
a.
is obligated to convert, redeem, or repurchase for a fixed amount of monetary value, not including a digital asset denominated in a fixed amount of monetary value; and
b.
represents that such issuer will maintain, or create the reasonable expectation that it will maintain, a stable value relative to the value of a fixed amount of monetary value.
The GENIUS Act expressly excludes from the definition of a “payment stablecoin” digital assets that are: (i) national currencies, (ii) deposits (as defined under section 3 of the Federal Deposit Insurance Act,4 including deposits recorded using distributed ledger technology); and (iii) “securities” under the Securities Act of 1933 (Securities Act), the Securities Exchange Act of 1934 (Exchange Act), the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Securities Investor Protection Act of 1970, and “commodities” under the Commodity Exchange Act.
Further, the Act provides that a “bond, note, evidence of indebtedness, or investment contract” issued by a “permitted payment stablecoin issuer” will not qualify as a security solely because it meets the definition of a “payment stablecoin.”
By clarifying that “payment stablecoins” are neither securities nor commodities, the GENIUS Act divests the SEC and CFTC of regulatory jurisdiction.5 Carving out stablecoins covered by the GENIUS Act as “non-securities” and “non-commodities” represents a significant change from the positions of the SEC and CFTC under the Biden administration, wherein both agencies initiated enforcement actions against stablecoin issuers for failure to register stablecoin offerings, amongst other charges.6
Authorization Requirement for Payment Stablecoin Issuers
The GENIUS Act limits the issuance of payment stablecoins in the United States only to “permitted payment stablecoin issuer[s]” (PPSI). A PPSI is any “person” formed in the United States that:
1.
is a subsidiary of an insured depository institution approved to issue payment stablecoins by its primary federal or state banking regulator;
2.
is a federally qualified payment stablecoin issuer (i.e., nonbank entities, uninsured national banks, and federal branches) that has been approved by the OCC; or
3.
is a state-qualified payment stablecoin issuer approved by the relevant state agency having regulatory and supervisory authority over payment stablecoin issuers in such state.
Knowingly or willfully engaging in the issuance of payment stablecoin in the United States without being a PPSI could result in significant fines (up to $1,000,000 per violation) and imprisonment for up to five years.
Foreign Stablecoin Issuers
The GENIUS Act allows a “foreign payment stablecoin issuer” to offer and sell payment stablecoins in the United States provided it meets stringent conditions. A foreign payment stablecoin issuer is an entity organized or domiciled in a foreign country or U.S. territory that is not otherwise a PPSI. To operate in the United States, such issuers must be subject to oversight by a foreign regulator with a comparable regulatory regime, register with the OCC, and comply with technological requirements.7 Issuers located in countries subject to comprehensive U.S. sanctions or designated as primary money laundering concerns are categorically prohibited.
Requirements for Issuing Payment Stablecoins
The GENIUS Act establishes standards for the issuance of payment stablecoins and imposes a range of consumer protection, operational, and compliance requirements on PPSIs, including:
1.
Reserve backing on an at least a one-to-one basis for outstanding payment stablecoins;
2.
Public disclosure of the PPSI’s redemption policy;
3.
Monthly public disclosure of reserve composition on the PPSI’s website;
4.
Prohibition on the rehypothecation of reserve assets;
5.
Limitations on the use of reserve assets for high-risk activities, such as proprietary trading or lending;
6.
Public reserve reporting and executive certification;
7.
Capital, liquidity, and risk-management standards;
8.
Custodian asset-segregation requirements;
9.
Maintenance of an effective economic sanctions program, including verification of sanctions lists; and
10.
Compliance with Bank Secrecy Act/anti-money laundering (AML) requirements including:8
a.
effective AML program maintenance, including the designation of a compliance officer to oversee implementation of the program;
b.
record retention requirements;
c.
monitoring and reporting of suspicious transactions;
d.
maintaining the technological capability to comply with lawful orders to block, seize, freeze, burn, or prevent the transfer of outstanding stablecoins; and
e.
maintaining an effective customer identification program, including identification and verification of account holders with the PPSI, high-value transactions, and appropriate, enhanced due diligence.
PPSI Activities
PPSIs will only be permitted to engage in the following activities:
1.
issuing payment stablecoins;
2.
redeeming payment stablecoins;
3.
managing required reserves (i.e., purchasing, selling, and holding reserve assets or providing custodial services for reserve assets);
4.
providing custodial or safekeeping services for payment stablecoins, required reserves, or private keys or payment stablecoins; and
5.
conducting other activities that directly support the functions listed above.
PPSIs are prohibited from offering or paying the holder of a payment stablecoin any form of yield or interest on issued payment stablecoins.
Requirements to Offer, Sell, or Exchange Payment Stablecoins
Beginning July 18, 2028, “digital asset service providers” will only be able to offer, sell, or otherwise make available payment stablecoins that are issued by a PPSI. “Digital asset service providers” are persons that, for compensation or profit, engage in the following activities in the United States (including on behalf of U.S. customers):
1.
exchanging digital assets for monetary value;
2.
exchanging digital assets for other digital assets;
3.
transferring digital assets to third parties;
4.
acting as a digital asset custodian; or
5.
participating in financial services relating to digital asset issuance.
Immutable and self-custodial software interfaces, along with other decentralized technologies that do not involve intermediaries or custodial control, are expressly excluded from the definition of “digital asset service provider”.
Transactions Exempt from General Issuance, Offer, and Sale Requirements
The GENIUS Act exempts from the general issuance, offer, and sale requirements the following types of transactions:
1.
direct transfers of digital assets between two individuals acting on their own behalf without the involvement of an intermediary;
2.
digital asset transactions involving two accounts owned by the same individual where one account is in the United States and the other account is abroad, when such accounts are offered by the same parent company; and
3.
transactions facilitated by self-custodial wallets.
Federal and State Licensing and Oversight
The GENIUS Act delineates dual regulatory pathways for PPSIs:
1.
PPSIs with more than $10 billion in outstanding payment stablecoins will be subject to primary federal supervision by designated federal agencies, such as the OCC, Federal Reserve Board, FDIC, and the National Credit Union Administration.
2.
PPSIs with a consolidated total outstanding issuance of $10 billion or less may operate under state supervision, provided their regimes are certified by the Stablecoin Certification Review Committee as “substantially similar” to the federal framework.9 PPSIs supervised at the state level that exceed the $10 billion market cap threshold must transition to federal supervision, unless granted a waiver by the applicable primary federal payment stablecoin regulator based on their state’s regulatory adequacy.
3.
State-chartered depository institutions issuing stablecoins that exceed the $10 billion threshold are subject to joint federal and state supervision.
Federal and state regulators will have broad authority to license, supervise, examine, and enforce compliance with applicable requirements.
Preemption
The GENIUS Act includes provisions for federal preemption of state laws related to stablecoin issuance, with some exceptions. PPSIs approved through a federal regulatory pathway (i.e., as a subsidiary of an insured depository institution or as a federal qualified issuer) are exempt from state licensing requirements, including those applicable to money transmission. The GENIUS Act does not preempt state consumer protection laws.
Bankruptcy/Insolvency Considerations
The GENIUS Act provides significant protections for payment stablecoin holders in the event of a PPSI’s insolvency and contains amendments to the Bankruptcy Code to implement these protections. Specifically, the GENIUS Act amends Section 541 of the Bankruptcy Code to exclude stablecoin reserves from property of the bankruptcy estate, treating such reserves instead as property of the customer. The GENIUS Act also provides stablecoin holders with a priority claim to the reserves that is senior to any other claims against the stablecoin issuer with respect to the reserves. Somewhat inconsistently, the Act amends Section 362 of the Bankruptcy Code to apply the bankruptcy automatic stay to the redemption of stablecoins, and at the same time provides a mechanism to stablecoin holders to obtain relief from the stay, with distributions to begin within 14 days of the hearing on the stay relief motion. In addition, the Act amends Section 507 of the Bankruptcy Code to provide that if the reserves are insufficient, stablecoin holders will have a superpriority claim against the stablecoin issuer for any deficiency, senior to all other claims, including administrative claims.
This bankruptcy treatment of stablecoins under the GENIUS Act means that the protection provided to stablecoin holders appears stronger than the protection provided to secured creditors because the reserve is akin to a protected trust held outside of the bankruptcy estate of the issuer. Unlike traditional collateral held by a debtor, stablecoin reserves likely cannot be used by the issuer for any other purpose or pledged to secure a loan. The GENIUS Act enables stablecoin holders to consent to other claims to have priority, thus providing potential flexibility the opportunity for negotiation, particularly if the stablecoin holders are organized or have a representative.
Looking Ahead
The GENIUS Act is the first legislation in the United States that establishes a federal-state regulatory framework for the issuance, sale, and exchange of payment stablecoins. Persons that issue or are contemplating issuing payment stablecoin in the United States must evaluate the requirements of the GENIUS Act to ensure they would be able to satisfy them. Persons already issuing payment stablecoins must be mindful of the deadlines imposed by the GENIUS Act, including application requirements to the appropriate payment stablecoin regulator, demonstrating their ability to comply with the GENIUS Act’s requirements. Foreign payment stablecoin issuers should closely monitor proposed rulemaking, which will provide more clarity on applicable requirements, and in particular, expectations for determining whether a foreign stablecoin regulatory regime is compatible with the U.S. federal regime.
1 “One-to-one” backing refers to a situation where each unit of a liability is matched one-to-one by a corresponding asset of equal value held in reserve.
2 Each primary federal payment stablecoin regulator, the Secretary of the Treasury, and each state payment stablecoin regulator are required to promulgate rulemaking to implement the provisions of the GENIUS Act through a notice-and-comment rulemaking no later than one year after the date of enactment of the GENIUS Act.
3 Pursuant to the GENIUS Act, a “digital asset” is defined as “any digital representation of value which is recorded on a cryptographically-secured distributed ledger.” S. 1582, § 2(6), 119th Cong. (2025).4 12 U.S.C. § 1813.
5 This is consistent with the SEC’s Division of Corporation Finance’s April 4, 2025, “Statement on Stablecoins,” which explained that the offer and sale of stablecoins pegged or redeemable one-for-one to the U.S. dollar (USD) that “are backed by assets held in a reserve that are considered low-risk and readily liquid with a USD-value that meets or exceeds the redemption value of the stablecoins in circulation” does not constitute a securities offering under the Securities Act or Exchange Act.
6 See, e.g., Tether Holdings Ltd., et al., CFTC Doc. No. 22-04 (Oct. 15, 2021); SEC v. TrueCoin LLC, et al., Case No. 3:24-cv-06684 (N.D. Cal., filed Sept. 24, 2024).7 Within one year of enactment, the Secretary of the Treasury must promulgate rulemaking for determining whether a foreign payment stablecoin regulatory regime is compatible with the U.S. federal regime for purposes of determining whether payment stablecoin issuers from that foreign jurisdiction are exempt from the requirement to be a PPSI. Once these regulations are issued, foreign payment stablecoin issuers (or a foreign regulatory agency) may request a determination from the Secretary of the Treasury of compatibility (and thus exemption from U.S. application requirements). The Secretary must render a decision within 120 days of the request.
8 PPSIs will be treated as financial institutions for purposes of the Bank Secrecy Act and will be required to comply with all applicable AML requirements.
9 The Secretary of the Treasury will issue rulemaking to establish broad-based principles for determining whether a state-level regulatory regime is substantially similar to the federal regulatory framework under the GENIUS Act. State regulators must submit to the Secretary of the Treasury an initial certification of substantial similarity by July 18, 2026, and annual recertifications thereafter. If a state fails to submit a certification, or if the Secretary rejects it, PPSIs in such state will be subject to the federal framework, regardless of market cap. The Secretary of the Treasury’s determination can be challenged in the U.S. District Court for the District of Columbia. The Treasury will maintain a public list of compliant states in the Federal Register and on its website.
Jera L. Bradshaw and Tiffanie Monplaisir contributed to this article
Have You Enrolled in EDGAR Next? Enrollment Deadline Approaching
In September 2024, the US Securities and Exchange Commission (SEC) adopted rule changes to its Electronic Data Gathering, Analysis, and Retrieval (EDGAR) file access and account management system (EDGAR Next), which went into effect on March 24. EDGAR Next is designed to improve the security and manageability of electronic filings.
All filers should enroll in EDGAR Next by September 12. Beginning on September 15, only filers who have successfully enrolled in EDGAR Next will be able to file with the SEC. Between September 15 and December 19, existing filers will not be able to file with the SEC unless and until they have enrolled in EDGAR Next. Any filer that does not enroll by December 19 must submit a new Form ID to regain access to its account.
To help organizations and individuals prepare for these changes, it is important to understand the new requirements and the actions needed to maintain uninterrupted access to the SEC’s electronic filing system. The transition to EDGAR Next introduces several key steps and deadlines for enrollment that all filers must follow to ensure compliance and avoid disruptions in their filing capabilities.
Key Steps and Deadlines for Enrollment
Create Login Credentials: EDGAR Next requires individual login.gov accounts and multifactor authentication for anyone who manages or submits filings on your behalf.
Gather Existing EDGAR Codes: You will need current EDGAR access codes — Central Index Key (CIK), CIK Confirmation Code (CCC), and passphrase — to enroll. Make sure these codes are accurate and have not expired.
Designate Account Administrators: Each filer must identify one or more authorized “Account Administrators” (at least two for most filers, though single-member entities and individual filers may require only one). Account Administrators are charged with overseeing the filer’s EDGAR Next account, reviewing and updating account information, and confirming annually that only authorized individuals and entities have access.
Delegate Filing Authority: Each Account Administrator may also designate others as Delegated Users who are only authorized to submit filings.
Confirm Your Enrollment by September 12.
Final Deadline: After December 19, the legacy EDGAR system will be permanently decommissioned for enrollment.
Consequences of Not Enrolling
You will be unable to submit filings with the SEC, effectively halting all required reporting.
Missed filing deadlines could subject you to regulatory implications and potential penalties.
Reestablishing access to your EDGAR account will require a new Form ID, along with requisite documentation and potential delays.
You may want to take the necessary steps now to ensure a smooth transition.
QSBS Benefits Expanded by One, Big, Beautiful Bill
On July 4, 2025, President Trump signed into law the act referred to as the “One Big Beautiful Bill Act” or “OBBB.” This comprehensive bill includes provisions related to tax policy, federal spending, healthcare, border security, energy, and more. Notably, the OBBB substantially expands provisions that exclude from federal income tax all or a portion of gains from sales of qualified small business stock (QSBS) — a major win for emerging growth companies and venture capitalists. The tax break, which excludes qualified gains on exit events from taxation, previously had a five-year holding period threshold and a gross assets limit of $50 million for the stock of start-up corporations to qualify under Section 1202.
The One Big Beautiful Bill replaces the five-year holding period with a tiered gains-exclusion schedule: starting at three years, 50% of gains can be excluded, followed by a 75% tax exclusion for stock held for four years, and then a 100% tax exclusion at the five-year mark. The tax-free cap has also been raised from $10 million to $15 million or 10x the shareholder’s basis in Section 1202 stock, whichever is greater. The new law also raises the gross asset limit to qualify a startup’s stock under Section 1202 from $50 million to $75 million at the time of the stock’s issuance. The term “aggregate gross assets” means the amount of cash and the aggregate adjusted bases of other property held by the corporation (not the fair market value of other property). Beginning after the 2026 calendar year, the gross assets threshold will be indexed for inflation.
The changes apply only to Section 1202 stock issued after July 4, 2025.
Navigating Massachusetts Taxes after Relocation: Key Takeaways from Welch v. Commissioner of Revenue
Many Massachusetts residents have recently considered taking, or have undertaken, steps to relocate from Massachusetts to jurisdictions with lower or no state income taxes, especially in light of the recently enacted 2023 Massachusetts “Millionaire’s Tax.” While such a move could offer significant tax advantages, a recent Massachusetts Appeals Court decision, Welch v. Commissioner of Revenue, could reshape how nonresidents are taxed on capital gains from stock sales, emphasizing where the value was earned over where it is recognized.
The case involved a company founder who worked mainly from his home and office, both in Massachusetts, over a twelve year period. In 2015, however, the founder established residency in New Hampshire, and then sold his company stock for a gain, but did not report it as Massachusetts-source income on his nonresident tax return. The Massachusetts Department of Revenue challenged the reporting decision and the Massachusetts Appeals Court ultimately held that the gain realized from the stock sale was Massachusetts source income because it was effectively connected with the founder’s trade, business, or employment within the meaning of G. L. c. 62, § 5A.
The Court’s Reasoning
The Appeals Court emphasized the following points in upholding the Appellate Tax Board’s decision:
Broad Scope of § 5A. The statute defines Massachusetts source income to include “income derived from or effectively connected with . . . any trade or business, including any employment carried on by the taxpayer in the commonwealth, whether or not the nonresident is actively engaged in a trade or business or employment in the commonwealth in the year the income is received.” (emphasis added). A 2003 amendment added the emphasized language, and further broadly defined what income qualifies as being “derived from or effectively connected with” a Massachusetts trade or business and includes “the gain from the sale of a business or of an interest in a business.”
Not an Ordinary Investment. Massachusetts Regulations provide that generally, gain from the sale of C or S corporation stock is not Massachusetts source income if it is characterized as capital gain for federal tax purposes. However, the court noted that such a gain may be Massachusetts source income if “the stock is related to the taxpayer’s compensation for services.”
Compensatory Nature. The Court agreed with the Tax Board that the founder’s gain was not a passive investment return but rather was compensatory and connected with his continued employment at the company in prominent and crucial roles. The Tax Board emphasized that the founder acquired the stock after founding the company, dedicated himself to the company’s success, expected a payout for his “sweat equity,” and his resignation was contingent on the sale of his shares. Although the founder argued that there was no evidence of an explicit agreement that the shares were issued as compensation, the court noted that this was not determinative.
Implications for Founders and Executives
The Welch decision could have a profound impact on founders and executives who were employed in Massachusetts and hold equity interests in their company but who are no longer residents.
Gains from Equity May Be Source Income to Non-Residents. Even if a taxpayer changes residency before a liquidity event, Massachusetts may assert taxing authority over resulting gains if the equity was earned through services in Massachusetts. This decision reinforces that Massachusetts emphasizes where you earn value outweighs where you recognize it in determining Massachusetts source income.
Substance Over Form. The ruling underscores the Commonwealth’s ability to recharacterize what might seem like investment income as compensation for services rendered. The absence of an agreement explicitly labeling equity as compensation is not dispositive. Massachusetts taxing authorities may look at the facts and circumstances, including the taxpayer’s role within the company and the timing and circumstances of the equity acquisition, to determine whether the equity was compensatory.
Tax Planning Considerations. Executives and founders contemplating relocation or exit events should carefully evaluate the sourcing of equity-related income and consult with tax and legal advisors early in
Texas Senate Bill 2337: New Proxy Advisor Regulations Seek to Protect Shareholder Value of Texas Companies
The 89th Texas Legislature passed Senate Bill (S.B.) 2337, “Relating to the Regulation of the Provision of Proxy Advisory Services” (the Act), which introduced new regulations governing proxy advisors that provide proxy advisory services to the shareholders of Texas-based companies.
The governor signed the Act into law on June 20, 2025, and it takes effect on Sept. 1, 2025. The Act aims to ensure that proxy advice is provided to shareholders solely based on the maximization of shareholders’ financial interest. Accordingly, the Act requires proxy advisors to make certain disclosures in the event their recommendations to a Texas company are not solely in such shareholders’ financial interests. The Texas Legislature added several new sections to the Texas Business Organizations Code (the Code) to implement the Act as further explained below.
Legislative Intent and Applicability
Proxy advisors may influence the decision-making of Texas company shareholders by providing proxy advice and voting recommendations. Shareholders customarily expect proxy advisors to reflect the shareholders’ financial interests. The Texas Legislature was concerned by the increased influence that non-financial considerations, including certain environmental, social and governance (ESG) policies, diversity, equity, and inclusion (DEI) factors, and social credit or sustainability considerations have over the advice and recommendations that proxy advisors provide to shareholders.1
The Act imposes disclosure requirements on proxy advisors to shareholders of certain Texas companies. The Act defines a Texas company as a publicly traded for-profit corporation, limited liability company, partnership, or other business entity that: (1) is organized or created in Texas; (2) has its principal place of business in Texas; or (3) has proposed to become re-domesticated in Texas.2
The Act defines a “proxy advisor” as any person who, for compensation, provides a “proxy advisory service” to shareholders of a Texas company or to other persons with authority to vote on behalf thereof.3
A “proxy advisory service” includes specified services such as voting advice or recommendations, proxy statement research or proposal analysis, a rating, or research regarding corporate governance and the development of proxy voting recommendations and polices.4
Disclosure Requirements for Proxy Advisors
Any proxy advisor is required to make the disclosures further detailed below, when: (1) its recommendations are “not provided solely in the financial interest of the shareholders of a company”;5 or (2) such advisor provides advice that is “materially different” to shareholders who have not expressly requested services for a nonfinancial purpose.6
When Recommendations Conflict with Shareholders’ Financial Interests
A proxy advisor is deemed to have given advice not solely in a shareholder’s financial interest if its advice is entirely or partially based on, or otherwise takes into consideration, non-financial factors. The Act provides a non-exclusive list of non-financial factors that includes ESG policies or investment principles, DEI considerations, social credit, sustainability factor, score, or affiliation with an organization that bases its evaluation of the company’s value on similar non-financial factors. Similarly, any advice based on non-financial considerations that subordinates the financial interests of a shareholder to such non-financial considerations will be regarded as advice not provided solely in a shareholder’s financial interest. In addition, any recommendation to vote against a company proposal to elect a governing person that does not affirmatively state that such recommendation is made solely based on the shareholders’ financial interest will also be deemed to constitute advice that is not solely in a shareholder’s financial interest.7
New Disclosure Obligations Under S.B. 2337
If a proxy advisor gives advice that is not solely in the financial interests of shareholder clients, it must comply with new disclosure obligations. Specifically, it must provide a notice to each shareholder (or person acting on a shareholder’s behalf) and the applicable company that: (1) conspicuously states that its advice is not based solely in such shareholders’ financial interest because it is entirely or partially based on non-financial factors and (2) explains the applicable non-financial factors with particularity, including how the financial interests of such shareholder may have been subordinated to such non-financial factors. The proxy advisor must also publicly and conspicuously disclose on the home or front page of the website of such proxy advisor that its advisory services include advice and recommendations that are not based solely on the financial interest of shareholders.8
Additionally, if a proxy advisor provides advice that is inconsistent with the recommendations of the board of directors of a company or a relevant committee comprised of a majority of independent directors, such advice will be deemed to be provided not solely in the financial interest of a shareholder unless the proxy advisor provides a corresponding written economic analysis that explains its reasoning.
The analysis must set forth:
1.
the short-term and long-term economic benefits and costs of implementing any shareholder proposal as proposed;
2.
an analysis of whether the proposal is aligned with the investment principles and objectives of the proxy advisor’s shareholder client;
3.
the “projected quantifiable impact” if a proposal were accepted and the corresponding impact on the shareholder’s return on its investment; and
4.
an explanation of the methods and processes used to prepare such written economic analysis.9
Disclosure Obligations Concerning Inconsistent Advice
The Act includes new provisions that require proxy advisors to disclose if they provide “materially different” advice concerning voting requirements for company and proxy proposals. The Act defines “materially different” advice as the simultaneous recommendation to various shareholders concerning: (1) inconsistent recommendations to vote for or against any proposal; (2) inconsistent recommendations concerning a vote for, against, or an abstention for a nominee of any governing person of the company; or (3) recommendations that are in opposition to the recommendations of the company’s management team.10
In addition to the disclosure requirements set forth in Sections 3 and 4 above, a proxy advisor that provides materially different advice is subject to other disclosure requirements. Such proxy advisory must disclose the relevant advice to: (1) each shareholder receiving materially different advice; (2) any entity receiving such advice on behalf of a shareholder; (3) the company that the advice relates to; and (4) the attorney general of Texas. Further, such proxy advisor must also disclose which of the advice or recommendations provided is solely in the shareholders’ financial interest and supported by specific financial or economic analysis that the proxy advisor either performs or relies on.11
Enforcement and Compliance
Any proxy advisor’s non-compliance with the Act is deemed to be a deceptive trade practice under the Texas Deceptive Trade Practices-Consumer Protection Act.12 Accordingly, proxy advisors may face increased risk if they do not comply with the Act from claims brought by shareholders, the applicable company, and other recipients of proxy advice. The Act provides that a plaintiff must also notify the attorney general of Texas within seven days of the date that it brings a claim, and the attorney general may intervene in the action.13
Potential Impact on Texas Corporate Governance and Investment Climate
Some critics have raised concerns that the Act may increase compliance costs for proxy advisors and may tilt proxy advisors’ advice in favor of management teams as part of a proxy advisor’s strategy to mitigate its own financial risks arising from non-compliance with the Act. Other critics have suggested that the Act may have unintended consequences due to the breadth of the defined terms used in the Act (for example, proxy advisor) may extend beyond its intended targets.14
Supporters of the Act argue that the new Texas proxy advisory rules are intended to address uncertainty surrounding the methodology proxy advisors have used to establish their advisory decisions and are intended to promote a more accountable business environment. This new disclosure-based framework seeks to strike a balance between free-market principles and a need for transparency and accountability. The Act is part of a series of recent efforts the Texas Legislature has taken to enhance Texas’ desirability for investment, corporate relocations, and to establish the state as a favorable jurisdiction for public companies by bolstering investor confidence and promoting stronger corporate governance.
1Section 1(3) of the Act.
2 New Section 6A.001(1) of the Code.3New Section 6A.001(3) of the Code.
4 New Section 6A.001(4) of the Code.
5 New Section 6A.101 of the Code.
6 New Section 6A.102 of the Code.
7 New Section 6A.101(1), (3) and (4) of the Code.
8 New Section 6A.101(b) of the Code.
9 New Section 6A.101(c) of the Code.
10 New Section 6A.102(a) of the Code.
11 Ibid.
12 New Section 6A.201 of the Code.
13 New Section 6A.202 of the Code.
14 Pensions & Investments, “Texas bill targets proxy advisory firms’ use of ESG in voting recommendations,” June 16, 2025. Freedom to Invest issued a statement to Pensions and Investment, “This bill, as written, would harm Texas investors, retirees and the state’s highly competitive marketplace by imposing vague and unconstitutional disclosure mandates.”
Texas Court Stays CAT Class Action, But Reporting Must Continue
On July 7, Judge Alan Albright of the US District Court for the Western District of Texas granted the Securities and Exchange Commission’s (SEC) motion to stay a class action by industry groups that challenges the constitutionality and tracking capabilities of the Consolidated Audit Trail (CAT). The stay extends through January 15, 2026, by which date the SEC must report the results of its ongoing internal review of CAT governance, cybersecurity and cost‑allocation.
In its motion, the SEC referenced its current consideration of CAT National Market System plan amendments by self-regulatory organizations (SROs) that would prohibit the reporting of personal customer information to CAT entirely and eliminate all personal customer information stored in CAT. Importantly, CAT reporting obligations remain in full force during the stay. Judge Albright’s order provides the SEC with time to complete its review but does not suspend the operation of CAT or alter compliance deadlines.
For additional background on CAT and the underlying litigation, see Katten’s prior Quick Reads posts here and here.
Healthcare Practice Transitions: Capitalizing on the Perfect Storm
Highlights
Demographic Shift: Nearly 47% of physician practice owners are over age 55 and actively exploring retirement options, opening the door for widespread practice transitions.
Abundant Capital: Private equity firms and institutional buyers are deploying significant capital into healthcare platforms, driving record-high valuations.
Accelerated Consolidation: Sectors like dental (expected to hit 25% group ownership) and medical aesthetics (growing at 13%+ annually) are undergoing rapid consolidation, benefiting both sellers and strategic buyers.
The healthcare practice landscape is undergoing a once-in-a-generation transformation. For practice owners who have built their careers around the traditional “lifestyle business” model — prioritizing work-life balance and personal control — the market is signaling that the window to maximize practice value has never been wider. At the same time, for private equity firms, Dental Service Organizations (DSOs) and other institutional investors, the highly fragmented healthcare sector presents fertile ground for strategic consolidation.
Demographics Driving Deal Flow
The numbers tell a compelling story. Approximately 10,000 baby boomers turn 65 every day, and this generation owns roughly 2.3 million businesses with a combined valuation of $10 trillion (Snider and Weinberger). In healthcare specifically, nearly 47% of physician practice owners are over age 55 and actively considering transition options within the next decade (Association of American Medical Colleges).
For dental practices, the average retirement age has settled around age 69, but the wave of retirements is accelerating as practice ownership becomes increasingly complex and capital-intensive (American Dental Association).
These trends reflect more than age — they represent a generational shift in mindset. Today’s healthcare graduates demonstrate different career preferences than their predecessors. Female dentists now represent a growing percentage of graduates, and research consistently shows that they prioritize work-life balance over practice ownership (American Dental Education Association). Meanwhile, recent graduates face unprecedented challenges in securing banking relationships and managing the escalating regulatory and administrative burdens that come with independent practice ownership.
The Capital Revolution
What makes this moment unique isn’t just the supply of sellers, but the explosion of available capital on the buy side. Healthcare M&A activity surged in late 2024, fueled by institutional investors bringing unprecedented resources to practice acquisitions (Healthcare Finance News). Valuations for high-performing practices reached record heights in 2023, partly due to this large influx of capital driving consolidation across multiple healthcare sectors (Morrison).
Dental is a prime example: industry-wide group ownership has climbed from 10% to nearly 18% since 2022 and is projected to reach 25% over the next decade (Dental Group Practice Association). About one-third of dental practices are now consolidated — a trend that began in 2010 but has accelerated dramatically since 2015 (ADA Health Policy Institute). For practice owners, this represents a unique arbitrage opportunity: the ability to maximize financial outcomes by transitioning to well-capitalized institutional buyers rather than traditional individual successors.
The MedSpa Parallel
The consolidation trend extends well beyond dental practices. The medical spa industry presents a particularly compelling parallel opportunity. The global medical spa market is projected to reach approximately $25.9 billion by 2026, growing at a robust compound annual growth rate of over 13% (Grand View Research). Like dentistry a decade ago, the sector remains highly fragmented, with significant private equity investment activity in aesthetic medicine over the past two years (PitchBook Healthcare Services Report).
For aesthetic medicine practice owners, this fragmentation represents a fruitful opportunity. For institutional buyers, it represents a chance to establish platform companies in a rapidly growing sector that combines healthcare delivery with consumer-driven demand.
The Buyer’s Advantage
From the institutional buyer perspective, this market presents exceptional opportunities for several reasons:
Market Fragmentation: Both dental and MedSpan markets remain significantly fragmented compared to other healthcare sectors, providing ample acquisition targets for roll-up strategies.
Defensive Healthcare Spending: These sectors tend to be more recession-resistant than other healthcare specialties, as they often combine essential care with elective procedures that maintain steady demand.
Operational Efficiency: Consolidation allows for shared administrative functions, centralized procurement, standardized protocols and enhanced technology implementation, all of which drive improved margins.
Regulatory Navigation: Institutional buyers can better manage the increasingly complex regulatory environment that burdens individual practice owners.
The Perfect Storm for Transactions
Several factors are converging to create optimal conditions for healthcare practice transactions:
Motivated Sellers: Practice owners facing retirement, increased regulatory complexity and administrative burdens are increasingly motivated to explore exit strategies.
Available Capital: Private equity firms, DSOs and other institutional buyers have significant dry powder and are actively seeking healthcare platform investments.
Valuation Premiums: Current market conditions support premium valuations for quality practices with strong patient bases and operational systems.
Interest Rate Environment: While financing costs have fluctuated, institutional buyers with strong balance sheets maintain significant advantages in the current market.
Navigating the Complexity
Despite the opportunity, these transactions are not simple. Healthcare practice transactions involve intricate regulatory compliance requirements, including corporate practice of medicine considerations, supervision requirements for non-physician providers, and multi-state compliance issues for expanding platforms. For MedSpa transactions specifically, FDA requirements and state-specific aesthetic procedure regulations add additional layers of complexity.
Additionally, many healthcare practice owners have never navigated a business sale, particularly to institutional buyers with sophisticated due diligence processes and complex transaction structures. The disconnect between lifestyle business owners and institutional buyers can create significant friction without experienced guidance.
Successfully capitalizing on this market opportunity — whether as a seller seeking to maximize practice value or as a buyer pursuing consolidation strategies—requires sophisticated legal counsel with deep healthcare industry experience. The convergence of demographic trends, capital availability and regulatory complexity demands attorneys who understand both the business realities of healthcare practice ownership and the strategic objectives of institutional buyers. The perfect storm is here. The question is not whether healthcare practice consolidation will continue, but whether you have the right legal partner to help you make the most of it.
Sources
ADA Health Policy Institute. (2023). Distribution of Dentists in the United States by Region and State: Ownership Models and Practice Structures. HPI Research Brief.
American Dental Association. (2023). Survey of Dental Practice: Practice Ownership and Retirement Trends. ADA Health Policy Institute Research Brief. Available at: https://www.ada.org/resources/research/health-policy-institute.
American Dental Education Association. (2024). Trends in Dental Education and Practice Demographics: 2024 Annual Report. ADEA Survey of Dental School Seniors.
Association of American Medical Colleges. (2023). 2023 Physician Workforce Data Report.
Dental Group Practice Association. (2024). State of Group Practice Ownership Report: Consolidation Accelerates Across All Market Segments. DGPA Annual Survey.
Healthcare M&A Report. (2024). Year-End Healthcare Transaction Analysis: Private Equity and Strategic Acquisitions. Healthcare Finance News, Q4 2024.
Morrison, K. (2023). Practice Valuation Trends and Market Analysis: Record Values Drive Consolidation. Dental Economics, Vol. 113, No. 8.
Snider, J., & Weinberger, R. (2023). The coming wave of business transitions. Bain & Company Insights.
SEC Hosts Compensation Disclosure Roundtable in Advance of Potential Rule Changes
On June 26, 2026, the Securities and Exchange Commission (“SEC”) hosted a roundtable to discuss whether executive compensation disclosure rules produce information material to investors and if not, how they should be amended. The roundtable consisted of representatives from public companies and investors, as well as other experts in this field. Remarks were made by SEC Chair Paul S. Atkins and the other sitting commissioners. A recording of the roundtable is available on the SEC’s website here. Chair Atkins noted in his remarks that one might describe the SEC’s current compensation disclosure requirements as a “Frankenstein patchwork of rules.” He suggested that the compensation disclosure rules have become unwieldy, are not cost-effective and result in disclosure that a reasonable investor struggles to understand. Commissioners Hester Peirce and Mark Uyeda echoed his views. We expect that the SEC will issue one or more rule proposals amending executive compensation disclosure requirements, possibly later this year.
Prior to the roundtable, on May 16, 2026, Chairman Atkins issued a statement, including questions for the SEC staff to consider, and invited the public to submit comments on executive compensation disclosure. A number of comments were submitted prior to the roundtable, which are available on the SEC’s website here. At the roundtable on June 26, Chairman Atkins indicated that any further comments should be submitted in the next several weeks to be considered in any rule proposal that is issued.
Executive compensation is perennially a hot topic. Issuer panelists and investor panelists were not always on the same page on potential disclosure reform. Issuer panelists generally sought rationality and flexibility in compensation disclosure. Investor panelists were interested in improved navigability and comparability of compensation disclosure. Some of the executive compensation disclosure topics covered during the roundtable include:
Alignment of compensation disclosure with compensation decision-making. Chair Atkins and certain roundtable panelists wondered if there was a way to better align compensation disclosure with how compensation decisions are actually made by a company. Panelists inquired whether compensation disclosure should reflect information reviewed by boards and committees in making compensation decisions.
Perquisites. Under a 2006 rulemaking,[1] an item is not a perquisite (perk) or personal benefit if it is integrally and directly related to the performance of the executive’s duties. The concept of a benefit that is “integrally and directly related” to job performance is a narrow one. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees. In the 2006 rulemaking, the SEC specifically indicated security provided at a personal residence or during personal travel is perquisite. The existing SEC rules and guidance on perquisites also lead most companies to conclude that the provision of technology to an executive to facilitate working from home is a perquisite. These perspectives seem antiquated now, given the experience with COVID and increased threats against executives. There was support among panelists for a more facts and circumstances determination regarding whether an item provided by the company to an executive is a perquisite, and modification or elimination of the SEC guidance on items that are presumptively perquisites.
Pay-for-performance. Many panelists expressed frustration with the SEC’s implementation of the Dodd-Frank Act[2] mandated pay versus performance rules,[3] requiring companies to disclose both quantitatively and qualitatively, in both tabular and narrative formats, how the compensation actually paid to executives relates to company financial performance over a five-year time horizon. Panelists thought “compensation actually paid” requires a complex calculation that makes it hard to both produce and interpret the disclosure. A panelist indicated there is enough experience that suggests the costs to prepare the disclosure are much greater than any benefit of the rule.
CEO pay ratio. The SEC’s implementation of the CEO pay ratio rules[4] required by the Dodd-Frank Act is also looked upon with disfavor by issuer panelists. Certain investor panelists did not see much value in the disclosure because of the lack of comparability among issuers. However, some investor panelists saw potential value in tracking this ratio over time. Panelists generally considered the cost of preparing the disclosure as exceeding any benefit of the rule.
Clawback rules. In 2022, the SEC adopted new executive compensation “clawback” rules,[5] fulfilling its 2010 mandate under Dodd-Frank. Notably, unlike many existing clawback policies that only apply to officers who actually engaged in fraud or misconduct related to financial statements and provide companies with some degree of discretion in determining when and whether to pursue enforcement, the Dodd-Frank clawback rules generally require (subject to very limited exceptions) companies to clawback compensation erroneously received by any executive officer in connection with any “Little r” restatements (i.e., financial restatements that are not deemed material errors and do not require a full restatement of previously issued financial statements), as well as “Big R” restatements (i.e., financial restatements that are deemed material errors and do require a full restatement of previously issued financial statements, as well as immediate Form 8-K disclosure to the effect that the previously issued financial statements can no longer be relied upon). These clawback rules were described by a panelist as a trainwreck waiting to happen, offering a hypothetical of an executive who has engaged in no misconduct who decides to resign and fight the company for loss of prior compensation rather than return the compensation under the clawback rules.
XBRL. Certain investor panelists expressed an interest in XBRL tagging of the summary compensation table and supplemental compensation tables. The only proxy disclosures that currently require XBRL tagging are pay versus performance, equity grant policy disclosure, insider trading policy disclosure, and disclosure of a registrant’s action to recover erroneously awarded compensation.
Say-on-pay. There was little appetite among panelists to change say-on-pay requirements, although it was noted that this requirement may distort compensation decision-making. Panelist indicated that say-on-pay generates some amount of investor engagement and can result in more thoughtful narrative compensation disclosure than might otherwise be produced. However, some panelists identified as a downside that say-on-pay drives companies to adopt the current “best practices” on executive compensation programs, even if aspects of such programs are ill-fitted to certain adopting companies. Proxy advisory firms’ voting guidelines tend to further drive adoption of one-size fits all compensation programs.
While the scope of potential executive compensation disclosure reform is unclear, we expect reform is coming.
[1] Executive Compensation Disclosure, Release No. 34-55009 (Dec. 22, 2006).
[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
[3] Pay Versus Performance, Release No. 34-95607 (August 25, 2022).
[4] Pay Ratio Disclosure, Release No. 34-75610 (August 5, 2015).
[5] Listing Standards for Recovery of Erroneously Awarded Compensation, Release No. 34-96159 (October 26, 2022).
SEC Enforcement in the Second Quarter of 2025
In May 2025, we summarized the U.S. Securities and Exchange Commission’s (SEC) Division of Enforcement activity during the first quarter of the new presidential administration. With the second quarter now concluded, and Paul S. Atkins hitting his stride as the new Chairman of the SEC, we summarize below the types of SEC enforcement actions filed during the second quarter of 2025.
The Stats
The SEC publicly discloses each new enforcement action it files in federal district court or as an administrative proceeding. Although the SEC recently has received much attention for old cases it dismissed, rather than new cases it brought, we focus here on the latter. And a review of the cases shows that, at a high level, the SEC brought the following types of actions from April 1, 2025, through June 30, 2025.
The SEC filed 31 stand-alone enforcement actions, consisting of:
24 actions in federal district court; and
Seven administrative proceedings.
The subject matter of those actions included:
27 cases alleging fraudulent conduct (other than insider trading);
Nine cases involving investment advisers;
Six cases with parallel criminal proceedings;
Two cases alleging unregistered municipal advisors; and
One case alleging that a broker-dealer failed to file Suspicious Activity Reports (SARs).
The SEC also brought eight follow-on actions, imposing various suspensions or bars based on the entry of an order in a prior civil or criminal proceeding.
(The subject matters listed above exceed the number of stand-alone actions because a single action might involve more than one subject matter. For example, one case might involve both fraudulent conduct and an investment adviser.)
Takeaways
As SEC observers seek to discern the direction of enforcement under Chairman Atkins, several points may be gleaned from the second quarter of 2025:
First, every case filed in district court alleged fraud. Last year, the U.S. Supreme Court held that, when the SEC seeks civil penalties for securities fraud, the defendant is entitled to a jury trial. See SEC v. Jarkesy, 603 U.S. 109, 120-21 (2024). So, it is no surprise that the SEC now files all of its fraud cases in district court (where a jury is available) and not in its administrative forum (where cases are decided by administrative law judges). But it is notable that the SEC did not bring any non-fraud cases in district court. Perhaps this reflects that the SEC has refocused its limited enforcement resources on fraud cases involving more egregious conduct, rather than non-fraud cases involving technical violations. Time will tell.
Second, the SEC remains active in the investment adviser space, policing violations involving fee disclosures and conflicts of interest, among other things. Thus, investment advisers should anticipate scrutiny from the SEC and proactively ensure that their disclosures are accurate and their compliance functions operate effectively.
Third, the SEC continues to bring actions against broker-dealers for failing to file SARs. The Bank Secrecy Act, together with Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder, require broker-dealers to file SARs in connection with certain suspicious transactions. Bringing enforcement actions against broker-dealers for failing to file SARs was an area of emphasis before Chairman Atkins took the helm of the SEC, and it appears to remain a focus. Broker-dealers should thus ensure that their policies and procedures relating to SARs are effective.
Fourth, the SEC continues to coordinate with criminal enforcement authorities, typically at the U.S. Department of Justice (DOJ), on parallel investigations. One area where the SEC and DOJ often bring parallel actions is insider trading. Interestingly, the SEC did not bring any insider trading cases during the second quarter of this year, even though DOJ brought several. Whether that indicates a trend or a statistical blip remains to be seen. Notably, on July 10, 2025, after the quarter ended, the SEC brought an insider trading case in parallel with DOJ, so perhaps the dearth of SEC insider trading cases in the second quarter was simply an anomaly.
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Expanded QSBS Tax Benefits: Shorter Holding Periods, Higher Exclusions and Broader Eligibility
The recent passage of new federal legislation known as One Big Beautiful Bill (OBBB, formally House Bill 1 of the 119th Congress) brings significant changes to several material programs and tax laws. While some provisions — such as 100% bonus depreciation for certain business aircraft — have received attention, one major update has gone largely unnoticed: significant changes to the treatment of Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code (the Code).
These changes will have a major impact on the venture capital ecosystem, which include enhancements to QSBS incentives for founders and investors while expanding the number of companies eligible to issue QSBS.
At a high level, the changes allow:
A pro-rated tax exclusion benefit for a shorter holding period.
An expanded asset threshold, allowing larger companies to issue QSBS-eligible stock.
A higher, inflation-indexed exclusion cap on the sale of QSBS eligible stock beginning in 2027.
QSBS Background
Section 1202 of the Code provides significant tax benefits to individuals and certain entities that receive stock directly from certain early-stage companies if the stock and the issuing entity meet certain requirements. Before these changes, if the shareholder held that stock for more than five years after issuance (and certain other requirements were met), the shareholder generally would be entitled to entirely exclude a certain amount of gain from federal income taxation.
At a high level, QSBS eligibility required that:
The issuer of the stock must be a “C” corporation (i.e., not an S-corporation or a limited partnership).
The stockholder acquired the stock via an original issuance directly from the company (not as part of a secondary offering or another acquisition method).
The issuing company must be actively engaged in certain types of qualifying businesses (excluding many services-based businesses).
The issuing company must have avoided certain types of transactions and continue to abide by certain transactional limits, like certain stock redemptions. Note that this is one of the trickiest prongs for the issuing company to manage, as it requires historical analysis and forward-looking compliance.
The issuer’s aggregate gross assets must be below $50 million through the date the QSBS eligible stock is issued.
What’s New
While many baseline requirements (such as entity type and business activity) remain unchanged, the legislation introduces several investor-friendly revisions.
Important Note: These changes are not retroactive and only apply to newly acquired stock on or after July 4, 2025. QSBS acquired before that date will continue to be governed by the previous rules.
Shorter Holding Periods to Access Benefits
Stockholders can now begin to receive prorated QSBS tax benefits after holding qualified stock for as little as three years at the time of sale, instead of waiting for five years to receive the full benefit, as was previously required. The new sliding-scale benefit is as follows:
Stock held for at least 3 years: 50% of gain excluded from federal income tax
Stock held for at least 4 years: 75% of gain excluded from federal income tax
Stock held for at least 5 years: 100% of gain excluded from federal income tax
While early sales mean a reduced benefit, the shorter period, coupled with the other benefits detailed below, is a promising development for investors and founders alike.
Larger Companies Can Issue QSBS-Eligible Stock
What is a “qualified small business?” Before the legislation, an issuing company had to have gross assets below $50 million (as determined under Section 1202). That threshold is now $75 million (adjusted for inflation starting in 2027), measured before and immediately after the issuance of QSBS shares.
As a result, more companies — particularly those in mid- and later-stage rounds — can now issue QSBS-eligible stock.
QSBS Benefits Can Exempt More from Taxes
Stockholders can exclude up to $15 million (adjusted for inflation starting in 2027), up from the previous limit of $10 million.
Importantly, the $15 million limit is only one prong of the potential gain exclusion. QSBS rules state that a stockholder can exclude the greater of (A) $15 million or (B) 10x their basis in the QSBS eligible stock. Because the 10x basis limitation often can result in a larger exclusion and the law did not change this limitation or the “greater of” calculation, the exemption rules overall improved for stockholders under the legislation.
While these changes expand the potential benefits of QSBS, the rules remain complex. Engaging experienced tax advisors can help ensure eligibility is preserved and opportunities are fully realized. Our team regularly supports clients in navigating the nuances of Section 1202.
Key Takeaways
The recent legislation significantly enhances QSBS rules for founders and investors. Larger companies can now issue QSBS-eligible stock, which can be held for a shorter period to receive preferential QSBS tax treatment. Additionally, those QSBS benefits increase the amount of gain that can be excluded from taxation. These substantial changes are poised to reshape investment dynamics across the venture ecosystem.
Big Changes for QSBS: What the 2025 Trump Tax Bill Means for Founders and Investors
On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act (OBBBA), a sweeping tax reform package that includes major updates to the Qualified Small Business Stock (QSBS) rules under Section 1202 of the Internal Revenue Code. These changes are poised to reshape how founders, early-stage investors, and startup employees think about equity and exit strategies.
Key Changes to QSBS
1. Tiered Gain Exclusion Based on Holding Period Previously, QSBS had to be held for at least five years to qualify for a 100% capital gains exclusion (if acquired after 2010). The new law introduces a tiered system for stock acquired after July 4, 2025:
3 years: 50% exclusion
4 years: 75% exclusion
5+ years: 100% exclusion
This gives investors more flexibility and earlier access to tax benefits.
2. Increased Gain Exclusion Cap The per-issuer cap on excludable QSBS gain has been raised:
From $10 million to $15 million for stock acquired after July 4, 2025
The new cap will be adjusted for inflation starting in 2027
3. Higher Company Asset Threshold To qualify as a QSBS issuer, a company’s gross assets must now be under $75 million (up from $50 million), expanding eligibility to more mature startups.
4. AMT Relief Gains excluded under the new 50%, 75%, and 100% rules are not considered tax preference items for Alternative Minimum Tax (AMT) purposes
What This Means for You
These changes make QSBS even more attractive for startup founders, employees, and investors. The shorter holding periods and higher caps could influence how equity is structured, when stock is issued, and how exits are timed.
If you’re involved in startup formation, fundraising, or planning a liquidity event, now is the time to revisit your QSBS strategy.