The Big Story: Key startup policy debates to watch in lame duck, new Congress
Democrats’ major victories in Tuesday’s midterm elections could reshape policy debates affecting nearly every corner of the startup ecosystem, from access to capital and talent, to AI, online safety, trade, and more. Voters handed Democrats control of both chambers of Congress, setting the stage for significant changes in Washington—and governing trifectas in multiple states, setting the stage for supercharged state policymaking. The scale of the victories could influence what lawmakers pursue during the remaining weeks of the current Congress, while bringing increased oversight of the administration and the tech industry when the next Congress takes office in January.
Before we get to the new Congress, there are a number of outstanding tasks for the lame-duck session, but the election outcome has already changed priorities. Much of the Senate’s activity will be devoted to confirming as many outstanding administration nominees as possible. Lawmakers also have must-pass legislation on their to-do list, including the National Defense Authorization Act and reaching a government funding deal before December 11. The former may get mired in politics around the Iran war, but is a vehicle where lawmakers have often sought to attach problematic tech policy. On the latter, given the leverage handed to them by voters, Democrats will push strongly for a continuing resolution moving the funding fight to the new Congress and look to extend existing protections against proposed changes to increase political influence over federal grant decisions and make funding less reliable for startups. Meanwhile Republicans will push to pass some of their priorities while they still hold power, which could include an Administration push to renew Section 702, a government surveillance authority that has before upended international data flows.
The incoming Congress is expected to bring much greater scrutiny of the AI industry, including major AI companies’ relationships with the administration and the rapid expansion of data centers—and the impact on startups is likely to get lost in the fray. AI regulation will have momentum, but any federal legislation is unlikely to address differences among state laws. Meanwhile, states are poised to pursue their own restrictions on AI and data center development, potentially adding costs and delays to the infrastructure supporting AI.
Several House Republican lawmakers who championed capital formation legislation lost their seats, reducing the ranks of experienced legislators that had guided the passage of bipartisan capital formation packages in successive Congresses. Over in the Senate, Elizabeth Warren (D-Mass.) will chair the Senate Banking Committee, and is unlikely to be receptive to proposals that broaden the pool of accredited investors and make it easier for startups to access capital. Instead, renewed interest in restricting acquisitions could create additional barriers to one of the primary exit paths for startups.
Immigration policy could see increased congressional oversight, particularly around the administration’s enforcement practices. While much of that scrutiny will likely focus on broader immigration concerns around ICE tactics and agency-involved shootings, it could also extend to the administration’s efforts to impose higher fees and new restrictions on high-skilled visa programs, making it more difficult and expensive for startups to recruit global talent.
On Online safety, if Republicans decide they want to move their version of the legislation, the House-passed KIDS Act could see Senate action in the lame duck. But more likely, advocates will push for the Senate version of the Kids Online Safety Act to be considered in the new Congress, when historical House Republican opposition won’t be a meaningful factor. Either package could effectively push companies toward problematic age verification, but KOSA could impact services content moderation choices.
President Trump’s trade agenda has relied heavily on unilateral tariff actions, and that is likely to continue, but Democrat victories across industrial states that were supposed beneficiaries of the tariff regime bolster the case for scrutiny. Democrats will call key administration officials to testify and will seek to reassert Congress's role in trade policy. Fewer tariffs and less trade policy whiplash would be welcome for startups, but much more than stanching the bleeding will be needed to enhance U.S. startups’ global competitiveness.
The impact of these issues on startups is unlikely to be top of mind for the incoming Congress, but they will have significant implications for startups. Policymakers should account for startups’ role in the innovation ecosystem and broader U.S. economy as they reorient the agenda in the new Congress.
Policy Roundup:
Top EU court considers AI and copyright issues. Advocate General Maciej Spuznar delivered his advisory opinion Tuesday to the European Union’s top court as it considers the first case concerning AI and copyright with big implications for innovation in the Bloc. The opinion—which is not binding, but informs judges as they weigh the case—contains several bright spots for startups and AI innovation, including favorable findings on AI training, and instructive language around liability, namely that AI services should not be held liable for the actions of their users.
Treasury, IRS designate more than 6,500 new Opportunity Zones. The Treasury Department and the Internal Revenue Service announced Opportunity Zone designations this week for 6,576 census tracts across all 50 states, D.C., and U.S. territories, including 2,594 rural tracts that qualify for enhanced incentives. Opportunity Zones give investors tax breaks for putting money into businesses and projects in underinvested areas and can be a critical source of capital for startups in communities that traditional venture funding often overlooks.
Industry groups urge extension of China tariff exclusions. Engine joined more than 20 industry groups in a letter urging the U.S. Trade Representative to extend 178 tariff exclusions on certain imports from China for at least another year before they expire November 9. Allowing these exclusions to expire could raise costs for startups and other small businesses that rely on imported components, particularly where alternative suppliers remain limited.
California commission advances recommendation to restrict acquisitions. The California Law Revision Commission voted last week to approve a draft tentative recommendation changing how mergers and acquisitions are reviewed under state antitrust law, to make them easier to challenge. Acquisitions are a critical exit path for startups, allowing founders and investors to reinvest capital into new businesses, and additional restrictions could make those exits more difficult. The recommendation is expected to be made final and sent to the legislature to be considered during next year’s regular session.
House Democrats challenge fair use arguments in AI lawsuit. Three House Democrats filed an amicus brief siding with News Publishers in ongoing consolidated OpenAI copyright litigation, notable because two of the Lawmakers are expected to chair key committees with jurisdiction over copyright in the new Congress. Their filing adds to the competing arguments before the court, where Engine has separately argued that AI training is transformative fair use and warned that licensing requirements could create significant barriers for startups.
On the Horizon:
TUE 11/10: The Senate Commerce, Science, and Transportation Committee will convene a nominations hearing to consider four nominees, including Danielle Thumann Severs to serve as a commissioner on the Federal Communications Commission, at 10:30 AM ET.
TUE 11/10: House and Senate Republicans will hold their caucus leadership elections.
Startup Roundup:
#StartupsEverywhere: Farmington Hills, Michigan. Modal Motors is a startup based in Farmington Hills, Michigan, that designs and manufactures non-rare-earth electric motors with low- to no-touch labor. We spoke with founder and CEO Michael Van Steenburg about Modal Motors’ experience securing public and private funding, the importance of patents for startups, and the hurdles of navigating trade policy.