Venture Capitalists Seek “Safe Harbor” for Virtual Currencies

In the wake of further developments by the SEC, many key players in the industry are currently combining efforts to petition federal authorities to see certain virtual currencies in a “different light.” The Venture Capital Working Group is led by Andreessen Horowitz, which includes another significant VC firm, Union Square Ventures, and lawyers from Cooley LLP, McDermott Will & Emery LLP, and Perkins Coie LLP.

The primary purpose of the Group is to deter regulators from categorizing cryptocurrencies, such as Bitcoin and Ether, as securities. On March 28th, the Group met with the U.S. Securities Exchange and proposed a “safe harbor” for some cryptocurrencies.

The proposal suggests that digital tokens should generally be exempt from securities laws if they achieve “full decentralization” or “full functionality.” It adds that full decentralization could occur under several conditions, including when the token creator no longer has control of the network based on its ability to make unilateral changes to the functionality of the tokens. It can also be used, not just as a speculative investment, but for its intended purpose on a computer network.

The group notes that these definitions are only suggestions, but the “proposed safe harbor has been vetted by, and has the support of, many of the key players in the industry.” People briefed on the meeting said that regulators did not immediately embrace the safe harbor proposal.

Many entrepreneurs and law firms have been creating new ways for virtual currency projects to issue their tokens as securities and some exchanges have talked about getting registered as official securities exchanges. It is still unclear what will happen to tokens that did not register as securities but are later categorized as securities.

Furthermore, on April 26, a congressional hearing with testimony from the SECs Division of Corporation Finance took place to develop more reasonable approaches toward token sales and their classifications. The discussion marked a new attitude amongst SEC members and addressed how certain utility tokens could not be securities if purchased with no investment intention.

In the hearing, the SEC division head, William Hinman, stated:

“They can certainly imagine a token where the holder is buying a token for its utility, not as an investment; especially if it’s a decentralized network where it’s used, and not central actors where there would be information asymmetries where they would know more than token investors.”

Hinman — likely referring to the Venture Capital Working Group — replied that one of the steps that the SEC was taking was “meeting with participants that have these ideas of a token that shouldn’t be regulated as a security” and working with them on how they should be structured. Hinman pointed out that the SEC is heavily engaged with academics and other departments to better explore how everything might work, and that in the long run, the U.S. is “pragmatic” in its support of new technology.

Venture Capitalists Seek “Safe Harbor” for Virtual Currencies

U.S. Top Court Rules That Microsoft Email Privacy Dispute is Moot

Microsoft Corp. v. United States is a recent data privacy case concerning the extraterritorial reach of the Electronic Communications Privacy Act’s (of 1986) Stored Communications Act (the “SCA”).

In 2013, the US federal government issued Microsoft a warrant, asking it to turn over the email of a target who was being investigated in a drug-trafficking case. The warrant, issued by a US magistrate judge in the US District Court for the Southern District of New York, was issued under SCA. Pursuant to this warrant, Microsoft was to produce all emails and information associated with the target’s account. Microsoft denied the government’s request, arguing that the SCA precluded an extraterritorial application of a warrant for information stored on servers in Ireland.

After multiple failed attempts to block the government’s order, Microsoft appealed to the Second Circuit. A three-judge panel of the Second Circuit overturned the lower court’s ruling in July 2016, invalidating the government’s warrant. Relying on the US Supreme Court’s 2010 ruling in Morrison v. National Australia Bank, which held that the “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States,” the Second Circuit found no mention of extraterritorial application in the SCA.

In June 2017, the US Department of Justice appealed to the Supreme Court, arguing that the Second Circuit’s decision allows large, data-laden companies to deny law enforcement officials with requested information stored on servers outside the US and warned that such prohibitions could hamper criminal investigations. The Supreme Court granted certiorari in October 2017 and the case, United States v. Microsoft Corp., was heard on Feb. 27, 2018.

The Supreme Court’s ruling was to be expected by June 2018, but in the time between the oral arguments in February and the expected decision in June, Congress passed the Clarifying Lawful Overseas Use of Data Act (the “Cloud Act”) on March 22, 2018. The Cloud Act allows US judges to issue warrants with an extraterritorial reach to obtain data such as the one at issue here; if the warrant’s scope conflicts with foreign law, then companies have means to object under the Cloud Act.

In response to the Cloud Act, the DOJ requested that the Court vacate the case and remand it to the Second Circuit. On April 17, 2018, the Court issued a per curium that per the passage of the Cloud Act, the case was rendered moot, vacating the case and remanding it.

While it may seem strange, Microsoft actually backed the Cloud Act. In its support for the Cloud Act, Microsoft stated that legislators, rather than the courts, are best situated to resolve such extraterritorial disputes, in that comprehensive legislation as opposed to “repeated court visits and legal battles” is proper. Microsoft’s hope is that legislation such as the Cloud Act will motivate “governments to move forward quickly to put new international agreements in place…a set of agreements that create an accepted model and establish clear international legal rules that satisfy law enforcement and privacy advocates alike.”

U.S. Top Court Rules That Microsoft Email Privacy Dispute is Moot

Starbucks Response to Arrest of Two Men

A Philadelphia Starbucks manager called the police after having a disagreement with two patrons waiting for a friend. The episode unfolded after one of the men was refused access to the restroom since neither of the pair made a purchase. After the two men were asked to leave and refused to do so, they were arrested on charges of disturbance and trespassing. The men were freed later that night and the charges against them were dropped.

The two men, Rashon Nelson and Donte Robinson, are entrepreneurs that were at the Starbucks that afternoon to discuss a project which they had apparently been working on for months. The men claimed that the project was in its final stages and could potentially “change [their] lives.”

The arrest of the two men, both black, was captured on video and generated millions of views within days. The video reveals the two men being placed in handcuffs after being approached by police. Also appearing in the video is the friend they were waiting for, who is white, questioning the police’s intentions for the arrest, asking, “Is it because they’re black?”

Shortly after the video went viral, the hashtag “#Boycottstarbucks” started trending on Twitter. Shortly after that, Howard Shultz, Starbuck’s Executive Chairman, said that he felt “ashamed,” adding that he “had no doubt in [his] mind” that the police were called because the men involved were black. Starbuck’s new CEO, Kevin Johnson, also called the ordeal “reprehensible” and arranged to fly to Philadelphia to personally apologize to the two men.

In the aftermath of the incident, Starbucks announced that it will be closing more than 8,000 of its locations in order to train some 175,000 of its employees on racial bias. The closure will occur on May 29th and according to Schultz “will cost millions of dollars,” which he nonetheless views as “an investment in our people and community.”

Notwithstanding the appropriateness of Starbucks’s swift response, which many figures in the PR world applauded, one has to question, was the hideous event, at its core, really a Starbucks problem? Whether or not Starbucks’s response was sincere or merely a product of excellent crisis management, the company undoubtedly made the right call by going above and beyond just issuing a statement. With the plethora of instances of people of color being wrongfully arrested, many of which are captured on video, is it really that shocking that something like this could happen at a Starbucks? Black people shouldn’t be arrested for being black. The Starbucks arrests should serve as a wakeup call that a lot more than training Starbucks employees needs to be done in order to curtail these sadly not so unfamiliar occurrences.

Starbucks Response to Arrest of Two Men

PayPal Attempts to Enter the Traditional Banking World

PayPal, a leading global payment company, has recently announced that it is piloting some banking service models similar to those that traditional banks typically provide to customers. In addition to its primary money transfer service, the new feature services will be made available through the PayPal digital wallet. Under this scheme, PayPal is offering the option to make a mobile check deposit or have direct-deposit paychecks, an ATM-compatible debit card for cash withdrawals, and pass-through Federal Deposit Insurance Corp. (FDIC) insurance for the account balances.

According to Bill Ready, PayPal’s Chief Operating Officer, PayPal just wants to offer banking options to customers who may not be able to access fundamental financial services, but it has no interest in becoming a traditional bank at this moment. Ready emphasized that “if you already have a bank account connected to your PayPal account, this isn’t an account for you.” This is because PayPal claims that it aims to provide the service to promote financial access to a person who may not have an existing traditional bank account, also known as people who are “unbanked”. Ready pointed out that there are more than 30 million underserved people in the U.S. who basically spend 9.5% of their income on service charges or fees for alternative financial services. They are forced to turn to prepaid cards, check cashiers, or payday lenders to afford their basic needs of financial services.

In terms of serving those who are “unbanked,” on one hand, PayPal will not charge a monthly fee nor require the customers to maintain a minimum balance on their account. However, on the other hand, it will impose fees on cash withdrawals from out-of-network ATMs as well as take 1% of the deposited checks done through the smartphone camera system. This may not be so attractive to those with existing bank accounts but it would be a helpful option for some customers who are being ignored by big banks.

Interestingly, PayPal is hoping to pilot these services even though it has never obtained a U.S. banking license. The industrial loan company charter states that nonfinancial companies are allowed to engage in the banking business without being subject to banking regulations, including the Federal Reserve’s oversight authority in some states. To this end, PayPal has developed financial technological tools and has affiliated itself with small financial institutions who work behind the scenes for particular services from different locations. Namely, they use the debit card connecting to customers’ PayPal accounts issued by a Delaware bank, retain instant check depositing and clearing from another bank in Georgia, and engage with a bank in Utah to make loans to consumers. Such partnership agreements not only help PayPal bypass several financial regulations and FDIC deposit insurance but also allows PayPal to conform with the rules of card issuer companies, like Visa and MasterCard, which require their debit/credit cards to be issued by banks.

PayPal is not the only non-traditional bank firm trying to explore the banking field. There are other players, including startups such as Square Inc., Stripe Inc., Social Finance Inc. and TransferWise, or even one of the world’s biggest online marketplaces like Amazon, that are eager to seek the lucrative business opportunity in bank-like services too.

In the near future, we could see a lot of next-generation momentum in disruptive technologies and changes in the relationship between banks and customers. Fintech companies will likely go the extra mile to offer user-friendly services in the growing digital economy. In the end however, it would be a real nightmare for traditional banks if they cannot respond to these rapid changes.

PayPal Attempts to Enter the Traditional Banking World

Bayer’s sale of its Contraception Device Essure Faces New FDA Restrictions

On April 9, the United States Food and Drug Administration placed restrictions on Bayer’s implantable, contraception device Essure. The FDA’s order specifies that Bayer must restrict the sale and distribution of its contraceptive implant to “only health care providers and facilities that provide information to the patient about the risks and benefits of this device.” These new restrictions stem from a history of rising complaints that the agency has received about the device and the concern that women were not being apprised of its risks adequately.

Essure is a permanent, implantable birth control device made up of two small coils that operates via placement into the fallopian tubes to create scar tissue by triggering an inflammatory response. This resultant scar tissue created by the inflammatory response creates a physical barrier that isolates the eggs and prevents contact with sperm. Essure is a non-hormonal and non-surgical form of birth control. It is estimated that 750,000 Essure devices have been sold throughout the world with a majority of devices being sold in the United States.

In 2016, due to thousands of complaints regarding the use of the device, the FDA ordered Bayer to place the most serious health advisory warning on the label of Essure, warning that the device could cause certain injuries or health problems. The agency also ordered that Bayer conduct a new safety study. The concerns and complaints raised about the use of the device include depression, rash, hair loss, hives, fatigue, weight loss, perforation of the uterus or fallopian tubes, debilitating pain, and more. Many of the patients who complained suffered from more than one condition possibly caused by the device, and other serious problems reported include “deaths, pregnancy loss, and ectopic pregnancies.” In 2017, the FDA received almost 12,000 medical reports related to Essure. In addition to complaints filed with the FDA, Bayer itself has received about 10,600 U.S. lawsuits alleging Bayer gave insufficient warning to providers and regulators regarding the risks of the device.

Under the FDA’s order, before implantation of the device, an acceptance of risk form needs to contain the signatures of both the patient and the health care provider. The form can only be signed after the health care provider has discussed all the potential risks with the patient by reviewing a brochure together.

The burden lies with Bayer to ensure that medical providers follow the restrictions imposed by the FDA. If Bayer fails to implement the restrictions properly, and fails to ensure that physicians comply with the restrictions, the FDA has said that it will “take appropriate action against Bayer,” which can include criminal and civil penalties.

Essure entered the market in 2002. After the FDA required the most serious warning label to be placed on Essure’s box and ordered Bayer to conduct a new safety study in 2016, the sales of the contraceptive device have declined approximately 70% in the United States.

In light of these developments, Bayer maintains that the device’s “benefit or risk profile has not changed.

Bayer’s sale of its Contraception Device Essure Faces New FDA Restrictions

YouTube: Yet Another Tech Giant Under Fire for Privacy Issues

More than 20 consumer advocacy groups, including Consumers Union, Consumer Watchdog, and Public Citizen, filed a complaint with the Federal Trade Commission against Google, the parent company of YouTube. The complaint claims Google has made “substantial profits from the [illegal] collection and use of personal data from children on YouTube.” The complaint was filed just a few days before Mark Zuckerberg testified before Congress to address the future of privacy in the wake of Facebook’s Cambridge Analytica scandal.

While YouTube’s Terms of Service state that its video-sharing service is not to be used by children under 13 years of age, a recent study found that 80% of children in the United States ages 6-12 use YouTube daily. And YouTube is clearly aware its services are used by children. Content providers directly communicate to YouTube that their content is directed at children. In addition, executives at YouTube have remarked “kidfluencer channels [have been] extremely successful because children like to watch on their own.” YouTube has also marketed its services directly to children, launching the YouTube Kids app in 2015; the app even allows children to create their own profiles.

Because YouTube’s services do indeed reach children under 13 years of age, it must comply with the Children’s Online Privacy Protection Act (COPPA). COPPA has several requirements, one of which is that website operators obtain verifiable parental consent before collecting and using the personal information of children. Assuming YouTube does not disclose children’s personal data to the public, it may give proper notice to parents by simply sending them an email and getting a click response. However, YouTube has made no such reasonable effort to give notice to parents of its collection practices.

The complaint asks the Federal Trade Commission to enjoin Google, and to assess civil penalties totaling tens of billions of dollars. The complaint maintains that such a massive fine is necessary in order to adequately deter Google, the second wealthiest company in the world. While it is too early to speculate how the Federal Trade Commission will rule on the matter, there is an immense public interest in halting Google’s conduct: just over the last year, Ofcom reported a double digit increase in the number of children that watch YouTube, the world’s most popular platform among children.

YouTube – Yet Another Tech Giant Under Fire for Privacy Issues

Uber Suffers Another Legal Setback From Recent EU Ruling

The ride sharing application Uber has faced another legal blow following a verdict from the European Union’s highest court Tuesday, April 10th. The Court of Justice of the European Union (ECJ) upheld a French Court’s verdict that Uber was indeed a transportation company, not a “information society service”, as Uber had previously claimed.

Moreover, the ECJ declared that France, as an EU member state, was well within its right to fine and file criminal charges against Uber for running an illegal transportation service. Uber’s appeal sought to strike the fine on the basis that EU countries must first notify the European Commission before passing laws that could potentially impact digital services. The ruling came down once again to Uber’s status as a transportation company as opposed to an information society service.

This is the most recent legal defeat in a series of devastating losses to European regulators for Uber. The Case arrived at the ECJ after Uber appealed a ruling from a French court fining it $907,000 for failing to use professionally licensed drivers for its UberPop application and violating a French law which sets down restrictions on the use of digital technology to find customers for taxying services. This 2014 law comes in the wake of continued conflicts between traditional taxi services and emerging ride sharing platforms leading many to believe that the legislation was developed to target companies like Uber in particular.

The UberPop application, which allowed peer-to-peer interactions for the arrangement of transportation, enabled individuals without the credentials demanded by French law for commercial drivers to ferry passengers.  While, Uber has since discontinued the service, the ruling threatens one of Uber’s greatest fiscal advantages over traditional taxi services, particularly in the European union where digital services receive protection from EU member state’s nation laws. Potentially even more damaging to Uber’s bottom line is the additional red-tape and financial burdens applied to typical transportation companies, which Uber has traditionally skirted.

These added costs further diminish the competitive advantages held by Uber due to its unique structure as European authorities have been increasingly aggressive in holding companies like Uber to more standardized regulations. Another such example was the November 17th ruling last year in the UK demanding that Uber treats its drivers as traditional employees entitled to minimum wages and vacation time.

Uber continues to operate a ride-hailing business in France with professionally licensed drivers, however, the ECJ’s ruling marks another major hit for Uber. This most recent judgment was passed down just months after the ECJ affirmed the holding from a Spanish court also finding Uber to be a transportation company.

The impact of the most recent rulings against Uber may also have significant effects on the EU’s attempts to maintain a single digital market and could potentially impact other companies utilizing digital means to provide services and goods. Regardless, with losses in the UK, Belgium and expulsions from Hungary and Denmark, one thing is certain Uber does and will likely continue to face a significant challenge while operating in European Markets.

Uber is private company originating from Silicon Valley that now operates globally as a ride hailing application.

Uber Suffers Another Legal Setback From Recent EU Ruling

Silicon Valley Long Dominated Startup Funding – Now has a new challenger

The U.S. venture capital world has been forced to share its monopoly of the global market with a new upcoming player: China. The country has emerged as a power in the VC world. Asian investors directed nearly as much money into startups as American investors did, totaling 40% of the record $154 billion in global venture financing versus 44%, reported in the Wall Street Journal’s article that analyzes data from private market data tracker Down Jones VentureSource. China, in particular, has seen a surge in investments marked by over the top valuations, intense competition for the best targets, and uncertainty on returns.

During the beginning of the year, 3,418 new venture-capital and private-equity funds in China raised 1.6 trillion yuan ($241.76 billion), over double the amount of 2015 and more than 10 times that of 2006, according to consultancy Zero2IPO Group. It estimates about 12,000 investment firms manage 8.5 trillion yuan in capital, an increase from 8,000 firms managing 5 trillion yuan in 2015. This has helped drive funding totals into the stratosphere and has transformed the VC landscape, from an USA-monopoly to a duopoly environment. However, even with these changes, U.S. investors remain the largest sources of global venture capital, conducting more deals than any other group. In 2017, American investors did nearly half of the venture rounds. The U.S. is also one of the most important drivers of innovation, with many of China’s biggest investments simply copying the American-created technology.

On the other side of the startup’s excitement over cash available to finance new technology, there is a very real prospect of the development of a trade war between the U.S. and China. This could potentially cripple venture finance along with overall investments if the countries go through with the threats to levy billions of dollars in tariffs on each other’s products. However, since the tariffs are mostly focused on product exports like cars and agricultural goods, they are unlikely to have a strong impact on most startups.

China is creating “unicorns” at almost the same pace as the U.S., benefiting on funding from internet giants like Alibaba and Tencent Holdings. Money has rushed into the tech sector due to dwindling investment returns elsewhere and policy decisions by the Chinese government. Such decisions opened the credit taps last year to spur slowing growth, stirring money towards “innovation” in hopes of creating new economic drivers. This situation has lead experts to say that Chinese tech companies are at a critical size. The Chinese market alone is not enough to support their business and valuation, and the money will end up going first to the adjacent market where Chinese technology business models and capital have more impact.

Nevertheless, many in the U.S worry that strategic interests drive China’s new endeavors into technologies. Experts say these interests include the Chinese state and local governments having investments in private venture funds and Beijing’s interest in spurring startup VC activity.

Silicon Valley Long Dominated Startup Funding – Now has a new challenger

Bayer Faces U.S. Hurdles for Monsanto Antitrust Nod

The road to success is not a bed of roses. Although their deal was approved by more than thirty authorities around the globe, Bayer A.G. (“Bayer”), the German conglomerate chemical firm, still faces a legal challenge in the United States to win antitrust approval to buy American seeds supplier Monsanto Company (“Monsanto”). The U.S. government is worried that $62.5 billion deal could seriously hurt competition.

Looking back to August of last year, the decision on whether to approve the symbolic transaction has been postponed twice and suspended four other times. The deadline for the merger approval is currently scheduled to take place on April 5, 2018.

The significant proposed acquisition between Bayer and Monsanto would make the company the world’s largest integrated pesticide and seeds business. In fact, this would create a company with a market share of more than a quarter of the world’s seed and pesticides business. The transaction will constitute to the destruction of competition in at least three markets: pesticides, seeds, and traits.

In the United States, EU, and Brazil, the authorities are attempting to conduct further investigation of how combining Bayer and Monsanto will impact the price and supply of key products for farmers.

One of the effective solutions to solve potential antitrust issues is to sell a company’s assets when company seeking regulatory approval for a deal. After the CEO meetings, Bayer decided to resolve antitrust issue by selling assets to another company in order to carry out its project and achieve its $60 billion-plus takeover of St. Louis-based Monsanto. In particular, Bayer agreed to sell parts of its seed and herbicide assets to rival, BASF, for $7 billion to solve EU regulatory concerns. Moreover, Bayer agreed to divest its vegetable seeds business to BASF.

In the EU, the review of the Monsanto deal by the European Commission (“the Commission”) is set to greenlight after in-depth investigation by the Commission. The European Competition Commissioner, Margrethe Vestager, indicated that Bayer properly addressed its concern by selling its assets to competitor. She firmly stated that “Our decision ensures that there will be effective competition and innovation in seeds, pesticides and digital agriculture markets also after this merger.” The competitors can effectively compete with each other and the number of the competitors in these relevant markets will remain the same.

However in the United States, the intense review procedure is being led by Assistant Attorney General for the Antitrust Division, Makan Delrahim, who also spearheaded the filing of the antitrust lawsuit to block AT&T Inc.’s takeover of Time Warner Inc.

From the Justice Department’s antitrust division’s view, although selling the assets to BASF, a good buyer who can compete effectively in the business, does help with some of the issues, the officials do not think it goes far enough.  The government would like Bayer to take a step further and divest more.

In its substantive standard of review of the proposed merger, the Justice Department is analyzing the economic relationship among entities on the same level of market (“horizontal restraint”) as well as the economic relationship along supply chains (“vertical restraint”)

No one knows what the future holds, but the companies still have hope after two previous deals – the combination of Dow Chemical Co. and DuPont Co. and China National Chemical Corp.’s takeover of Syngenta AG that won antitrust clearance.

 

Bayer Faces U.S. Hurdles for Monsanto Antitrust Nod (PDF)

China Averts U.S. Trade War Tensions and Also Eases Relations with Japan

Withdrawing from the Trans-Pacific Partnership (TPP) and increasing bilateral tariffs have brought the U.S. and China on the edge of a trade war. Recent developments, however, have brought hopes of averting a trade war.

 

In a speech last week, Chinese President Xi Jinping promised to open the country’s economy and lower import tariffs. Xi said China will widen market access for foreign investors, addressing a chief complaint from the Trump administration. Specifically, Xi said that China would raise the foreign ownership limit in the automobile, shipbuilding, and aircraft sectors.

 

Although there have been no talks between the U.S. and China since U.S. tariffs were announced, Trump struck a conciliatory tone in response to Xi’s announcement. He tweeted that he was “thankful” for the Chinese leader’s kind words on tariffs and access for U.S. automakers, predicting that the two countries will “make great progress together.”

 

Others, however, are not so optimistic. Jonas Short, head of the Beijing office at Everbright Sun Hung Kai, said that the promised reforms are in sectors where China already has a “distinct advantage” or “strangehold” over the sector. For example, Xi pledges to open up the auto sector, where it maintains a 25 percent auto import tariff compared to the U.S’s. 2.5 percent. Analysists have cautioned that Chinese concessions on autos, while welcome, are a relatively easy win for China to offer to the U.S.

 

Easing relations with the U.S. is not China’s only strategy in approaching these trade disputes. China’s foreign minister Wang Yi met senior officials on Monday, April 16, in Tokyo for China’s first high-level economic talk in eight years with Japan. While there was no direct reference to Trump, the two nations’ finance ministers agreed on the importance of multilateral free trade and spoke against trade protectionism.

 

Victor Teo, an assistance professor at the University of Hong Kong and academic associate at the Harvard programme on US-Japan relations, said that the relationship between China and Japan has reached a turning point in order to concentrate on the challenges posed by Trump’s trade policies.

China Averts U.S. Trade War Tensions and Also Eases Relations with Japan (PDF)