SEC Regulatory Requirements

Venture Capitalists Seek “Safe Harbor” for Virtual Currencies

By Jimena Rubio, LL.M. Candidate 2018 | Posted on

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

A New Approach to Financial Regulatory Enforcement

By Nicole Danesh, J.D. Candidate 2019 | Posted on

The regulatory enforcement of the financial industry may soon change. As the new administration settles into Washington; reports have suggested the rise of dedicated efforts to change, and potentially reduce, financial regulation by the Securities and Exchange Commission (“SEC”) and the Consumer Financial Protection Bureau. While these efforts have not yet fully materialized, there are some indications that they will soon impact the financial services industry.

The pressures to alter the regulatory framework are two-fold. First, major banks want to change the way regulatory agencies collect data related to possible crimes. If the banks can modify the framework in a way that would shift more responsibility to the government, then this may lower the banks’ costs of compliance. Second, government officials and regulatory agencies have taken steps to change the enforcement landscape from the top-down. For example, last month, the acting chairman of the SEC, Michael Piwowar, took steps to limit the agency’s powers. Piwowar’s directive gave exclusive power to the director of the enforcement division to authorize formal investigations. This will both limit inquiries and slow down the process of starting investigations. Consequently, the new structure will weaken financial regulatory enforcement.

Scaling back regulation may create undesirable consequences. Particularly concerning is the idea that violations can go undetected for quite some time until they grow into large and harmful issues. Additionally, a lack of sufficient regulation will increase the risk of another financial crisis.

On the other hand, excess regulations are not always desirable either. Too many regulations can create extremely high costs which may not be proportional to the consequential benefits of detecting minor violations. In order to prevent this, a current administration official and financial regulator has recently called for easing the strict requirements that arose after the 2008 crisis.

Ultimately, these new approaches might simply be an attempt to curb over-regulation. However, it may also offer a way for companies to tip-toe around the law in the name of generating profits. Regardless, regulatory agencies must strike a balance in structuring the new enforcement frameworks and make sure that the new regulatory regime is neither too stringent nor too lenient. This balance is key in preventing arbitrary targeting—wasting taxpayer resources in the process and burdening private businesses—and in incentivizing lawful behavior in the financial industry.

A New Approach to Financial Regulatory Enforcement (PDF)

Does Climate Change Affect Profitability? S.E.C. Orders Shareholder Vote on Disclosure

By Sean Pinckney, J.D. Candidate 2018 | Posted on

The S.E.C. recently ordered oil behemoth Exxon Mobil to include a resolution on its annual shareholder proxy statement that, if approved by shareholders, would require the company to disclose how its future profitability might be affected by climate change and related legislation. This marked a defeat for Exxon, the world’s largest oil producer, which fought against the proposal. While Exxon suggested that it was too vague and that it already provided adequate carbon disclosures, the S.E.C. rejected those arguments. A company spokesman stated that Exxon would provide the board’s position on the proposal in its upcoming proxy materials. It is questionable whether Exxon’s shareholders will approve the measure, as just last year shareholders overwhelmingly rejected adding an independent board member with expertise in climate change.

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SEC Charges Wells Fargo with Fraud

By Dori Kojima, J.D. Candidate 2016 | Posted on

On Monday, March 7, 2016, the Securities and Exchange Commission (SEC) charged Wells Fargo with fraud in its role as underwriter of a $75 million municipal bond deal. The Rhode Island Economic Development Corporation (RIEDC), a state agency, issued the bonds and loaned $50 million of its proceeds to 38 Studios, a now defunct video game company whose chairman and majority shareholder was the legendary Boston Red Sox pitcher, Curt Schilling. The RIEDC hoped to stimulate jobs and lure other businesses to relocate to Rhode Island.

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“Tenure voting” as a New Voting Structure for Corporate Shareholders

By Aicha Ahardane, LL.M. Candidate 2016 | Posted on

According to a new paper by UC Berkeley law professor Steven Davidoff Solomon and Wilson Sonsini Goodrich & Rosati lawyers David Berger and Aaron Benjamin, the dual-stock structure of public companies divides shareholders into two categories: the haves and have-nots of corporate governance.

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Thinking About Gender Quotas in the Boardroom

By Assaf Ariely, LL.M. Candidate 2016 | Posted on

A recent study involving thousands of public companies in 91 countries found a positive correlation between profitability and the number of females in senior management positions (including top executives and boards of directors). Despite this correlation, the study found that, as of 2014 approximately one-third of companies worldwide have no women in senior management; 60 percent have no female board members; 50 percent have no female top executives; and only 5 percent have a female CEO.

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Monsanto and SEC Reach Settlement over Inaccurate Financial Disclosures

By Samantha Vega, J.D. Candidate 2018 | Posted on

On February 9, 2016, the Monsanto Company (NYSE: MON), a multinational agricultural chemical manufacturer based in St. Louis, Missouri, and the Securities and Exchange Commission (SEC) announced their agreement to settle charges that Monsanto’s public disclosures in fiscal years 2009, 2010, and 2011 had materially misstated the firm’s financial results. The provisions of the settlement require Monsanto to pay the SEC an $80 million fine and retain independent compliance monitors.

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SEC as Investigator, Prosecutor and Judge: Defendant’s Right to Jury Trial

By Aditya Parolia, LLM Candidate 2016 | Posted on

The New York Times recently ran an article criticizing SEC’s filing of securities cases before its own judges—administrative law judges employed by the SEC. Last year, the Wall Street Journal weighed in against SEC being prosecutor and judge in its own cause. On a practical level, the criticism is that SEC is filing more cases before its judges to side step federal courts where it does not have a successful record of winning. On a doctrinal level, the SEC’s new policy is decried for being constitutionally suspect, being allegedly against the tenets of due process, equal protection and a right to jury trial.

The clamor against SEC’s new policy comes in the wake of numerous lawsuits pending before federal courts challenging the constitutional validity of adjudication by SEC judges. The criticisms seem to carry water in the light of the fact that SEC rarely loses before its judges. However, the arguments against adjudication by SEC judges have not withstood doctrinal scrutiny. It behooves us to ask: does the SEC have the power to file cases before its judges?

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S.E.C. Adopts JOBS Act Title III to Allow Equity Crowdfunding

By Joyce Li, J.D. Candidate 2018 | Posted on

As of October 30, the S.E.C. has adopted new crowdfunding rules that will allow small investors to purchase equity shares in startup companies. Under Title III of President Obama’s JOBS Act (Jump-Start Our Business Start-Ups), the revisions seek to improve upon an earlier draft that was widely rejected for requiring unworkable compliance costs and procedures.

The new Title III rules cap companies at $1M per year, and limit individual investor contributions based on annual income and net worth. Those with an annual income or net worth of less than $100K are restricted to investing between 5% of such or $2K, while those with greater than $100K, are limited to investing 10% of such. Each company is also required to disclose financial statements that must be independently audited, unless they are seeking less than $500K or are equity crowdfunding for the first time. Further, each funding portal must register with the S.E.C. and be subject to regulation.

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Administrative Judge Raises S.E.C’s Burden to Convict Insider Trader

By Matt Kempf, J.D. Candidate 2017 | Posted on

In a pivotal 1983 ruling, the Supreme Court held that to find a breach of duty to stockholders resulting in “insider trading,” a party must prove that a personal gain, either material or immaterial, resulted from confidential information provided by a trading relative or “friend.” The Court, however, left ambiguous the term, “friend” for over three decades, causing much confusion.  Did the Court intend to mean a close friend? A friend with whom you occasionally converse? A Facebook friend?

Recently, Judge Patil provided some context, although controversial, to this central term in a S.E.C. administrative decision, by dismissing insider trading charges against Joseph Ruggieri, a former securities trader at Wells Fargo. At issue in the case was the question of how close a non-familial relationship must be to qualify as “meaningfully close.” Ruggieri mentored Gregory Bolan, a Wells Fargo analyst, and allegedly profited approximately $117,000 from tips received from Bolan. In order to have succeeded, the Department of Justice needed to prove that benefits Bolan received from the mentorship and feedback was substantial enough to qualify their relationship as meaningfully close. The Department of Justice argued that mere friendship was enough to establish the benefit. In his decision, however, judge Patil disagreed, holding that the benefit received by the mentorship was insufficient.

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