Are There “Defects” in the Share Repurchase Disclosure Modernization Rule?

The United States Court of Appeals for the Fifth Circuit rejected the Securities and Exchange Commission (SEC)’s rule for share repurchase disclosure modernization (“Share Repurchase Disclosure Modernization Rule”) on October 31, 2023, stating that the “[r]esponse to uncertainty about matters of low probability or low magnitude should be markedly different from those of high probability and magnitude.”

The SEC proposed a draft of the share purchase disclosure modernization rule, in December 2021 (“Proposed Rules”), to promote transparency, which in turn enhances efficiency, competition, and capital formation. A key factor that leads to information asymmetry among issuers, insiders, and investors, is the timing of the disclosure. In a share repurchase transaction, since the issuers of the securities are repurchasing their own securities, insiders and affiliated purchasers possess significantly more information about the issuers and their prospects. In contrast, investors only become aware of this information a month or so after the end of the quarter when the issuers’ 10-Q filing is released. To assist unsophisticated investors who lacked access to or the understanding of complex trading information, the SEC proposed that the details of the repurchase activities be disclosed daily. It believed that a daily disclosure of an issuer’s repurchase activities would provide investors with more granular information such as the reasons behind the repurchase. This would enable them to better evaluate the market for the issuer’s securities and the actions of the issuer’s insiders. It also sought alignment with global regulations like those of the U.K. and Hong Kong where issuers must report repurchases to the stock exchange before trading begins the next day.

One key concern regarding opportunistic repurchase activities is management’s interest. Repurchasing shares reduces the denominator for earnings per share, allowing an apparent increase in the issuer’s earnings per share. The management can use it to meet or beat its earnings forecast for the quarter or the year. Furthermore, if the management’s compensation is tied to earnings, the management can use repurchases as a tool to maximize its compensation. Through the disclosures, both the SEC and investors may be able to identify trading patterns and any bad-faith practices.

However, the Share Repurchase Disclosure Modernization Rule, which was finally adopted in May 2023, differed from the Proposed Rules. The SEC backed away from its initial position where it proposed that the trades be disclosed daily. In the Final Rules, the SEC mandated that issuers of securities disclose their aggregate repurchase activities on a daily basis, at the end of each quarter instead of the same day as the trade (“Aggregate Disclosure Regime”).

The Chamber of Commerce protested the Aggregate Disclosure Regime. It believed that the Share Repurchase Disclosure Modernization Rule allows the SEC to micromanage and discourage repurchase activities. It argued that while there may be an increase in transparency pursuant to the disclosures, the rule does not explain how increased transparency will promote efficiency, competition, and capital formation. Further, the Chamber of Commerce by way of its comments on the Proposed Rules commented that the SEC should undertake different quantitative studies to justify the need for these heightened disclosures. It suggested various studies that the SEC could undertake to gauge if there is a need for these heightened disclosure requirements like (i) the percentage of issuers’ annual and long-term incentive plans that is tied to earnings per share and how it correlates with buybacks, (ii) the number of issuers using share repurchases to trigger executive bonuses that would not have been earned, (iii) investors’ reaction to more frequent repurchase disclosure in other jurisdictions, or (iv) the movement of stock prices on days that repurchases are disclosed in jurisdictions with daily reporting. The Chamber of Commerce pleaded before the Fifth Circuit that the SEC had acted arbitrarily and capriciously in formulating the proposed rule since it had not responded to the Chamber of Commerce’s comments on the proposed rule’s economic impact and could not “substantiate the rule’s benefits.”

In its order, the Fifth Circuit exercised its powers under the Administrative Procedure Act (“APA”) and ruled in favor of the Chamber of Commerce. The court held that the agency had not “examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983). The Fifth Circuit held that “[i]f opportunistic or improperly motivated buybacks are not genuine problems, then there is no rational basis for investors to experience uncertainty [in the event the disclosure is made at a later date].” After all, motivated buybacks may be a matter of “low magnitude and low probability.” Accordingly, it held that the SEC had failed to “substantiate the rule’s benefits.” The Court ordered the agency to correct the “defects,” including the lack of justification for the heightened disclosure, within 30 days.

The purpose of the Proposed Rule, like that of the disclosure standards of some other jurisdictions, is to assist unsophisticated investors who lack access to or the understanding of complex trading information. Therefore, additional quantitative analysis of the proposed rule’s economic impact—demanded by the Chamber of Commerce—is hardly necessary to form a “rational connection” between the disclosure requirements and its concerns. However, the U.S. has been opposed to a continuous disclosure regime, and the Chamber of Commerce’s pushback on additional disclosures is no surprise.

While it remains to be seen whether the SEC will rectify the “defects” by modifying the heightened disclosure or justifying its position, most issuers will likely need to continue preparing their 10-Q filings in accordance with the Share Repurchase Disclosure Modernization Rule, which still applies to Q3 starting on October 1, 2023.






Acquisition of Activision Blizzard by Microsoft

After a wait of nearly two years since its initial announcement of the deal, Microsoft finally acquired Activision Blizzard for $68.7 billion on October 13, 2023 after receiving a nod from the U.K. regulators. This acquisition is likely Microsoft’s strategy to boost its product Xbox Game Pass, which is a membership-based service. However, the deal went through a lot of hardships including an insider trading investigation, wrongdoing accusations from multiple New York City funds and concerns from Senators. The biggest hurdles were set forth by the United States’ Federal Trade Commission (FTC) and the Competition and Markets Authority of the United Kingdom.

The FTC was established under the Federal Trade Commission Act with a mission to protect “the public from deceptive or unfair business practices and from unfair methods of competition through law enforcement, advocacy, research, and education.”  The FTC blocked Microsoft from acquiring Activision Blizzard on December 8, 2022 alleging that the deal would provide Microsoft with undue advantage which would lead to the suppression of competitors. The FTC believed that if Microsoft acquired Activision, it would be able to manipulate Activision’s pricing, Activision’s game quality, and player experience on rival consoles and gaming services. The FTC alleged that Microsoft would even be able to change the terms of Activision’s content which could result in harm to consumers. Finally on July 11, 2023, Judge Jacqueline Scott Corley ruled in favor of Microsoft and found that there was not a substantial likelihood that the Microsoft-Activision deal would lessen competition. On the contrary, the court found that Microsoft’s arguments provided evidence that consumers will have more access to Call of Duty after the deal. Microsoft committed in writing, in public, and in court to keep Call of Duty on PlayStation, which is owned by Sony, for the next ten years maintaining the quality of the game exactly how it will be available on Xbox to ensure fair competition.

The Competition and Markets Authority (“CMA”) of the United Kingdom raised additional issues for Microsoft. CMA is a watchdog organization that ensures that consumers in the UK are not subject to malpractices such as monopolization and that there is no unfair competition in the economy. On July 6, 2022 an inquiry, for ensuring fair competition among businesses in the UK, was initiated by CMA. CMA stated in a press release that it speculated that the Microsoft-Activision deal could be harmful to its rivals, both current and future, by hampering access to Activision’s games. Finally on October 13, 2023, CMA granted Microsoft consent to acquire Activision with the condition that the sale of Activision’s cloud streaming rights shall terminate prior to the acquisition which was proposed in the first proposed merger.

As a result of these orders and decisions, Microsoft was able to acquire Activision Blizzard for a whopping amount of $68.7 billion on October 13, 2023, making it the biggest deal in the history of the gaming industry. This deal will open new gates for Microsoft in the gaming industry with it becoming the third largest gaming company, in terms of global revenue, after Tencent and Sony. Microsoft now has access to multi-dollar IPs of Activision and is expected to become a key player in the esports market. The significant advantage that Microsoft gains through this deal is the reduced time-to-market with new gaming products. It will be able to expand into the market at a fast pace after acquiring Activision. Microsoft now has a strong position to change the gaming industry in the upcoming years.

The Game of Chips?

As tensions escalate, the US has taken steps to stop chipmakers in the country from selling their semiconductor products to China. In order to ensure that obtaining the raw material used to produce the chips is hard, the government has made a few updates to the rules. Also, there is a tab on forty other countries so that the same raw material is not supplied to China indirectly either. The main motive behind such a ban by the US is to prevent China from gaining any further military strength.

The rules for regulating the exports do not apply to regular chips but only to those capable of pulling powerful AI stunts. Going forward, the companies engaged in the export of such chips must get special permission for sales to other countries. Further, the government requires that the chip companies disclose if their chips are close to the established threshold. The decision to export the same or not shall be decided on a case-by-case basis ensuring that national security is not threatened.

The latest advancements in the chip export ban have worsened the tension between the two countries. China has criticized the move and has asked the United States to stop the unnecessary weaponization of the technology industry. The stocks of the major chip developers in the US, like Nvidia and Intel, have plummeted.

In the short run, this ban by the US might put China behind if China does not develop its technology in this field. While China is dependent on imports of advanced chips, this move may not be sufficient in derailing its technological progress. However, this action might end up hurting various American companies that rely on the Chinese market, and no level of support from the government for semiconductor industry may be able to fill the gap.

Since technology is a driving factor of development and convenience, it can also have serious military repercussions. No nation can underestimate protecting its interest, as it is the foremost responsibility. However, the ongoing technological advancements are constantly blurring the line between commercial and military utility.

At the international level, the observers see the ban as an interplay of economic, geopolitical and technological factors. The US is trying to protect its national security interest, and China is accusing it of destabilizing the world economy. The long-term impacts remain uncertain for both countries, being majorly dependent upon China’s ability to overcome this hindrance.  However, a transparent and well-developed control process might help mitigate the risks. In the meantime, this might prove to be beneficial for other Asian countries as the West will be looking for new markets and suppliers. Southeast Asia might be considered a more appealing option compared to major chip-producing nations like South Korea and Taiwan, given the region’s perceived neutrality amid the continuing trade tensions between the U.S. and China.

Chrome’s “Sandbox”: Corporate Advertisements and Consumer Privacy

In 2020, in the midst of existing tensions between consumer privacy and corporate profit,  Apple seemed to take a major step in the field of digital rights—on the side of the consumers, for once. The tech giant’s primary search engine, Safari, was reconfigured to automatically block all third-party cookies. It became the second browser to ever do so, following Tor, a browser already well-known for its focus on total digital anonymity.

Third-party cookies are the driving force behind targeted advertising: by keeping track of what websites a user visits, companies can show advertisements targeted towards goods and services that the user might specifically be interested in. These cookies are imposed by “third-party” servers that allow for data to be transferred across multiple websites at once. Browsing a shopping website for purses, for example, might inject first-party cookies into your browser that allow that website to continue showing you purse recommendations. If third-party cookies are enabled, however, browsing any other website allows it to pull from your purse-browsing data—showing you purse ads no matter where you go.

Safari’s cookie block closed many of the potential security vulnerabilities and addressed privacy issues inherent to allowing websites to share data between each other without a user’s explicit permission. It also cut off a significant source of ad revenue for companies that relied on these targeted advertisements as a source of profit, such as Safari’s search-engine competitors. Not to be outdone, Google supposedly started phasing out its own use of third-party cookies on Chrome and Chromium-based browsers. In turn, however, it insidiously provided advertisers with another option for maintaining their streams of targeted ad revenue: the “FLoC” and “TrackAPI” programs, which ultimately evolved into the modern “Privacy Sandbox” that came into full effect this September. Instead of using cookies, the Privacy Sandbox is the name for a developer tool built into the search engine itself that tracks user searches. Users are sorted into cohorts of people with similar interests, and the group’s collective data is then passed on to advertising companies. The Privacy Sandbox is a new replacement for an old tracking method that has gotten bad optics in recent years, allowing Google to assert its concern for user privacy while continuing to track searches in ways that violate user privacy rights.

This arms race in the field of privacy protection exemplifies a push-and-pull between consumer rights and profit margins that has characterized corporate activity in the digital age. Legislators have only recently begun to address the lack of federal and state regulations regarding user rights and privacy online—with the burden of improvement being placed primarily on the corporate entities that benefit from tearing them down in the first place. With the increasing skepticism that Internet-based companies face from their users today, corporations have been forced to frame themselves as privacy-conscious entities, even as they attempt to maintain the same profits that they have reaped from targeted advertising in the past.

Different corporations have dealt with public opinion on their advertising methods in different ways. As mentioned earlier, companies like Apple have shifted the burden of profit to the consumers: rather than relying on ads to make money, they make users pay subscription fees (or buy expensive devices like iPhones) in exchange for the privilege of blocking advertisements and cookies entirely. Other corporations have begun to rely heavily on user “consent,” warning users every time they log onto a website that uses third-party cookies and providing them with an opt-out option. Some companies have dedicated themselves entirely to the cause of consumer privacy: the search engine DuckDuckGo uses private search ads that do not rely on users’ browsing habits, while the Mozilla Firefox browser is utterly transparent with what necessary data it collects from its users to improve its open-source engine.

Nevertheless, it seems that ad-driven tech giants still reign supreme over more privacy-conscious alternatives. In 2022, Google possessed an astonishing 86-96% of the search engine market share; the closest runner-up, Yahoo, occupied a measly 3%. Similarly, as of September 2023, Chrome made up 63% of the market share of all browser usage worldwide. Safari trailed behind at 20%, serving as a larger competitor primarily due to mobile iPhone and iPad use. Given that Internet privacy seems to be a major concern for modern corporations—to the point where many have adjusted their business practices to account for it—why have more users not turned towards more obviously privacy-friendly options like Mozilla?

Google argues that it is because its products are better than those of its competitors. The U.S. Department of Justice, however, in the biggest tech monopoly antitrust trial of the twenty-first century thus far, claims otherwise. It contends that Google’s predominance arises from the illegal maneuvers it has taken to outcompete smaller search engine and browser companies, making itself the default way to access the Internet for billions of users across the globe. The trial against Google began on September 17 this year. Only time will tell what it will reveal about Google’s potentially monopolistic practices and how sanctions, if they are imposed, will affect the rest of the digital market.

If the DOJ succeeds, hopefully Internet users will begin looking towards business models that genuinely focus on protecting their digital rights, no matter how murky and ambiguous those rights may seem. With the possibility of increased market competition, true privacy protection might become a far more relevant concern for those companies hoping to woo privacy-conscious consumers into using their services—rather than, as Google has done, paying lip service to the issue of privacy while maintaining the same invasive practices from which it profited in the past.

The Failure of the US Antitrust Laws in Tackling Predatory Pricing

The Biden administration has made antitrust enforcement a top priority. In July 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy, which directed the antitrust agencies to take a more aggressive approach to enforcement. The administration has also appointed a team of enforcement-minded leaders to lead the main antitrust agencies, including Lina Khan as the chair of the FTC. In the first major antitrust case in the context of the contemporary Big Tech landscape, the DOJ has brought a lawsuit against Google, alleging that the company has abused its dominance in the online search and advertising markets. The suit accuses Google of illegally monopolizing the advertising technology market in violation of sections 1 and 2 of the Sherman Antitrust Act of 1890, which prohibits using exclusionary practices to maintain a monopoly. The trial commenced in September 2023 and is anticipated to take three months.

In theory, the court could order Google to be broken up, but legal analysts consider that option unlikely and even impossible. This raises the question of whether antitrust laws created in the late nineteenth through mid-twentieth century have failed to keep pace and become obsolete. Our solution to the anti-monopoly problems must align with our ideals of political and economic democracy. This article will first briefly map out the US antitrust laws and some of the main critiques, and next, it will lay out a potential reform to such laws.

The focus of antitrust laws until the 1960s was to ensure that the market structure was competitive by prohibiting price fixing. In the landmark case Standard Oil, the Supreme Court held that predatory pricing violated antitrust laws because Standard Oil used such practice to drive out rivals and gain monopoly in an otherwise competitive market. Starting in the 1970s, as the Chicago school of economic theory developed, antitrust laws shifted to consumer welfare standards, which see antitrust laws’ purpose as to promote efficiency. In the leading case Reiter, the SCOTUS solidified this view and held that “[c]ongress designed the Sherman Act as a “consumer welfare prescription.”This decision fundamentally reformed the antitrust litigation by changing the standing requirement, which required the plaintiff to show that there was harm to consumer welfare in the form of price increase and output restrictions. The Court introduced the recoupment test, under which the plaintiff must demonstrate that the target company can recoup its investment after the predatory scheme.

However, the recoupment test is no longer equipped to tackle big tech’s power. As one example, Amazon accomplished its rise as the world’s largest e-commerce website, at least in part, through pricing schemes that completely disregarded antitrust laws. Amazon evaded scrutiny by keeping its prices low, which forced publishers to set their own prices, and Apple would get a 30% cut. The DOJ charged Apple with colluding with the publishers to fix the prices of e-books and raise their prices in the market. The DOJ completely missed how Amazon’s below-cost pricing tactics afforded it significant advantages to achieve monopoly power in the e-book market. The current antitrust system fails to account for how modern-day e-commerce platforms can recoup losses.

One of the major voices for change in antitrust laws is Senator Elizabeth Warren. Her plan consists of two parts. First part of the Senator Warren’s proposal is to designate large tech platforms, such as Amazon, as “Platform Utilities” and break them apart from any participant on that platform. In other words, these companies would be prohibited from owning both the platform utility and any participants on that platform. They also would be required to meet a standard of fair, reasonable, and nondiscriminatory dealing with users. Second, Senator Warren proposes to enforce existing laws to break up mergers that reduce competition and to put pressure on big tech companies to be more responsive to user concerns.

Warren’s plan shifts the focus of antitrust enforcement to a more holistic standard. By breaking up large companies, she is reigning in the power these companies have to manipulate markets in their favor. Following a standard of “fair, reasonable, and nondiscriminatory dealings,” the courts can look at various factors to decide if a company’s activity violates the antitrust laws. This plan is a great way to attack some structural issues with our modern-day antitrust enforcement system; however, it does not account for predatory pricing schemes as it does not offer a solution for recoupment requirements.

One way to strengthen Warren’s plan is to place the presumption of predation on such company when a dominant company prices its products below its production cost. As seen in the Amazon case, recoupment does not count for today’s e-commerce economy, because there is a business justification to engage in such actions. The presumption puts the burden on these giant conglomerates.

SPAC-ed Out! — The Rise and Fall of SPACs

Special purpose acquisition companies, or SPACs, had very short-lived fame. These publicly traded “blank cheque companies” with a two-year life span and unspecified acquisition targets boomed during the 2020-21 period. Unlike an Initial Public Offering (IPO), SPACs introduced a faster and easier way for companies to go public. IPOs take years to complete, whereas SPAC mergers can occur within months.

A SPAC starts as a private company and goes public through an IPO to raise money to buy a company or its majority stake. This merger process is called a de-SPAC transaction. If a SPAC is unable to reach a de-SPAC transaction, it must liquidate and distribute all its assets back to the company’s shareholders. That being said, the cost of carrying out a SPAC transaction is notably lower than going public through an IPO. The shareholders can also benefit from experienced financial investors and private equity or hedge fund industry professionals.

Additionally, because an acquisition target is not required for a SPAC to be formed, a SPAC has the flexibility to negotiate terms that are good for its investors. By 2020, the COVID-19 pandemic created volatile market conditions which made private companies wary about investing large capital, thereby turning investors to low-risk SPACs. Further, lenient government regulations imposed relaxed monetary policies and encouraged investments, thereby pushing SPACs to stardom.

The IPO market took a backward march in 2022, with 1145 IPOs filed compared to 2436 IPOs in 2021. However, this trend seemed to be catching up with the SPACs too. Market instability forced companies to stay private longer. The decline was further accelerated by new SEC regulations requiring more disclosure regarding de-SPAC transactions and target companies. These regulations, per the SEC Chair Gary Gensler, fall under three categories—disclosure, marketing practice standards, and gatekeeper issuer obligations. The new disclosure regulations require that SPACs disseminate documents related to the SPAC process to investors to ensure fairness and help them make informed decisions. Additionally, the SEC proposed to amend the definition of “blank cheque company” to encompass SPACs so that they cannot turn to the Private Securities Litigation Reform Act (PSLRA) for safe harbor. The proposal also imposed liabilities on third parties such as auditors, lawyers, and underwriters to ensure disclosures’ accuracy and adequacy. Nonetheless, these regulations are yet to be passed.

In conclusion, several factors could be attributed to the rise and fall of SPACs. Even though SPACs are a quick, affordable, and easy way for businesses to go public, their appeal was ephemeral. It remains to see whether SPACs can adjust to new regulations and market changes and once again regain their popularity.

VIE in the Evolving Capital Market Landscape: A Risk Analysis

The Variable Interest Entity (VIE) model has long been a key strategy employed by Chinese companies seeking to access international capital markets, mainly the U.S. Trillions of USD worth of Chinese companies publicly traded abroad were listed through this strategy, which circumvents China’s stringent restrictions on foreign investment in sectors such as technology and education. Since Sina’s first adoption of VIE in the U.S. stock market in 2000, the model has enabled the IPOs of various companies such as, and Alibaba Group—the largest IPO in U.S. history and the second largest globally. Despite many tech stocks having generated substantial profits for foreign investors in the past decade, critics often express concerns regarding VIE’s inherent validity and legal risks, particularly amidst evolving regulations. This article elaborates on some of the risks associated with VIE.

VIE is a structure via which a Chinese company creates an offshore entity to be listed abroad. Under this system, the U.S.-listed company from which investors buy stocks is often a holding company incorporated neither in the U.S. nor China but in the Cayman Islands or the British Virgin Islands. According to the SEC, such an offshore entity is incorporated to “enter into contractual arrangements with the China-based operating entity,” rendering the latter a wholly foreign-owned enterprise. Although the listed company frequently does not own stock or any equity in the actual operating entity, it purports to “exercise power over” and “obtain economic rights from” it based on contractual arrangements, which often include powers of attorney, equity pledge agreements, and exclusive services or business cooperation agreements.

Although the Chinese government has never formally approved or outlawed VIE, the China Securities Regulatory Commission (CSRC) published the “New Rules” on February 17, 2023, which became effective on March 31. Before the “New Rules” came into effect, amidst rumors of an outright ban, seven Chinese firms rushed to launch U.S. IPOs in March, compared with four in the previous two months. According to Dentons, however, the CSRC “eased” the concern of a ban by suggesting that China “w[ould] not shut down this financing loophole,” which the CSRC considers “a viable channel for its companies to access foreign capital,” despite potentially harsher scrutiny as well as more detailed filing requirements. Recently, the CSRC approved CheChe Technology Inc.’s U.S. listing, bringing it closer to becoming “the first Chinese company using VIE to issue shares in the U.S.” under the “New Rules.”

Yet, risks associated with VIE, notably regulatory risks and agency problems, have long existed and may persist. Under VIE, a listed entity has economic rights and power to direct the activities of the operating company without actual equity ownership. The SEC does not “assess the merits or appropriateness” of the listed entity’s VIE structure but “oversees a disclosure-based system” that provides relevant information. Hence, the SEC has warned that “if the parties to [the VIE] contracts. . . do not meet their obligations as intended or there are effects on the enforceability . . . from changes in Chinese law, the U.S.-listed company may lose control over the China-based company, and investments in its securities may suffer significant economic losses.” In cases with a void or breach of contract, there may be “little or no recourse available” to effectively remedy the losses borne by U.S. investors. This is because the listed entities are often incorporated offshore with different governance regarding disclosure and reporting from the U.S. requirements. Additionally, Chinese law and jurisdiction often govern such disputes, but ambiguity persists concerning the legality of VIEs and the enforceability of such contracts.

More specifically, regulatory issues would occur when Chinese authorities outlaw the underlying contractual agreements on which the listed entity’s control of the operation is based. The consequent invalidation of such contracts could lead to “a mandatory reorganization to expel foreign control” or “a withdrawal of the business license of the Chinese operating entity.” For instance, in July 2021, China halted for-profit educational tutoring, banning foreign investments in this industry via VIE. Similarly, Alibaba shares also dropped significantly when the Chinese regulators “ordered to break up Ant’s Alipay.” Yet, Chen has noted it is unlikely that Chinese authorities would grant reasonable compensation in such cases. In addition, agency problems exist because the VIE structure’s success hinges on “the integrity of the shareholder of the operating entity as a key person.” Yet, if the shareholders prioritize personal interests over the entity’s best agenda, this could result in significant economic harm. One of the most notorious VIE digression issues was the Alibaba group incident over a decade ago, where its founder separated Alipay from Alibaba to be an independent company under his name without informing the latter’s shareholders. This resulted in a sharp 9.8 percent drop in Alibaba’s stock price when disclosed.

In response, the SEC has taken measures to enhance investor protection and tighten its control over VIE listings. It mandated further disclosure of listed companies’ VIE status and required the companies to release their dialogues with the CSRC concerning their VIE structures’ legality. It investigated the appropriate consolidation of financial results and suspended trading of certain companies’ stocks after alleged fraud. Yet, with President Biden’s Executive Order addressing the country’s investments in “National Security Technologies and Products in Countries of Concern” expected to be implemented next year, uncertainties remain regarding the future of VIE entities. Despite potential economic gains, investors should continue to exercise their due diligence in measuring the costs, benefits, and appropriateness of their investments, particularly in ventures that contain higher risks.


A Breakdown of the California Accountability Package as Compared to the Rules Proposed by the SEC

On October 7, 2023, California Governor Gavin Newsom signed into law the Climate Accountability Package, comprising the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261). The Climate Accountability Package imposes disclosure requirements on entities that are active in the state with a total annual revenue above $1 billion (“Reporting Entities”). For the listed entities, these new laws are broader than the Enhancement and Standardization of Climate-Related Disclosures for Investors rules (“SEC Proposed Rules”)  proposed by the U.S. Securities and Exchange Commission (“SEC”) in March 2022. However, the SEC Proposed Rules have not yet been finalized and are still under discussion. Below, the Climate Accountability Package is discussed in contrast with the SEC Proposed Rules in relation to (i) the annual disclosure requirements and (ii) the regular assessment of climate-related financial risk.

The Climate Accountability Package requires the Reporting Entities to, starting in 2026, disclose all direct greenhouse gas (“GHG”) emissions that stem from the Reporting Entities themselves, including, but not limited to, fuel combustion activities (Scope 1), and GHG emissions from purchased or acquired electricity, steam, and heating by the Reporting Entities (Scope 2). Further, it requires Reporting Entities to, starting in 2027, disclose all GHG emissions from entities that form a part of the supply chain that may not be owned or controlled by the Reporting Entities (Scope 3). The Reporting Entities are required to follow the Greenhouse Gas Protocol, an accounting and reporting standard formulated by the World Resources Institute and the World Business Council for Sustainable Development set to take effect in 2024.

The SEC Proposed Rules, which apply to only publicly listed companies, proposed that the Scope 3 disclosure be made by listed companies only if they consider them material or if combating Scope 3 GHG emissions is a target or goal of the listed company. Further, although the goal is to provide consistent and comparable data, the SEC Proposed Rules do not link the compliance standards to any framework any global standards. On the contrary, the California laws not only mandate both public and private entities to disclose Scope 3 emissions but also link the requirement to the Greenhouse Gas Protocol.

However, the California laws have underestimated the cost of compliance to businesses in general. They fail to consider that the small-scale entities forming a part of the supply chain of the Reporting Entities may also have to comply with the exhaustive accounting and reporting standards of the Greenhouse Gas Protocol. If these small-scale entities fail to provide the information, they may lose business and see a negative impact on their revenues and financial position. While the Climate Accountability Package does provide a safe harbor from any penalty for failing to assess and calculate Scope 3 emissions from 2027 to 2030, it mandates an annual filing and does not provide a good faith carve out, contrary to the SEC Proposed Rules. To avoid penalties as high as $500,000 annually under the Climate Accountability Packages, the Reporting Entities and those forming their supply chain will have to engage carbon accounting professionals and streamline internal processes to comply with the prescribed standards, possibly incurring huge capital expenses.

The SEC Enhancement and Standardization of Climate-Related Disclosures for Investors rules remain under discussion and have not been finalized. If the finalized rules continue to provide companies the discretion to disclose Scope 3 emissions only if they consider them material, it will be hard for a Reporting Entity to argue that the Scope 3 emissions are immaterial in its registration statements or periodic SEC filings. Further, to be consistent with the California laws, the SEC may also consider linking GHG emissions disclosures to global standards like the Greenhouse Gas Protocol in its finalized rules. However, it is still to be seen if the California laws actually “change the baseline”  on which the SEC formulates its emissions disclosure policies.

Another aspect of the Climate Accountability Package is the requirement to assess climate-related financial risks, a layer missing in the SEC Proposed Rules. The Climate-Related Financial Risk Act requires that all entities doing business in California with total annual revenues above $500 million in the previous fiscal year (except insurance companies) to evaluate their climate-related financial risks following the standards set by the Task Force on Climate-Related Financial Disclosures (“TCFD”). The entities are required to submit a report every two years disclosing the risks that they have identified and outlining the measures they have already adopted or propose to adopt to reduce these risks. To comply, the boards of these entities would need to take measures and establish independent committees with outside carbon accounting professionals and set costly internal processes in place.

While the disclosure of Scopes 1, 2, and 3 emissions may not be a matrix for solving climate change, the assessment of climate-related financial risks may be a step in the right direction. Understanding and disclosing the impact of their business operations may force businesses to make more sustainable choices in the future. In the meantime, however, compliance costs could heavily burden the businesses. While California Governor Gavin Newsom showed his concerns by instructing the California Air Resources Board to monitor the cost impact, the bulk of the finances these disclosures may sit on will have to be seen in practice.

Mandatory Disclosures of Climate-Related Information: The Investment Impact of California Senate Bills 253 and 261

California Governor, Gavin Newsom, recently signed California Senate Bill 253, known as the Climate Corporate Data Accountability Act, and California Senate Bill 261, referred to as the Climate-Related Financial Risk Act, into law. Both bills were part of the Climate Accountability Package, a collection of bills aiming to enhance corporate climate action by improving transparency, standardizing disclosures, and aligning public investments with climate goals.


The Climate Accountability Package is a part of the broader global movement in which policymakers are increasingly regulating how the private sector addresses climate risks intrinsic to its businesses. This shift is driven, in part, by investors’ pressure and demands for climate-related information concerning their investments. Several major institutional investors have begun incorporating climate risk considerations into their portfolio selection process. They are demanding more disclosure from companies and from regulators in order to stop or prevent unavailable, incomplete, and misleading information regarding climate-related risks.

Europe and the UK have introduced some of the most recent and innovative mandatory disclosure requirements. In the United States, the Securities and Exchange Commission (SEC) proposed rules that enhance and standardize climate-related disclosures for investors, but these measures have not yet been approved.

Senate Bills 253 and 261 emerged in this context and represent significant steps forward in regulating carbon footprint and climate risk disclosures.

Climate Corporate Data Accountability Act (Senate Bill 253):

Senate Bill 253 requires all large corporations conducting business in California to publicly disclose their carbon footprint according to the Greenhouse Gas Protocol (“GHG Protocol”). GHG Protocol is a global initiative that establishes standardized frameworks to measure and manage greenhouse gas emissions from private and public business. The GHG Protocol classifies greenhouse gas emissions into three scopes: direct emissions (Scope 1), indirect emissions from consumed electricity (Scope 2), and indirect upstream and downstream emissions such as purchased goods and services, business travel, employee commutes, and processing and use of sold products (Scope 3). Companies will have until 2026 to start annually disclosing their Scope 1 and 2 emissions and until 2027 to disclose their Scope 3 emissions.

Notably, Senate Bill 253 is significant for two key reasons, especially when compared to the SEC’s climate proposal. First, Senate Bill 253 applies to both public and private U.S. companies doing business in California with total annual revenues that exceed $1 billion, whereas the SEC’s regulatory authority is limited to public companies. Second, Senate Bill 253 mandates the disclosure of Scope 3 emissions, whereas under the SEC’s proposal, businesses would only report on Scope 3 emissions if they have set Scope 3 reduction targets or if the emissions are material. Having to disclose Scope 3 emissions is significant because they often constitute more than 90% of a corporation’s total emissions. This requirement presents a considerable challenge for companies to assess and report this information.

Climate-Related Financial Risk Act (Senate Bill 261):

Senate Bill 261, on the other hand, requires large corporations to prepare and report (i) their climate-related financial risks based on the recommendations of the internationally recognized Task Force on Climate-Related Financial Disclosures, which provides guidance on governance, metrics and targets, strategy, and risk management. The Bill also mandates large corporations to publish the measures they adopted to mitigate these risks. Senate Bill 261 applies to both public and private U.S. companies doing business in California with a yearly revenue of $500 million. The reporting must be done on a biannual basis starting in 2026.

Why These Laws Matter:

California has the largest economy in the United States in terms of GDPs, and these new rules are expected to impact nearly 10,000 companies. Some global corporations such as Apple, Google, Microsoft, Salesforce, and IKEA publicly supported these laws during the legislative approval process. On the other hand, companies with fossil fuel interests, notably Chevron, Marathon Petroleum, and Western States Petroleum, expressed significant opposition.

Both bills aim to not only promote accountability but also address the lack of standardized disclosure requirements and transparency around climate risks and impact. The private sector is one of the major emitters of greenhouse gases, and promoting accountability is key to reducing its carbon footprint. By making companies undertake self-examination and gather information about how they affect the environment, companies can create more resilient, efficient, and sustainable businesses. In addition, investors, regulators, and stakeholders will be able to properly identify and assess which companies are making progress toward their climate commitments.

These new regulations mark a significant milestone toward a cleaner global economy. Many stakeholders view them favorably, and they are expected to exert a substantial influence on the future of carbon accounting and reporting worldwide.

JP Morgan Acquisition of Frank: Why the Startup Industry is Vulnerable to Fraud

In 2021, JP Morgan acquired Frank, a college financial planning company, for $175 million. Charlie Javice founded Frank in 2017 to help students apply for and negotiate financial aid, enroll in online courses, and find scholarships. JP Morgan hired Javice and a few other Frank executives with the acquisition.

Initially, Frank was seen as a way for JP Morgan to reach younger customers. But the deal quickly turned sour, and JP Morgan sued Javice and another former Frank executive, Olivier Amar. JP Morgan alleged Javice and Amar inflated the company’s user database with nearly 4 million fabricated customers created by an unnamed data scientist who generated false personal information–including birthdays and schools.

The Frank scandal drew comparisons to the Theranos controversy, although on a much smaller scale. In 2015, Theranos, a blood-testing startup, was found to have provided false information to investors in the medical industry regarding the accuracy and reliability of its technology to secure funding.

These examples highlight how fraudulent practices can pervade the startup industry. Given their innovative and disruptive nature, start-up companies have a high probability of failure, with almost 80% failing to reach projected rates of return or profitability and 40% failing altogether. To compete with more established businesses and attract investment, start-ups may have more significant incentives to deceive investors or fabricate facts about their core business.

Founders often face substantial challenges securing funding and forming partnerships with suppliers and customers. Unlike conventional firms, startups develop innovative technologies and strategies and often have negative cash flows, making it difficult to determine their value using traditional methods. 

Obtaining funding and business partnerships requires time, effort, and resources, especially for early-stage startups. And their competitors often have more experience and sophistication in the industry. To compensate and convince investors of their legitimacy, founders may effectuate a fake it till you make it strategy.

A rush to launch products and attract media attention and the pressure to compete against other startups may also contribute to fraudulent practices. To survive, start-ups must demonstrate rapid growth and stand out among a crowded field of competitors. Media coverage often operates as a positive feedback loop, building upon initial stories of success or significant investment by venture capital firms. 

Start-up founders develop skills to persuade the public and investors that their business model will succeed. Despite the necessity for creative pitching, start-up executives should refrain from resorting to bad faith exaggeration or bending the truth.

Returning to the Frank controversy, Javice is accused of falsifying Frank’s consumer database and exaggerating the company’s achievements. In a 2018 interview with Forbes, Javice claimed that Frank had helped 300,000 students to get $7 billion in financial aid. However, after the JP Morgan acquisition, Javice posted on LinkedIn that the number had risen significantly to 5 million students, almost twenty times the original figure in just three years.

Javice also exaggerated her achievements to attract attention from investors and the media. She claims she struggled to secure financial aid while studying at Wharton, but the school did  not confirm this. Additionally, she falsely claimed to have turned down a Thiel Fellowship while studying at Wharton.

Fraud in the startup industry is a complex and multifaceted issue. Start-up companies face significant challenges in securing funding and competing with more established businesses. This incentivizes founders to do whatever is necessary to generate buzz around their company, including, in some cases, gross exaggeration. Frank is another reminder of the importance of due diligence in the investment and business partnership process. It is essential for investors, partners, and customers to carefully scrutinize the information provided by start-up companies and carefully vet their founders and executives.