The Risks of Insolvency in Venture Capital

The venture capital industry has one goal: making startups incredibly lucrative and, thus, maximizing returns to venture capital investors. For the venture capital investor these outstanding returns are generally materialized 5 or 6 years after the Series A investment round, when the investor makes an exit and the startup either performs an initial public offering of its shares (IPO) or is sold to a strategic acquirer or a private equity fund.

However, in a business inherently risky as venture capital, there are also many examples of failures, where venture capital backed startups go insolvent or bankrupt. This happened recently with online retailor and Montreal-based Beyond the Rack, which had previously raised over U$90 million in venture capital investments and other financings. When the company was entering into insolvency, it pursued a sale with a potential buyer, but negotiations fell through, forcing it to file for creditor protection on March 23.


Fintech Driving Regulatory Changes in the Financial Sphere

Disruptive technology is taking over the financial services industry, much like technology has reshaped the retail, hotel, music, and taxi industries in recent years. While investment in the Fintech market has been growing rapidly and substantially—from $514.5 million in 2010 to $7.6 billion in 2015—the regulatory framework is still immature, and we should expect to see substantial development in the near future. Fintech innovations bring major benefits to the economy and consumers, but they also raise concerns in relation to data privacy, security, and equality of access. For example, mobile payments create a parallel system outside the banking system, which central banks do not have the authority to oversee. Bank regulators worry that consumer data can be breached by, or through, third parties that gain access to data in the course of processing transactions, performing marketing roles, and offering shared or co-branded products or other services. Target’s major security breach in 2013 was initiated through its air-conditioning vendor.


North Carolina’s Anti-LGBTQ Law Provokes Business Reprisals

“These laws are bad for people, bad for business and bad for job growth,” declared Brad Smith, Microsoft’s president and chief legal officer, in the wake of Anti-LGBTQ laws being enacted across the country. On March 23, 2016, Governor Pat McCrory signed House Bill 2 (HB2) into law. This bill destroyed all existing anti-discrimination protections for LGBTQ people throughout the state of North Carolina.


Five Major U.S. Banks’ Living Wills Fail to Pass Regulatory Muster

On April 13, 2016, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) jointly announced that five major banks – JPMorgan Chase, Bank of America, State Street, Wells Fargo and Bank of New York Mellow – failed to fulfill an important regulatory requirement of the Dodd-Frank Act, the major piece of legislation introduced in 2010 by Congress following the 2008 debacle. The “living wills” provision of the Dodd-Frank Act demands that big banks provide regulators with carefully drafted plans for how they would deal with a potential bankruptcy. This ambitious section seeks to make it easier for bank regulators to oversee potential bankruptcies by providing an orderly method to avoid the kind of chaos that followed the Lehman Brothers’ bankruptcy. The current process requires banks to submit updated living wills every year. Whether living wills pass muster critically hinges on whether they are “credible.”


Boston Bitcoin Startup Gains Crucial U.K. Toehold

Circle, a Boston-based Bitcoin start-up, was recently awarded the U.K.’s very first Electronic Money License. This award is a tangible sign of the English government’s commitment to promoting the development of financial technology. Furthermore Circle was not only selected for a license, it was also placed into the British “Innovation Hub,” which offers support to innovators in financial technology. The license allows Circle to help its customers transfer money via a mobile app in the U.K. This license also enables Circle to build a business relationship with Barclays, a major British bank that has tremendous interest in financial technology.

Circle, founded in 2013, is a start-up that allows its customers to use virtual currency in order to transfer money cheaply and quickly. It is backed by giant investors, such as Goldman Sachs and IDG Capital Partners. Traditional Bitcoin companies act as trading companies and focus their business on helping their customers buy and sell Bitcoins. Circle still possesses this traditional function, but their innovative emphasis is on facilitating the transfer of money between different national currencies. Customers can use dollars to buy Bitcoin and hold it for a short period of time before transferring the Bitcoin into pounds. By using Bitcoin as a medium, Circle allows people to exchange dollars and pounds instantly, with no cost. Circle customers will also be able to transfer money for euros in the near future, since its license is valid in the European Union as well.


“Freezing” Untainted Assets Amounts to Sixth Amendment Violation in Recent SCOTUS Decision

The Sixth Amendment guarantees that criminal defendants “have the assistance of counsel,” which entails the freedom to choose said counsel, so long as he or she is able to pay for it. However, federal forfeiture laws related to asset “freezing” have served as a clever workaround to this Constitutional right for many years. That was until this March when the Supreme Court ruled in a 5-3 decision against such laws in the case of Luis v. United States.


New Treasury Rules End Pfizer-Allergan Merger Plans

On April 6, 2016, U.S. pharmaceutical firm Pfizer abandoned its $160 billion planned merger with its Irish counterpart Allergan. The two companies called off what would have been the largest merger in the pharmaceutical sector after the U.S. Treasury announced new rules restricting tax-avoiding “inversions.”

An inversion is a corporate strategy to lower a company’s tax burden by moving its U.S. corporate headquarters to another country with lower corporate tax rates. The U.S. corporate tax rate is currently 35 percent—the highest among developing countries. Ireland, by comparison, has a tax rate of only 12.5 percent. Most U.S. corporations invert overseas by merging with a smaller foreign company and moving overseas, which is exactly what New York-based Pfizer sought in merging with Dublin-based Allergan. Pfizer stood to save over $35 billion in taxes by relocating to Ireland.


Another Day, Another Airline Merger: Alaska Airlines Buys Virgin America

Over the last fifteen years, an era of mergers has left the airline industry in the hands of a few giants. Since 2005, nine of the USA’s biggest airlines have been reduced to just four, with Delta, Southwest, American, and United controlling 80% of the U.S. market. Following in the footsteps of American Airlines’ merger with US Airways in late 2013, a new $2.6 billion dollar merger between Alaska Air and Virgin America seeks to further reshape the airline industry.


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

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.