Cryptocurrency, Blockchain, & the SEC's Actions
To understand why governments are interested in regulating cryptocurrencies, background about their potential function is necessary.
To understand why governments are interested in regulating cryptocurrencies, background about their potential function is necessary.
On May 25, 2018, the European Union (EU) began the enforcement of the General Data Protection Regulation (GDPR) with the aim of protecting all citizens residing within the EU from privacy and data breaches. (GDPR Key Changes, GDPR.org). Approximately 40% of acquiring companies that engage in merger and acquisition transactions discover cybersecurity issues in their newly-acquired entities, and companies are starting to become wearier of acquisition transactions due to the expensive repercussions of non-compliance with GDPR rules. (Harroch, Forbes). Approximately $1.3 trillion of deals have failed with 900 transactions being terminated or withdrawn due to GDPR concerns, despite 2018 being a notable year overall for mergers and acquisitions. (Thomson, Bloomberg Law).
Alibaba Group Holding (“Alibaba”), a Chinese multinational corporation, which provides internet infrastructure, e-commerce, online financial, and internet content services, has acquired German start-up data analysis company, Data Artisans (“Artisans”) . (Reuters, Bloomberg). Alibaba has been called the Chinese “Amazon” and is currently the world's fifth-largest internet company by revenue. (Yahoo Finance). Artisans, which was founded in 2014 by Kostas Tzoumas and Stephan Ewen, is attributed with creating Apache Flink, an open source stream processing framework for high-performance, scalable, and accurate real-time applications. (Ververica). The Apache Flink application essentially analyzes large quantities of data as it comes in, rather than once it is saved, providing for a more efficient stream processing method. (Stephan Scheuer, Handelsblatt).
Following Democratic control of the House, a new resolution was passed in January as a means to limit lawmakers’ control over public companies. Specifically, the resolution amended the Rules of the House of Representatives to ban House lawmakers’ membership on public company boards, with exceptions for nonprofits and board positions that do not provide compensation. (H. Res. 1043). Other rules passed at the same time direct the House Committee of Ethics to address conflict of interest concerns arising from lawmakers’ participation in other company roles. (Andrea Vittorio, Bloomberg Law). Although a similar ban and exceptions have existed for members of the Senate, until now there were no equivalent rules for the House.
Countries around the world are being forced to decide what role, if any, cryptocurrencies and initial coin offerings (“ICOs”) will play in their financial markets. The United States is no exception, as investors and leaders in the crypto industry continue to push for as little regulation as possible. But given the long, slow nature of the regulation process, many of these investors and crypto leaders are anxious to see some form of clear and uniform cryptocurrency regulations (Adrian Zmudzinski, Cointelegraph). To make matters worse, the partial shutdown of the federal government further delayed the process, particularly as it relates to agencies such as the Securities and Exchange Commission (SEC) (John Nancarrow, Bloomberg Law).
Is political endorsement considered good corporate governance practice? Patagonia says yes.
Shortly before the November 6, 2018 midterm election, Patagonia publicly endorsed two Democratic senatorial candidates, Jon Tester from Montana and Jacky Rosen from Nevada, what appears to be a first for any corporation. Patagonia stated that it endorsed the candidates because of their commitment to public lands and waters. (Dino Grandoni, Power Post). Both Tester and Rosen were victorious in the midterm elections.
International Business Machines Corporation (“IBM”) announced on October 28th of 2018 its plans to acquire American software company Red Hat, Inc. (“Red Hat”) for $34 billion. (Liana B. Baker and Greg Roumeliotis, Reuters). The deal, which is the software industry’s largest-ever acquisition, is expected to close in the latter half of 2019. Id. IBM is set to pay $190 per Red Hat share — a 63% premium on Red Hat’s closing share price on October 26, 2018. Id. IBM intends to maintain Red Hat’s headquarters, facilities, brands, and practices, as well as retain Red Hat’s management team and Chief Executive Officer Jim Whitehurst after the deal has closed. Id. This post provides an overview of the two companies, the deal, and its anticipated effects.
A settlement agreement has been reached regarding the SEC Investigation of Elon Musk and his infamous Tweet stating that he was taking Tesla private. The tweet created an array of problems for the company since its publication. Under the settlement agreement, both Tesla and Musk will each pay a $20 million dollar fine and Musk will resign as Tesla’s Chairman for three years in order to resolve other pending charges arising from this incident. (Munsif Vengattil, Business Insider). The $20 million dollar fine assessed to Tesla was not for fraud, however, but rather, for the company’s failure to have any procedures or disclosure controls over Musk’s communication practices, i.e. his Twitter account. (Kirsten Korosec, TechCrunch). As a result of Musk’s resignation, Tesla will have to appoint two new independent directors to its board. (SEC Press Release). Nevertheless, despite the settlement agreement and the backlash that ensued over his Tweet, Musk will remain as Tesla’s Chief Executive Officer and more importantly, he will not have to admit or deny the allegations of the lawsuit.
On October 31, 2018 the SEC adopted new mining disclosure requirements that were originally proposed under the Obama Administration. (Andrew Ramonas, Bloomberg Law). According to an agency press release, the amendments, which modify both the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act), will “provide investors with a more comprehensive understanding of a registrant’s mining properties, which should help them make more informed investment decisions.” (SEC, Press Release). The new rules eliminate and update Industry Guide 7, the current set of rules that have been called “woefully out of date.” (Anderson, Brenkert, and Doerksen, Dorsey & Whitney LLP).
On August 15, 2018, Best Buy Co., Inc. (Best Buy) announced that it signed a definitive agreement to acquire GreatCall Inc. (“GreatCall”) for $800 million as part of its growing business selling health and wellness products specifically focused on the aging population. (Investor Relations, Best Buy). GreatCall is the maker of the senior focused Jitterbug cell phones along with other devices designed to allow elderly consumers to connect with caregivers and to facilitate communication with emergency services. (Barba, Wall Street Journal). The acquisition is projected to be neutral to Best Buy’s adjusted earnings in 2019 and 2020 as well as to increase its adjusted earnings by 2021. (Investor Relations, Best Buy). The acquisition is part of Best Buy’s 2020 strategy to use technology to address key human needs among the aging U.S. population. (Barba, Wall Street Journal). GreatCall headquarters will remain in San Diego and David Inns will remain as the company’s CEO. (Press Release, Market Watch).
In September 2018, the United Kingdom’s Treasury Select Committee ("TSC") published the result of its months-long examination of the UK’s cryptocurrency sector. It provided regulatory recommendations to protect consumers and to prevent fraud and money laundering in the cryptoasset market (the “TSC Report,” House of Commons Treasury Committee Crypto-assets Report.) Certain industry players, led by the non-profit British Business Federation Authority (BBFA), objected to these recommendations. They argued the TSC’s proposed approach lacks nuance and will lead cryptomarket participants to flee the UK for jurisdictions with fewer regulations (William Suberg, Coin Telegraph.).
In Davis v. Skullcandy, Inc., No. 2:16-cv-00121-RJS-PMW, 2018 BL 96655 (D. Utah Mar. 21, 2018), the United States District Court for the District of Utah Central Division granted Skullcandy, Inc. (“Skullcandy”), CEO Seth Darling ("Darling"), CFO Jason Hodell ("Hodell"), and board member Richard Allen’s ("Allen") (collectively the “Defendants”) motion to dismiss shareholder Melanie Davis’s (“Plaintiff”) securities fraud claim alleging Defendants mislead shareholders about Skullcandy's performance. The court held Plaintiff did not allege with particularity a violation of Section 10(b) or Section 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).
On July 16, 2010, the CEO and co-founder of Instagram, Kevin Systrom, posted the very first photo to the social media platform, which depicted a golden retriever next to a taco stand. (Olivia Waxman, The New York Times). Within 18 months, Facebook, Inc. purchased Instagram, and nearly 8 years after Instagram’s inception, the co-founders of Instagram, Kevin Systrom and Mike Krieger, announced their resignation from Facebook, Inc. in a New York Times article. (Mike Isaac, The New York Times).
When a private company decides to “go public”, it does so through an Initial Public Offering (IPO). An IPO is the private company’s first sale of stock on the public market. Benefits of going public can include a permanent and liquid source of capital for the company, and the company can increase their brand and name recognition through broadcasting their corporate narratives, which suggests legitimacy and stability. (Joe Bou-Saba, Forbes). Although the number of domestic companies listed on U.S. stock exchanges increased in the mid-1990’s, that number has since dropped by nearly half. (Editorial Board, Bloomberg; Michael Wursthorn and Gregory Zuckerman, Wall Street Journal). A study by the Center for Research in Security Prices at University of Chicago’s Booth School of Business reported in the Wall Street Journal showed that in 1996 there were over 7,400 companies listed on U.S. stock exchanges, and today that number is less than half. (Michael Wursthorn and Gregory Zuckerman, Wall Street Journal).
Initial coin offerings (ICOs) function in two capacities: they are used as a way for companies to raise capital and as investment opportunities for individuals. ICOs are relatively new, with the first ICO occurring in 2013. Initially, ICOs were not regulated by the Securities and Exchange Commission (SEC) and there were no restrictions on who could invest. In July 2017, however, the SEC released an investigative report determining that a particular coin was a security and, therefore, subject to federal securities laws. Despite new regulations and increased SEC scrutiny, ICOs continue to grow.
Corporate boards face increasing compliance responsibilities and must consider how best to handle those responsibilities. There are various sources of the increasing burdens and pressures being placed on corporate boards. Among them are the traditional legal duties of due care, good faith, and loyalty placed on directors, with possibly severe consequences if directors fail to fulfill those duties. Included in the duty of care is the especially challenging duty of establishing and monitoring internal controls, the so-called Caremark duty, which lies at the heart of fulfilling the board’s compliance responsibilities.
The Securities and Exchange Commission (SEC) held a roundtable on November 15 to discuss whether the SEC’s current proxy voting rules and procedures should be updated. (Chairman Jay Clayton, SEC Announcement). According to the announcement, the evidence and testimony presented at the roundtable will aid SEC staffers in making their recommendations about what changes should be made. (Andrew Ramonas, Bloomberg Law). The roundtable is scheduled to discuss several topics, including the voting process, retail shareholder participation, shareholder proposals, proxy advisory firms, technology and innovation, and other actions. (Chairman Jay Clayton, SEC Announcement).
Blockchain and cryptocurrency are now mainstays in financial markets and initial coin offerings (“ICO’s”) are giving companies and firms a new avenue to raise capital. Within the cryptocurrency market, “stablecoins” offer a unique form of cryptocurrency to investors. Stablecoins are cryptocurrencies pegged to real-world assets such as the dollar (“USD”) or gold. (Oscar Williams-Grut, Business Insider). Breaking from the volatility seen in other cryptocurrency markets, stablecoins are an attempt to combine the benefits of digital transfer offered by cryptocurrency with the stability of mainstream currency. (Oscar Williams-Grut, Business Insider).
On September 20th of this year, fashion industry giants Michael Kors Holdings Limited (“Michael Kors”) and Gianni Versace S.p.A. (“Versace”) issued a joint press release announcing that Michael Kors would purchase Versace for $2.12 billion. (Katina Metzidakis, Business Wire). The transaction is expected to be completed in Michael Kors’ fourth quarter, which ends April 1, 2019. (Michael Kors Holdings Limited, 2018 Annual Report). When the transaction is complete, the company will be renamed Capri Holdings Limited (“Capri”), after the famed Italian island “long recognized as an iconic, glamorous and luxury destination.” (Katina Metzidakis, Business Wire). This post provides an overview of the transaction and its anticipated effects.
Countries around the world are being forced to decide what role, if any, cryptocurrencies and initial coin offerings (“ICOs”) will play in the future of their financial markets. Russia is no exception. Russian officials’ initial actions included proposals that would prohibit private investors from investing, ban cryptocurrencies altogether, and even imprison users (Maria Prusakova, Medium). Recently, however, changes appear to be on the horizon as Russian President Vladimir Putin began pushing for legislation addressing cryptocurrencies, crypto mining, and ICOs. While the official drafts are still working their way through Parliament, the proposed regulations will allow for some form of ICOs and digital asset trading. (Id).
Vertical mergers, unlike more-litigated horizontal mergers, are governed by few guidelines from antitrust regulatory organizations and, until recently, had never been challenged in federal court. The approval of a vertical merger between AT&T and Time Warner (“The Merger”), despite protests from the Antitrust Department of the U.S. Department of Justice (DOJ), has shed some light on merger control rules for vertical mergers. This post provides an overview of: (1) vertical merger laws; (2) The Merger; and (3) the governing principles that have emerged since the approval of the AT&T transaction. (Noah Brumfield, Antitrust & Trade Regulation Report (BNA)).
Following the appointment of Chairman Joseph Simons to the Federal Trade Commission (FTC), large tech companies including Google, Facebook, and Amazon should expect tougher enforcement against anti-competitive behavior. In recent years, the FTC has become increasingly concerned that these large tech companies may be violating antitrust law and limiting competition in the market by acquiring small startups or otherwise vertically integrating.
Simons’ appointment comes at a time when mega-mergers among technology companies are commonplace.
With the revolutionary technology known as blockchain quickly spreading across the globe, regulators are struggling to find an ideal balance between regulation and innovation. The critical question is whether cryptocurrencies and initial coin offerings (“ICOs”) are unique enough to warrant the creation of a new categories or if they should be considered securities and therefore subject to existing securities laws and requirements. Because new cryptocurrencies do not require government backing, many leaders in the cryptocurrency arena fear additional regulatory delay, or excessive regulations, will lead many cryptocurrency founders to take their innovation and multibillion dollar businesses overseas to countries with more established and favorable regulations (Kate Rooney, CNBC).
The emergence of cryptocurrency and blockchain poses questions for financial regulators around the world. Regulators are struggling to understand both where cryptocurrency fits within their regulatory framework and how to set up parameters for transparency and investor integrity. (Bob Pisani, CNBC). Recently, American regulators increased scrutiny for broker-dealers working with cryptocurrency. (Benjamin Bain, Bloomberg). Financial powers in other countries are also responding individually to the crypto-movement, and France exemplifies a recent response.
In SEC v. Cade, No. 2:18-cv-01323-JEO (N.D. Ala. Aug. 17, 2018), the SEC filed an initial complaint against Catlin Cade (“defendant”) alleging a violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and SEC Rule 10b-5 by trading shares of Golden Enterprises, Inc. (“Golden”) on the basis of material nonpublic information.
According to the allegations, a director of Golden learned of nonpublic information pertaining to a contemplated merger between Golden and a second company. The director separately owned and controlled a different privately held company (“Director’s Company”)
Last month the Securities and Exchange Commission (SEC) obtained a permanent officer-and-director and penny stock bar against Tomahawk Exploration LLC founder, David T. Laurance, for perpetrating a fraudulent initial coin offering. (SEC Press Release). On its face, the decision shows the SEC merely enforcing its previous statements that anything resembling a security will be labeled as such and regulated under the Securities Act. The ruling, however, extends the umbrella of SEC oversight to explicitly include “Bounty Programs”—a mainstay practice for many initial offerings.
Crypto exchanges—which operate much like traditional stock exchanges—are online platforms where crypto currencies are traded. Traditional exchanges deal almost exclusively with exchanging fiat, or legal tender currency, for highly regulated securities, such as stocks and bonds. Similarly, crypto exchanges primarily deal with trading one cryptocurrency for another. It is unclear which agency has, or should have, authority to regulate this arena because these exchanges primarily trade one currency for another. Regulating crypto exchanges is difficult because of the subtly different and often overlapping definitions surrounding initial coin offerings (ICOs) and cryptocurrencies (Michael del Casillo, Forbes). The unprecedented growth and increasing number of new crypto exchanges and cryptocurrencies is another factor making unified regulation increasingly difficult.
The Public Company Accounting Oversight Board (PCAOB) is a nonprofit entity that was created with the passage of the Sarbanes-Oxley Act of 2002 and established by Congress to oversee the audits of public companies with the goal of protecting investors and the public's interest by promoting accurate and independent audit reports (About the PCAOB). In addition to its oversight of public company audits, the PCAOB also oversees the audits of brokers and dealers (About the PCAOB). Much like the Securities and Exchange Commission (SEC), the PCAOB's mission is to protect investors.
As cryptocurrency and blockchainbecome more prominent in today’s financial markets, regulators around the worldare coping with how to maintain transparency and legitimacy in the market. Recently, the Securities and Exchange Commission (SEC) and its new cyber unit began requesting specific information about cryptocurrency brokerage and Initial Coin Offerings(ICO’s) for enforcement purposes. (Josephine Wolff, Slate; Benjamin Bain, Bloomberg). The results of the requests remain unclear, but the probe for information sheds light on the SEC’s suspicion of misconduct.
On August 7, Elon Musk made an abrupt announcement regarding his plan to take Tesla private. Mr. Musk claimed that this Twitter announcement came after he had “secured” funding from the Saudi Arabian sovereign wealth fund. (Ben Bain and Matt Robinson, Bloomberg). After the announcement, Tesla’s shares rose in value to over $381 per share, from $342 (the closing price on August 6). (Mark Matousek, Business Insider). Nevertheless, the share price dropped dramatically over the next few weeks to as low as $263 on September 7.
Earlier this year, the Securities and Exchange Commission (SEC) amended Rule 15c2–12 (17 C.F.R. § 240.15c2–12). Rule 15c2-12 ensures that underwriters secure an agreement with states, cities, and other governmental entities issuing municipal securities that those entities will disclose information about the issued securities to the Municipal Securities Rulemaking Board (MSRB) on an ongoing basis. This information is intended to inform interested parties on the financial standing or other condition of the state government that may have an effect on the bonds.
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