The Initial Coin Offering (ICO) is one of the stranger financial innovations in recent memory. Imagine if Coca-Cola had funded its initial deployment of vending machines through the sale of tokens its machines might one day require. Now replace soda and physical tokens with software-based services and digital (“crypto”) assets. This scenario roughly captures the ICO. If you believe what you read on social media, you might get the impression the ICO form is revolutionary—a “1000x improvement over the status quo,” as one observer put it. But if you trust the Wall Street Journal, you might think the ICO … Read more
The continued explosion in the number of securities class action filings is once again the big headline in our half yearly update. The now-sustained increase in both the number of filings and average and median settlement amounts—including a five-fold increase in average settlement amounts in the first half of 2018 to $124 million from $25 million in 2017—is causing significant alarm in the securities defense bar, prompting insurance carriers and others to seek regulatory reform and explore other alternatives to reverse these trends. The trends and critical case law updates are explored in detail below.
I. Filing and Settlement Trends
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In our recent paper, we find that the tone of language in Securities and Exchange Commission (SEC) comment letters after enforcement reviews has capital market implications, which are amplified or abbreviated based on the strength of a given country’s enforcement.
In the financial reporting realm, foreign firms listed on U.S. stock exchanges account for a significant percentage of market capitalization. They often attract particular scrutiny, however, because their accounting quality is weak compared with that of U.S. firms. In an effort to enhance informational transparency and promote the overall compliance with U.S. reporting regulations, the SEC conducts periodic … Read more
Shareholder engagement is a hallmark of our public capital markets, and the proxy process is a fundamental component of that engagement. In 2010, the Commission issued a concept release seeking public comment on whether the U.S. proxy system as a whole operates with the accuracy, reliability, transparency, accountability, and integrity that shareholders and companies should expect. In light of the many changes in our markets, technology, and how companies operate since then, SEC staff will host a roundtable this fall to hear from investors, issuers, and other market participants about whether the SEC’s proxy rules should be refined.
The … Read more
“When you talk, you are only repeating what you already know. But if you listen, you may learn something new.” – Dalai Lama XIV
Disclosure regulation is a cornerstone of modern securities markets. Its economic consequences have been extensively studied and heavily debated. A widely recognized benefit of mandatory disclosure is that it levels the playing field by publicly disclosing to everyone what is known only to sophisticated investors. This leveling reduces trading costs and consequently reduces the firm’s cost of capital.
In our recent paper, available here, we show that this reduced informational advantage of sophisticated investors is … Read more
On July 17, 2018, the Ninth Circuit issued an opinion in Automotive Industries Pension Trust Fund v. Toshiba Corp., No. 16-56058 (9th Cir. July 17, 2018), holding that the Supreme Court’s Morrison decision does not preclude purchasers of Toshiba’s unsponsored American Depository Shares or Receipts (“ADRs”) in the over-the-counter (“OTC”) market from maintaining securities claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against Toshiba. The Ninth Circuit’s decision reverses the district court’s dismissal of the securities claims under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). The Ninth Circuit … Read more
This is a column for insider trading junkies—a special breed who love all the nuances in this very nuanced subject. Late last month, a Second Circuit panel did something fairly unusual: It withdrew a 2017 decision and substituted a new opinion with a new rationale (but still with the same 2-1 division on the panel). The new decision in United States v. Martoma has a less sweeping and more defensible rationale but still deviates from the law in other circuits. In addition, it has some nuances that future cases are certain to explore. Chief among these is the status … Read more
Over the last half century, finance has made remarkable progress explaining the pricing of financial assets. In relying on portfolio theory, however, mainstream pricing models tend to ignore investor preferences for certain asset types. This is a mistake. In a new paper forthcoming in Harvard Business Law Review and available here, I weave recent empirical findings on the demand for “safe assets” with an institutional account of how financial intermediaries increase the effective supply of such assets to demonstrate how investor preferences can drive financial innovation and radically alter the structure of the financial system. By moving beyond abstract … Read more
Our new research paper studies the issuers of unregulated crypto-tokens such as EOS and Tether. We examine two dimensions: the success of the Initial Coin Offering (ICO) process, and the capital market patterns following the listing of the tokens on exchanges. Specifically, we study how these issuers signal their quality to investors, and how their disclosure practices affect market quality.
Crypto-tokens are different from crypto-currencies such as Bitcoin, which serve as a medium of exchange like fiat currencies. Instead, crypto-tokens are sold by “virtual organizations” that want to raise capital for their projects through initial coin offerings (ICOs), which are … Read more
Does paying employees for blowing the whistle on corporate crime to regulators discourage internal reporting and undermine corporate governance? The answer is not as simple as it might seem. My research shows that, as the amount of reward increases, the probability of internal reporting rises at ﬁrst but then falls.
The question has been discussed in countries that have introduced or contemplated the introduction of legislation to reward whistleblowers but has not yet been fully analyzed. One of the overlooked obstacles is that the standard of proof for external whistleblowing cases is higher than for cases of internal reporting, and … Read more
William Hinman, Director of the US Securities and Exchange Commission (SEC) Division of Corporation Finance, provided substantial color on the SEC’s evolving view of digital asset classification recently when he shared his thoughts on how to characterize purchases and sales of digital assets under US securities laws (the securities laws), as part of the Yahoo Finance All Markets Summit: Crypto. While the headline moment occurred when he stated his belief that current transactions in Bitcoin and Ether are not securities transactions, he also laid out a framework for his reasoning that has greater implications for digital asset market … Read more
Between January 1 and December 17, 2017, the value of a single Bitcoin skyrocketed from under $1,000 to nearly $20,000. To match Bitcoin’s 1183 percent return during this period, an investor would have needed the equivalent of 38 years’ average equity market returns. Investors and news outlets alike were entranced by Bitcoin’s stratospheric rise, and direct investment in the crypto-asset surged. But Bitcoin’s climb was followed by an equally stomach-turning fall, as its price declined 70 percent in less than two months between December 17 and February 6.
Discussion of Bitcoin’s swing occurred primarily in one of two … Read more
Starting in November 2018, U.S. public, open-ended mutual funds will have the option to adjust the daily pricing of the fund—the net asset value or NAV—to account for and recoup large transaction costs. Currently, the fund, and therefore its remaining shareholders, absorb those costs generated by existing shareholders. This quiet, technical change in the regulation—swing pricing—is a part of the SEC’s sweeping mutual fund Liquidity Management Rules, adopted in 2016.
Swing pricing is an anti-dilution tool protecting shareholders staying in a fund—the sedentary shareholders—by guarding their investment from transaction cost erosion, which by 2014 estimates total $10-17 billion annually. This … Read more
On June 21, in a much anticipated decision, the Supreme Court held that SEC Administrative Law Judges (“ALJs”), who have historically been appointed by SEC staff, are “Officers of the United States” and, hence, under the Appointments Clause, can be appointed only by the President or by the SEC itself. Lucia v. SEC. The Court further ruled that any litigant who has made a “timely challenge” to the validity of an ALJ’s appointment is entitled to a new hearing before a different, properly appointed ALJ or the SEC itself.
In addition to possibly reopening past cases, the Court’s opinion … Read more
On Thursday, June 14, the SEC Director of Corporation Finance, William Hinman, stated his view that current secondary market trades of Ether are not now securities transactions as part of a speech on the treatment of digital assets under the securities laws. While he expressly set aside the question of whether the capital-raising that initially accompanied the sale of Ether in 2014 was a securities offering, he confirmed previous suggestions that Ether is a prime example of a digital asset that may once have been offered as a security, but is now “something else” that is not regulated by the … Read more