Finance Without Law: The Case of China

In a new article. I investigate how two financial markets of trillions of dollars each have developed extralegally in the past two decades, creating risks of regulatory enforcement actions and contract defaults. More specifically, I examine (1) how Chinese internet companies from Sina to Alibaba have adopted the structure of a variable interest entity (“VIE”) both to circumvent the Chinese government’s ban on foreign capital in high-tech industries and to get listed on overseas stock markets, and (2) how Chinese entities and foreign investors contract out of China’s stringent regulations on the issuance of international bonds, focusing on one of … Read more

Machine Learning, Algorithmic Trading, and Manipulation

Trading in financial markets is increasingly dominated by algorithms. They enable trading at speeds and levels of adaptiveness that are impossible for human beings. A key question for the legal system is whether these algorithms will disrupt the efficiency and integrity of markets, and if they will, whether existing regulation is well-suited to deterring misconduct. A key question for finance is to determine what market structures are most robust to manipulation by new algorithmic trading agents.

In our new working paper, we study the potential consequences of advanced algorithms trading in a financial market. Specifically, we analyze experimentally how … Read more

Argentina’s Cliffhanger Negotiations on a New Loan Deal with the IMF   

In late March, Argentina and the IMF agreed on a new arrangement that would enable Argentina to avoid falling into arrears on the IMF’s 2018 loan. However, the agreement was reached only after protracted and tortuous negotiations that dragged on for at least 18 months and concluded only at the last minute before a de facto March deadline.

In a new two-part article, I discuss the many twists and turns of the process and review the major substantive policy differences between Argentina and the IMF as well as the political considerations involved in the negotiations.

In August 2020, Argentina restructured … Read more

How Common Are Negative First-Day IPO Returns?

Investors generally expect companies to make a successful and profitable debut on the stock market with their initial public offering (IPO). However, some stock market launches fall short: The price of shares in Deliveroo’s $2.8 billion IPO in 2021, for example, fell by more than 26 percent when launched on the London Stock Exchange, and the price of Uber shares issued in its $75.46 billion IPO in 2019 dropped, 7.6 percent after their first day of trading on the New York Stock Exchange.

In 2021, around $143 billion worth of shares were issued in U.S. IPOs, but more than 25 … Read more

How to Move from Local to Global Regulation of Crypto-Assets

On July 7, 2022, the U.S. Department of Treasury (USDT) published a fact-sheet on the regulation of digital assets(a.k.a. crypto-assets) in which it emphasized the need for global cooperation. However, this fact-sheet is only a drop in an ocean of mostly uncoordinated crypto-regulation initiatives, both domestically (e.g., presidential executive order, a bi-partisan bill submitted to Congress, and diligent SEC enforcement) and abroad (e.g., final steps toward a harmonized regulation in the EU and several declarations by individual countries).

The current wave of crypto-regulation announcements aims to eliminate the confusion that has dominated the cryptomarket since its emergence. In … Read more

Cleary Gottlieb Discusses Digital Asset Amendments to the UCC

This month, the sponsors of the Uniform Commercial Code (“UCC”) approved wide-ranging amendments to the UCC (the “2022 UCC Amendments”)[1] to provide workable rules for emerging technologies, such as distributed ledger technology and virtual currency.  If adopted by individual state legislatures, these amendments should provide greater certainty regarding the rules governing security interests, competing claims, custodial risks, and other issues associated with digital assets.

The UCC is a uniform law sponsored by the American Law Institute (“ALI”) and the Uniform Laws Commission (the “ULC”) and governs various commercial transactions in personal property, including rules for granting and perfecting security … Read more

Skadden Discusses Senate Bill to Create Regulatory Structure for Crypto and Other Digital Assets

In recent years, innovation in the blockchain or “Web3” space has been impacted by uncertainty on the regulatory front. Undoubtedly, the greatest area of uncertainty has involved the Securities Exchange Commission (SEC) and its application of the so-called Howey test when determining whether a cryptocurrency or other digital asset is being offered as an investment contract for purposes of applying U.S. securities law. Despite repeated calls for regulatory clarity from industry members, lawmakers and even SEC commissioners, little progress has been made in achieving that clarity.

Industry members have therefore increasingly come to the conclusion that a long-term solution will … Read more

The Unsung Upside of Share Repurchases

Stock repurchases by issuing corporations have always been controversial. But they have become even more so recently because of the perception that the excess funds used to finance buybacks have come from tax cuts and other sources (such as government bailouts) that were intended to stimulate reinvestment or enhance wages and benefits for workers. As a result, critics have proposed that tax law be amended to discourage buybacks (and possibly dividends as well) on the theory that the benefits of such distributions go mostly to executives (who are compensated in large part with equity) and to already wealthy stockholders.

The … Read more

Investor Information Gathering and the Resolution of Uncertainty

Gathering additional information is an instinctive response to uncertainty. This behavior is found in many settings, perhaps most pervasively in capital markets. For example, if investors observe an earnings number that differs from what they expected, they might seek to better understand the number by gathering additional information and context from financial statements or corporate disclosures. Such efforts may not fully resolve the uncertainty that prompted them, particularly if uncertainty is more difficult to resolve as it increases. Thus, the intensity of investors’ information gathering efforts may reflect both the uncertainty that motivated their search and the residual uncertainty that … Read more

Skadden Discusses the Growing Complexity of Commercial Rights Issues In NFTs

Although it has only been a little over a year since nonfungible tokens came into the mainstream, the industry has taken a number of twists and turns, not the least of which is the granting of certain commercial exploitation rights in the digital works associated with an NFT.

However, this trend has uncovered an inherent issue with attaching contractual rights to NFTs. It is an issue for which there is not yet a definitive solution, which is creating potential issues for rights holders, NFT issuers and NFT owners.

In order to understand this issue, one needs to keep in mind … Read more

Decentralized Finance, Crypto Funds, and Value Creation in Tokenized Firms

Decentralized Finance (DeFi) employs blockchain technology and smart contracts with the goal of enabling perfectly disintermediated financial markets. Despite the far-reaching ambition, DeFi markets are experiencing increasing intermediation recently, as a new type of intermediary, so-called Crypto Funds (henceforth, CFs), reintroduces centralized market structures. In fact, the number of newly established active CFs has substantially grown over the last four years to more than 850 at the end of 2021, with a surge in total assets under management from $8.3 billion in mid-2018 to $57.5 billion in 2021. In a new article, we address the question of why CFs find … Read more

Meme Investors and Retail Risk

Dramatic trading in GameStop, AMC, and other “meme stocks” has reignited debates about the efficiency of the stock market, its purposes, and whose interests it should serve. The changing role of retail investors and meme investors, a subset of retail investors involved in recent stock rallies fueled by social media, has raised urgent questions around the need for regulatory agencies to protect them.

In a recent article, I discuss the evolving role of retail investors in price discovery and the stock market. Calls for regulation usually misunderstand the role of retail investors, either dismissing them as victims of suspect … Read more

Machine Learning and the Future of Tax Valuation

The tax law handles many computational issues with extraordinary efficiency. Need to compute employment taxes? The Internal Revenue Code (“Code”) lays out the rate for doing so. Need to ascertain the dollar amount deductible for business mileage expenses? Treasury regulations provide a formula based upon the number of miles driven.

But the same computational efficiencies do not routinely extend to asset valuations. As we discuss in in a recent article, administration of the tax law in this realm is plagued with problems. Admittedly, the problem is not universal; for example, it does not extend to (i) items that are bought … Read more

Sullivan & Cromwell Discusses California Governor’s Executive Order on Blockchain

On May 4, California Governor Gavin Newson signed an executive order that is intended “to foster responsible innovation, bolster California’s innovation economy, and protect consumers” and “create a transparent regulatory and business environment for web3 companies which harmonizes federal and California approaches, balances the benefits and risks to consumers, and incorporates California values such as equity, inclusivity, and environmental protection.”[1]  The executive order outlines several priorities to advance these aims.  The executive order indicates that supporting blockchain technologies and crypto-related assets, in connection with other policy concerns, such as consumer protection, and aligning with the federal government’s approach to … Read more

Do Venture Capital Funds Overstate Their Performance? The Effects of FOIA

Venture capital (VC) has become an increasingly important asset class for institutional investors such as endowments, pension funds, insurance companies, and sovereign wealth funds, as well as for wealthy individuals. A large amount of money is involved: U.S. VC-backed companies raised nearly $300 billion in 2021. Moreover, there is a great deal of hype related to the potential benefits of VC. Everyone is aware of examples of phenomenally successful VC investments, including in Amazon, Facebook, and Tesla. And a quick Google search reveals many sources touting VC returns of 15 to 30 percent (and sometimes much higher).

The appeal of … Read more

Too Much Information? Increasing Firms’ Information Advantages in the IPO Process

Traditionally, high-growth private firms in the United States have used the public equity markets as their primary source of external financing to fund innovation and expansion. For this reason, well-functioning capital markets have been instrumental to the U.S. economy, supporting job creation and economic growth. In recent decades, however, there has been a decreasing number of U.S. companies going and staying public, attracting significant concern from regulators. In particular, the U.S. Securities and Exchange Commission (SEC) is concerned that firms using private rather than public sources of financing limits investment opportunities for ‘Main Street’ investors and reduces the availability of … Read more

Deep Learning Mutual-Fund Risk Assessment and Performance

The ripple effects of the COVID-19 pandemic have increased market volatility and even caused markets to close in some countries. These fluctuations substantially affected mutual funds, leading to fire sales of their assets and SEC scrutiny of their risk management. Investors responded quickly and withdrew more than $40 billion from mutual funds in the first two months of the pandemic. With nearly half of the households in the United States having their pension plans and life savings invested in mutual funds, understanding the risk-taking behavior of mutual funds is thus of prime importance for investors.

For fund managers, the ability … Read more

How Disclosure and Information Intermediaries Strengthen the Credibility of Initial Coin Offerings

The crypto-tokens market has recently emerged as an alternative source of financing for entrepreneurial ventures, with approximately $27 billion raised globally through March 2022.[1] These ventures issue blockchain-based digital “crypto-tokens” to raise external capital through an initial coin offering (“ICO”). In return, a token provides holders with various benefits, such as “utility” value through access to the venture’s current or future product (or service), potential participation in future profit distributions, and the ability to trade the token on crypto-exchanges (e.g., Binance and Coinbase).

The “ICO” designation is inspired by initial public offering (“IPO”) whereby private firms list shares on … Read more

Cleary Gottlieb Discusses the LIBOR Act, State Law, and Litigation Risks

On March 15, 2022, President Biden signed into law the Adjustable Interest Rate (LIBOR) Act  (the “LIBOR Law”).[1] The objectives of the legislation are to facilitate the transition of legacy LIBOR contracts that either (a) lack LIBOR fallback provisions entirely or (b) contain inadequate LIBOR fallback provisions and to avoid related “disruptive litigation”.[2]

When Does the LIBOR Law Apply?

The LIBOR Law applies to contracts that use, as a Benchmark rate, the one-month, three-month, six-month and twelve-month tenors of U.S. Dollar LIBOR as of the applicable LIBOR Replacement Date (each, a “LIBOR Contract”).[3]Read more

Skadden on Revisiting Share Repurchases in Volatile Times

In light of the recent increased volatility in the global financial markets,1 a number of companies have raised questions regarding the desirability of repurchasing shares at reduced market prices. This alert addresses questions surrounding share repurchases that companies should consider as they evaluate the advantages, disadvantages, legal implications and strategic considerations of share repurchases in a turbulent market.

Overview

As a preliminary matter, any company contemplating a share repurchase should consider the limitations set forth within the Coronavirus Aid, Relief, and Economic Security Act, passed into law on March 27, 2020; the Consolidated Appropriations Act, 2021, passed into law … Read more