Finance & Economics

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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

When Biden Met Crypto: Thoughts on the President’s Executive Order

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On March 9, 2022, President Biden signed an executive order (“the Order”) requiring federal agencies to submit reports on how cryptocurrencies relate to various issues, including money laundering, investor protection, international cooperation, central bank digital currencies (“CBDC”), and systemic risk. Here, we offer some perspective and suggestions on those issues.

First, consider money laundering. Typically, anti-money-laundering regulation aims to block money received from crime or terrorism from flowing into traditional financial institutions. Cryptocurrencies create concerns because they can be purchased (more or less) anonymously and without intermediaries. That raises two questions: (1) who should regulation target in the absence of … Read more

ISS on Addressing the Looming Water Crisis in Investment Portfolios

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Water means life. More than half of our bodies consist of water, and it is an indispensable resource for production of food and other goods. It is fundamental for societies and ecosystems alike. While water covers approximately 70 percent of our planet’s surface, only 0.5 percent is freshwater that is readily available in lakes and river systems. Over the last few decades these freshwater resources have come under increasing pressure due to population growth, climate change, and unsustainable production and consumption patterns.

According to the UN World Water Development Report 2020, global demand for water has been increasing by

… Read more

New Department of Labor Investment Rules Could Be Big Win for Everyone but Labor

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Few constituencies benefited more from the election of Joe Biden than the socially-responsible investor community, which saw the most-hostile presidential administration replaced by the most supportive.[1] The point is best illustrated by the departure of Labor Secretary Eugene Scalia, who was perceived by labor to be a “union buster,”[2] and the arrival of former Boston Mayor Marty Walsh, the first union member to serve as secretary in decades.[3] New investment rules proposed by Walsh’s Department of Labor governing trillions of dollars in retirement funds are set to undo much of the harm to environmental, social, and governance … Read more

Sullivan & Cromwell Discusses Federal LIBOR Transition Legislation

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On March 15, 2022, President Biden signed into law the “Consolidated Appropriations Act, 2022,” which enjoyed significant bipartisan support and contains, as Division U, the “Adjustable Interest Rate (LIBOR) Act” (the “LIBOR Act”).[1]  The LIBOR Act provides a uniform national approach for replacing U.S. dollar LIBOR (“LIBOR”) as a reference interest rate in so-called “tough legacy” contracts (contracts that do not include effective fallback provisions, for example, because they have no provisions for a replacement benchmark or their fallback provisions would require the use of a LIBOR-based rate or a poll to determine a rate) for a time when … Read more

Debevoise Discusses Russia, Sanctions, and Digital Assets

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In response to ongoing Russian military action in Ukraine, U.S. authorities have imposed several tranches of new sanctions against Russia, particularly against Russia’s financial industry, including its major banks and the Central Bank of Russia. On February 26, President Biden and leaders of other European countries announced their intention to remove certain Russian banks from the SWIFT financial messaging system, a measure that was enacted by the European Union on March 2, 2022, and applies to seven Russian banks, cutting them off from SWIFT’s secure network for transmitting financial messages between financial institutions (e.g., payment instructions).

As … Read more

SPACs and PIPEs as Efficient Tools for Corporate Growth

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A SPAC can be understood as an alternative to an IPO, with investors using a large investor, a PIPE, to find out whether the SPAC founder has really chosen a good target or is simply rushing to get a big payoff before investors must be repaid. The PIPE is an expert that gets paid to certify a SPAC, and it is compensated accordingly.

While many sophisticated observers believe that SPAC shareholders receive a bad bargain because their shares are subject to dilution, there is less of an argument to be made for protecting target management from aggressive sponsors. The relevant … Read more