October 2015

I recently spoke at a crowdfunding conference in Germany. One of the professors there made a comment about entrepreneurship in Germany that I thought was interesting.

He indicated that small business entrepreneurs in Germany avoid hiring any employees for as long as possible, to avoid all of the (expensive) rights given to employees under German law.

Another example of the possible unintended consequences of regulation. Regulations intended to protect employees actually keep them from being hired.

The title of my talk at the conference was Regulating Investment Crowdfunding: Small Business Capital Formation and Investor Protection. I discussed how crowdfunding should be regulated, using the U.S. and German regulations as examples. The talk will eventually be posted online; I’ll supply a link when it’s available.

The Second Circuit decision in the Newman case has provoked much discussion of the Supreme Court’s opinion in Dirks and how to interpret the requirements it lays out for tippee liability. But it’s important to remember that Dirks was not writing on a clean slate. This year is the 35th anniversary of the case that preceded Dirks and laid the foundation for the Supreme Court’s insider-trading jurisprudence, Chiarella v. United States.

I realize that this was not the Supreme Court’s first look at insider trading. That honor, arguably, goes to Strong v. Repide, 213 U.S. 419 (1909). But Chiarella was the court’s first discussion of insider trading under Rule 10b-5.

The facts of the Chiarella case are relatively simple. Vincent Chiarella, the defendant in the case, was an employee of Pandick Press, a financial printer. His company was hired to print announcements of takeover bids. Although the identities of the target corporations were concealed in the announcements, Chiarella was able to figure out who they were. He bought stock in the target companies and made a profit of roughly $30,000. He was convicted of a criminal violation of Rule 10b-5, but the Supreme Court overturned his conviction.

It’s…

On the one hand:

Tech Startups Feel an IPO Chill

Dropbox Inc. had no trouble boosting its valuation to $10 billion from $4 billion early last year, turning the online storage provider’s chief executive into one of Silicon Valley’s newest paper billionaires.

But the euphoria has begun to fade. Investment bankers caution that the San Francisco company might be unable to go public at $10 billion, much less deliver a big pop to recent investors and employees who hoped to strike it rich, according to people familiar with the matter.

BlackRock Inc., which led the $350 million deal that more than doubled Dropbox’s valuation, has cut its estimate of the company’s per-share value by 24%, securities filings show.

Dropbox responds that it is continuing to increase its business, added 500 employees in the past year, including senior executives, and has no need for additional capital from private or public investors.

Still, the company is a portent of wider trouble for startups that found it easy to attract money at sky’s-the-limit valuations in the continuing technology boom.  The market for initial public offerings has turned chilly and inhospitable, largely because technology companies have sought valuations above what public investors are willing to pay….

Many

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This week I thanked the law review editors at the West Virginia Law Review for their hard work on my forthcoming article. They seemed truly grateful for the thanks, which was well deserved, and it made me think that I should thank law review editors more often.

Law review editors put in a tremendous amount of time working on our articles, often well after-hours given all of their other commitments. Even when the process is frustrating, I think we need to be thankful and professional. Also, given that I have had a few rough editing experiences, I now state my preferences up front, which (at least this time) led to better results. 

Somewhat related, over at PrawfsBlawg, Andrew Chongseh Kim has a couple posts on the law review process: one on exploding offers and one on peer review of law review articles.

Personally, I don’t have a problem with exploding offers, and I actually think more law reviews should use them. The submission game incentivizes submission to many journals and trading up multiple times. This process wastes an incredible amount of student editor time and they have every right to effectively shut down the expedite process.

As I have…

Regular readers know that I write a lot about business and human rights and that I have posted about a number of lawsuits brought in California alleging violations of consumer protection statutes and false advertising claiming that companies fail to disclose the use of child slavery on their packaging. The complaints allege that consumers are deceived into “supporting” the child slave labor trade. The latest class action has been filed against Hershey, Mars, and Nestle. Back in 2001, these companies and several others signed the Engel-Harkin Protocol (drafted by Congressman Engel) in an effort to avoid actual FDA legislation regarding “slave-free” labeling. Nestle has touted its work with some of the world’s biggest NGOs to help clean up its supply chain for all of its human rights issues, not just in the cocoa industry. Nestle denies the allegations and actually has an extensive action plan related to child labor. Mars and Hershey also denied the allegations.

I am curious as to whether shareholders demand action from the boards of these companies or if the steady stream of litigation being filed in California causes companies to invest more in supply chain due diligence or to change where and how they source their…

Just as I was in the middle of preparing for my class on shareholder proposals – for which I have assigned the opinion in Trinity Wall Street v. Wal-Mart Stores, Inc. – I got an email notification that the Division of Corporate Finance Staff had issued a new legal bulletin announcing that it disagrees with the majority opinion in Trinity, and instead agrees with the concurring opinion.

I discussed the Trinity opinion here, but basically, the issue was whether Walmart could exclude a shareholder proposal, submitted by Trinity Wall Street, requesting that Walmart develop a policy for oversight of sales of guns with high capacity magazines (the proposal was framed to encompass harmful products broadly, but the narrative made clear it was aimed toward gun sales).  In the Third Circuit opinion, the majority and the concurrence disagreed regarding the proper interpretation ordinary business exclusion for social-responsibility proposals.  The majority held that to determine whether a proposal is excludable, the court must first analyze whether it concerns ordinary business, next determine whether it involves a significant issue of social policy, and finally determine whether – despite involving ordinary business – the social policy issue is so important as to “transcend”…

BLPB guest-blogger Todd Haugh (Indiana University – Kelley School of Business) has a new article in the Vanderbilt Law Review entitled Overcriminalization’s New Harm Paradigm. The abstract is reproduced below:

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The harms of overcriminalization are usually thought of in a particular way—that the proliferation of criminal laws leads to increasing and inconsistent criminal enforcement and adjudication. For example, an offender commits an unethical or illegal act and, because of the overwhelming depth and breadth of the criminal law, becomes subject to too much prosecutorial discretion and faces disparate enforcement or punishment. But there is an additional, possibly more pernicious, harm of overcriminalization. Drawing from the fields of criminology and behavioral ethics, this Article makes the case that overcriminalization actually increases the commission of criminal behavior itself, particularly by white collar offenders. This occurs because overcriminalization, by lessening the legitimacy of the criminal law, fuels offender rationalizations. Rationalizations are part of the psychological process necessary for the commission of crime—they allow offenders to square their selfperception as “good people” with the illegal behavior they are contemplating, thereby allowing the behavior to go forward. Overcriminalization, then, is more than a post-act concern. It is inherently criminogenic because it facilitates some…

Home court advantage alleged in SEC securities cases brought before administrative judges rather than a jury.  Read this recent thought provoking article in the NYT DealB%k, A Jury Not the SEC, by Suja A. Thomas, a Univ. of Illinois law professor, and Mark Cuban, billionaire investor.  

After losing several cases before juries, the S.E.C. went to a place where it generally cannot lose: itself. When it accuses a person of a securities violation, the S.E.C. has often brought the case in an administrative hearing where one of its own judges decides the case, not a jury. Rarely does the agency lose such cases before its judges

Thomas and Cuban refute the argument that after the financial crisis securities issues are considered public rights questions and can constitutionally be transferred to an administrative judge. 

Despite the persistence of this public rights doctrine, there is no constitutional authority for it. First, Article I does not give Congress any authority to determine who decides civil cases. Second, the Seventh Amendment itself tells us who should decide these cases. Under it, juries decide money issues and federal judges decide other matters.

-Anne Tucker

As Steve Bradford mentioned in his post on Monday (sharing his cool idea about mining crowdfunded offerings to find good firms in which to invest), our co-blogger Haskell Murray published a nice post last week on venture capital as a follow-on to capital raises done through crowdfunding.  He makes some super points there, and (although I was raised by an insurance brokerage executive, not a venture capitalist), my sense is that he’s totally right that the type of crowdfunding matters for those firms seeking to follow crowdfunding with venture capital financing.  I also think that, of the types of crowdfunding he mentions, his assessment of venture capital market reactions makes a lot of sense.  Certainly, as securities crowdfunding emerges in the United States on a broader scale (which is anticipated by some to happen with the upcoming release of the final SEC rules under Title III of the JOBS Act), it makes sense to think more about what securities crowdfunding might look like and how it will fit into the cycle of small business finance.

Along those lines, what about debt crowdfunding as a precursor to venture capital funding?  Andrew Schwartz has written a bit about that.  Others…