November 2015

Once the SEC has created a safe harbor for a statutory exemption, can it ever really get rid of it? That’s one of the issues raised by the SEC’s proposed changes to Rule 147, which I considered in detail last week.

Rule 147 is currently a safe harbor for the intrastate offering exemption in section 3(a)(11) of the Securities Act. Section 3(a)(11) exempts from the Securities Act registration requirement

“Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.”

Rule 147 currently provides that an offering

“made in accordance with all of the terms and conditions of this rule shall be deemed to be part of an issue offered and sold only to persons resident within a single state or territory where the issuer is a person resident and doing business within such state or territory, within the meaning of section 3(a)(11) of the Act.”

In other words, if you meet the requirements of Rule 147, you are within…

One of the best news stories to come in the wake of the financial crisis was L’Affaire du Chaton, in which the accusation was lobbed that Goldman Sachs literally abandoned a group of stray kittens. Goldman, apparently recognizing that there are limits to the amount of profit-seeking the public is willing to tolerate, set not one, but two spokespeople to quell the looming media disaster.

Which is what I’m reminded of when I read this story about Goldman Sachs’s investment in social impact bonds sold by Utah to fund its preschool program.

As I understand it, Utah’s Granite School District needed money to finance its preschool program – which, it believed, prevented at-risk students from needing expensive special education later.

So Utah’s United Way of Salt Lake sold Goldman bonds.  The money was used to finance the preschool program, and Goldman was to be paid by the United Way and Salt Lake County to the extent that the program did result in cost-savings by reducing the need for special education.

The problem was that Utah itself set a rather specious standard for determining whether the pre-school program avoided the need for special education, by inflating the numbers…

REI recently announced that they will close their stores on the busiest day in retail, Black Friday. They are encouraging their customers and employees to spend time outside. REI is also paying their employees on Black Friday even though their stores will be closed.

At first, I was proud of REI for this move; Black Friday can be materialism at its worst. 

But I think REI made a poor strategic move by over-promoting this announcement and buying numerous social media advertisements for their #OptOutside campaign. REI’s self-congratulatory ads have been following me around the internet for the past few days. 

Advertising about your social responsibility is really difficult to do well.

Convincing customers that you are socially responsible through advertising is like trying to convince your friends you are generous through social media posts. Both are likely to backfire. As Wharton professor Adam Grant recently wrote, you shouldn’t say “I’m a giver;” that determination is for others to make.

In my opinion, praise of a company’s socially responsible behavior should come primarily from its stakeholders. REI received plenty of third-party press regarding their announcement (see, e.g., here, here, and here), but their self-promotion…

I would like to build off of Marcia Narine’s post about binding arbitration clauses. In her post, she discusses two related subjects. The first concerns the importance of civil procedure, noting that jurisdictional problems prevented the human rights victims in Kiobel from finding justice. The second addressed the grim picture painted by the New York Times about how companies use arbitration clauses to undermine meritorious legal claims. I mention this because there seems to be a radical development brewing about how arbitration clauses might actually help human rights victims.

The problem with adjudicating human rights claims is that few courts have been able, or willing, to remedy violations. Most abuses occur in countries where legal systems are too weak to prosecute offenders. And, in light of Kiobel, the United States generally lacks jurisdiction over entirely foreign defendants and events. This has led commentators to conclude that courts of law are poorly equipped to hear human rights cases.

But could arbitration be the answer? Consider the Bangladesh Accord, which was recently signed by over 200 apparel companies—including H&M, Abercrombie & Fitch, and Adidas—after a series of sweatshop fires in Bangladesh. Signatories agree to take numerous proactive and remedial measures…

With the recent release of bar results in many states, I have been obsessed of late about the sorry state of bar passage across the country–as well as specific bar passage issues relating to our graduates.  So, rather than (as I should and will do soon) responding to Steve Bradford’s prompting post on the final JOBS Act Title III crowdfunding rules and the related proposals regarding Rules 147 and 504 under the Securities Act of 1933, as amended (as well as his follow-up post on the Rule 147 proposal), I have decided to focus on bar passage for my few minutes of air time this week.  Specifically, I want to begin to explore the question of what we can do, if anything, as business law professors to help more of our students succeed in passing the bar on the first attempt.

At a base level, this means we should endeavor to understand something about the reasons why our individual students fail the bar the first time around.  A lot has been written about the national trends (inconclusively, as a general rule).  And I am sure every law school is now analyzing the data on its own bar passage shortcomings.  But my experience teaching Barbri and my conversations with former students who have not passed the bar indicate a number of possible causes.  They include (and these are my descriptions based on that experience and those conversations, in no particular order):

  • Failing to state the applicable legal rule(s) and apply them to the facts;
  • Difficulty in processing legal reasoning in the time allotted;
  • Nerves, sleep deprivation, illness and the like; and
  • Engaging insufficiently with study materials and practice examinations.

Assuming that these anecdotal observations are, in fact, causes contributing to bar exam failures for at least some students, how might we be able to help?

The Department of Labor issued new interpretive guidelines for pension investments governed by ERISA.  A thorny issue has been to what extent can ERISA fiduciaries invest in environmental, social and governance-focused (ESG) investments?  The DOL previously issued several guiding statements on this topic, the most recent one in 2008, IB 2001-01, and the acceptance of such investment has been lukewarm. The DOL previously cautioned that such investments were permissible if all other things (like risk and return) are equal.  In other words, ESG factors could be a tiebreaker but couldn’t be a stand alone consideration. 

What was the consequence of this tepid reception for ESG investments?  Over $8.4 trillion in defined benefit and defined contribution plans covered by ERISA have been kept out of ESG investments, where non-ERISA investments in the space have exploded from “$202 billion in 2007 to $4.3 trillion in 2014.” 

In an effort to correct the misperceptions that have followed publication of IB 2008-01, the Department announced that it is withdrawing IB 2008-01 and is replacing it with IB 2015-01. 

The new guidance admits that previous interpretations may have

“unduly discouraged fiduciaries from considering ETIs and ESG factors. In particular, the Department is

…

The Georgia Attorney General’s (AG) office is trying to make the case that the Georgia Pipeline Act does not allow any entity other than a corporation to use the statute’s eminent domain power.  Palmetto Pipeline is seeking a certificate for authorization to use that power, provided in GA Code § 22-3-82 (2014): 

(a) Subject to the provisions and restrictions of this article, pipeline companies are granted the right to acquire property or interests in property by eminent domain for the construction, reconstruction, operation, and maintenance of pipelines in this state . . . .

The state AG has argued that a pipeline company must be a corporation, and thus a limited liability company (LLC)  cannot use the statutory power.  The AG is right.  In the Pipeline Act’s definitions section, it provides, at GA Code § 22-3-81 (2014), 

As used in this article:

. . . .

(2) “Pipeline company” means a corporation organized under the laws of this state or which is organized under the laws of another state and is authorized to do business in this state and which is specifically authorized by its charter or articles of incorporation to construct and operate pipelines for the

…

Gday

Please join me in welcoming guest blogger Greg Day. 

Greg is a legal studies professor at the Spears School of Business at Oklahoma State University. Greg earned a JD at the University of North Carolina and a PHD in political science (with a focus on international relations) at the University of Mississippi. Before joining the faculty at Oklahoma State, Greg practiced with Morris, Nichols, Arsht & Tunnell LLP, a Delaware-based law firm. His scholarship focuses on the relationship between law and market inefficiencies.

Thanks to Greg for joining us, and I look forward to his posts. 

Here’s something everyone who has ever taken Securities Regulation should know: Section 3(a)(11) of the Securities Act, the intrastate offering exemption, has a safe harbor, Securities Act Rule 147.

As Lee Corso would say, “Not so fast, my friend.”  The SEC is proposing to overturn that longstanding wisdom. If the SEC’s proposed changes to Rule 147 are adopted,Rule 147 would no longer be tied to section 3(a)(11) and section 3(a)(11) would no longer have a safe harbor. The intrastate nature of Rule 147 would be preserved, but the proposed changes would be adopted under the SEC’s general exemptive authority in section 28 of the Securities Act.

Here are the most significant changes that the SEC has proposed:

Tied to State Regulation

The premise of section 3(a)(11) and its Rule 147 safe harbor is to relegate purely intrastate offerings to state regulation. But there’s currently nothing in Rule 147 to enforce that premise; federal exemption does not depend on state regulation of the offering.

The SEC proposal would expressly tie the federal Rule 147 exemption to state regulation. An offering would qualify for the federal exemption only if it was (1) registered at the state level or (2) sold pursuant…