Securities Regulation

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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…

Recently, a number of the sports media outlets, including ESPN, the Pac-12 Network, and Fox Sports featured a company called Oculus that makes virtual reality headsets used by Stanford University quarterback Kevin Hogan, among other players, to prepare for games.

In 2012, Oculus raised about $2.4 million from roughly 9,500 people via crowdfunding website Kickstarter. Following this extremely successful crowdfunding campaign, Oculus attracted over $90 million in venture capital investment. In mid-2014, Facebook acquired Oculus for a cool $2 billion. 

Oculus is only one example, but it caused me to wonder how many companies are using crowdfunding to attract venture capital, and, if so, whether that strategy is working. This study claims that 9.5% of hardware companies with Kickstarter or Indigogo campaigns that raised over $100,000 went on to attract venture capital. Without a control group, however, it is a bit difficult to tell whether this is a significantly higher percentage than would have been able to attract venture capital money without the big crowdfunding raises. 

If I were a venture capitalist (and I was raised by one, so I have some insight), I would see a big crowdfunding raise as potentially useful evidence…

Fellow BLPB editor Haskell Murray highlighted Laureate Education’s IPO (here on BLPB) last week as the first publicly traded benefit corporation.  Steven Davidoff Solomon, the “Deal Professor” on Dealbook at NYT, focused on the interesting issues that can be raised by public benefit corporations in his article, Idealism That May Leave Shareholders Wishing for Pragmatism, which appeared yesterday.  Among the concerns he raised were the  vagueness of the “benefit”provided by the company, the potential laxity or at least untested waters of benefit auditing, and the potential for management rent seeking at the expense of shareholder profit in the new form.  Davidoff Solomon, who (deliciously and derisively) dubs benefit corporations the “hipster alternative to today’s modern company, which is seen as voracious in its appetite for profits,” is certainly skeptical. But the concerns are valid and will have to be worked out successfully for this hybrid form to carve out a place in the securities market.  What I found particularly interesting was his focus on the role of institutional investors, who as fiduciaries for their individual investors, have fiduciary obligations to pursue profits which may be in conflict with or at least require greater monitoring when investing in…

Last week,  I asked whether casebooks should include statutes. That post provoked a healthy debate in the comments and elsewhere. Today, I want to address another content question, this one dealing not with the content of casebooks but with the content of the Business Associations course itself. What securities law topics should be included in the basic business associations course?

The answer to that question obviously depends on whether the course is for three or four credit hours. I don’t think a comprehensive business associations course should ever be limited to three credit hours. But, if I had to teach a three-hour course, I would not cover any securities law. Agency, partnership, corporations, and LLCs are already too much to cram into a three-hour course. Adding securities topics on top of all that would, in my opinion, make the course too superficial.

Luckily, I have the hard-fought right to teach B.A. as a four-hour course. In a four-hour course, I think it’s essential to cover proxy regulation. Federal law or not, it’s mainstream corporate governance, at least for public companies, and many, perhaps most, securities regulation courses don’t cover it.

Beyond that, I’m not sure any securities coverage is…

Between the US Supreme Court’s decision to let Newman stand and the Delaware Supreme Court’s Sanchez decision, the intersection of friendship and corporate governance has been a hot topic this past week.  While the commentary has been enlightening, it’s always good to reflect on the primary sources.  To that end, I have collected below a series of what I perceive to be interesting quotes from the relevant opinions as follows (I also included an excerpt from a law review article referencing Reg FD, which has something to say about the extent to which we need to protect insider communications with analysts):

1.  Dirks v. S.E.C., 

2.  United States v. Newman, 

3.  United States v. Salman, 

4.  Delaware Cnty. Employees Ret. Fund v. Sanchez, 

5.  Dirks v. S.E.C. (dissent, excerpt 1),

6.  Dirks v. S.E.C. (dissent, excerpt 2), and 

7.  Donna M. Nagy & Richard W. Painter, Selective Disclosure by Federal Officials and the Case for an Fgd (Fairer Government Disclosure) Regime.

Obviously, Sanchez may be viewed as an outlier here, but perhaps this will spur some creative work on how the standard for director independence might inform the standard for improper tipping or vice versa.

Two weeks ago I wrote my first in a series of posts on the SEC’s proposed liquidity and redemption rules for mutual funds.  The first post, available here, focused on swing pricing.  Today’s post will focus on the liquidity management proposals contained in the proposed rules to address liquidity risk.

The proposed rules would require all open end mutual funds (not UITs, closed-end funds or money management funds) to create a written liquidity management program and to disclose it to the SEC via the proposed forms N-CEN and N-PORT.  Under the plan, funds would (1) classify and conduct ongoing reviews of liquidity of each of the fund’s positions in portfolio assets, (ii) assess and conduct periodic reviews of the fund’s liquidity risk, and (iii) manage the fund’s liquidity risk through a set-aside minimum portion of fund assets that are convertible within 3 business days at a price that does not materially affect the value of that asset immediately prior to sale.

Liquidity risk is born of concern that a fund “could not meet requests to redeem shares issued by the fund that are expected under normal conditions, or are reasonably foreseeable under stressed conditions, without materials affecting the fund’s net…

Alicia Plerhoples (Georgetown) has the details about the first benefit corporation IPO: Laureate Education.*

She promises more analysis on SocEntLaw (where I am also a co-editor) in the near future.

The link to Laureate Education’s S-1 is here. Laureate Education has chosen the Delaware public benefit corporation statute to organize under, rather than one of the states that more closely follows the Model Benefit Corporation Legislation. I wrote about the differences between Delaware and the Model here.

Plum Organics (also a Delaware public benefit corporation) is a wholly-owned subsidiary of the publicly-traded Campbell’s Soup, but it appears that Laureate Education will be the first stand-alone publicly traded benefit corporation.

*Remember that there are differences between certified B corporations and benefit corporations. Etsy, which IPO’d recently, is currently only a certified B corporation. Even Etsy’s own PR folks confused the two terms in their initial announcement of their certification.

Last night, I took my husband (part of his birthday present) to see The Illusionists, a touring Broadway production featuring seven masters of illusion doing a three-night run in Knoxville this week.  I admit to a fascination for magic shows and the like, an interest my husband shares.  I really enjoyed the production and recommend it to those with similar interests.

At the show last night, however, something unusual happened.   I ended up in the show.  I made an egg reappear and had my watch pilfered by one of the illusionists.  It was pretty cool.  After the show, I got kudos for my performance in the ladies room, on the street, and in the local gelato place.

But I admit that as I thought about the way I had been tricked–by sleight of hand–into performing for the audience and allowing my watch to be taken, I realized that these illusionists have something in common with Ponzi schemers and the like–each finds a patsy who can believe and suckers that person into parting with something of value based on that belief.  That’s precisely what I wanted to blog about today anyway–scammers.  Life has a funny way of making these kinds of connections . . . .

So, I am briefly posting today about a type of affinity fraud that really troubles me–affinity fraud in which a lawyer defrauds a client.  Most of us who teach business law have had to teach, in Business Associations or a course on professional responsibility, cases involving lawyers who, e.g., abscond with client funds or deceive clients out of money or property.  I always find that these cases provide important, if difficult, teaching moments: I want the students to understand the applicable law of the case, but I also want them to understand the gravity of the situation when a lawyer breaches that all-important bond of trust with a client.