Hi, everyone – welcome to BLPB at the new place! As you can see, we’ve imported our old posts over here but in the process, the authors got scrambled for a lot of the older ones … we’ll work that out eventually. So! Moving on –

OpenAI’s been in the news, again, and there are some interesting things to talk about.

First, apparently both OpenAI, and Anthropic before it, have been raising funds through SPVs.  The SPV formally invests in the company; the SPV raises the funds from the real investors.

The purpose of that is the securities laws. If OpenAI/Anthropic have too many investors, they’ll have to make public filings.  But each SPV counts as a single investor.  So, by taking investment through SPVs, OpenAI and Anthropic can keep their formal investor count below the threshold of becoming a public company, while in fact raising capital from a dispersed group.

That said, it only works if OpenAI/Anthropic are not the ones organizing the SPVs. If they are, they’re evading the statutory limit on the number of investors a private company can take on.  The SEC’s view is that this trick only works if the SPVs are organized independently…

Yesterday, the Department of Justice unsealed indictments of several cryptocurrency exchange operators for various forms of market manipulation, in coordination with SEC complaints targeting the same conduct.  It turns out there was an elaborate FBI sting operation involved, whereby the FBI actually created a token for the targeted individuals to manipulate.  The FBI set up a website and everything – the website is actually hilarious, because it describes the token with every bit of crypto-futurish-gibberish you can imagine.  To wit:

It almost reads like it was written by AI as a parody, but I hope a real human person got to draft this.  They must be so proud.

Anyhoo, that’s not the only interesting thing.  Here’s what’s also interesting.

Often, when DOJ comes for crypto, it just charges wire fraud.  That way – unlike the SEC – it can avoid getting into a fight about whether a particular token was or was not a security.  But market manipulation, specifically, is a security-related offense.  And the DOJ wanted to get at market manipulation.  By creating its own token, DOJ could be sure that the token satisfied the definition of a “security.”  It designed it to be a security! 

For example, one…

The SEC recently settled an enforcement action against Zymergen for making false projections about its business.  Prior to its IPO in April 2021, many of these projections were given directly to analysts.  Zymergen did not include the projections in its registration statement, because companies are strictly liable to investors for false statements in a registration statement under Section 11 of the Securities Act, and so they generally try to avoid making projections that may turn out to be overly optimistic.  Instead, Zymergen gave the false projections to analysts, so the analysts would take the projections, and use them in building their models, which they would pass on to investors with a recommendation of some sort.

One question then, is, if the SEC had not brought an enforcement action, could Zymergen have been liable to investors for passing on bad info to analysts?

The answer is, maybe not.  Certainly not under Section 11, which only applies to information in a registration statement.  And maybe not under Section 10(b), the general antifraud statute, because Stoneridge v. Scientific-Atlanta holds that public investors are not deemed to “rely” on behind-the-scenes conduct that’s filtered to the public through the false statements of another entity. …

Reincorporations from Delaware to Nevada and elsewhere remain in the news with the Delaware Supreme Court awaiting oral argument in the TripAdvisor case.  I’ve covered the issue here before and written about Nevada with our Secretary of State for the Wall Street Journal.  Nevada offers an alternative to Delaware and a different litigation environment.  In that op-ed, we framed the issue this way:

The likelihood of expensive, meritless or value-destroying litigation leads public companies in Delaware to avoid deals they would otherwise make. Another of the three public companies that recently decided to exit, Fidelity National Financial, explained in a shareholder letter that the state’s approach “may discourage pursuit of transactions the Board might otherwise believe to be in the best interests of the Company and its stockholders” because of litigation costs.

This issue looms particularly large for corporations with significant shareholders. Although Delaware law offers a process for companies to manage transactions with conflicts outside court, Delaware jurists themselves don’t always agree about how much information corporate boards must push out to shareholders to avoid litigation. When the process becomes too costly and cumbersome, deals don’t get done.

This brings me to the most recent reincorporation proxy…

A while ago, I posted about an SEC enforcement action against Wahed Invest.  Wahed Invest is a religious investment advisor that purported to select and monitor investments to ensure compliance with Shari’ah law.  In fact, according to the SEC, it did not in fact have policies in place to assess ongoing Shari’ah law compliance,  

At the time, I noted that I had not before seen an enforcement action based on false nonfinancial representations – that were nonetheless material to investors’ nonfinancial goals – and I compared it to the then-proposed climate change rule’s consideration for the nonfinancial goals of investors.  Specifically, the proposed rule justified, in part, its requirement that companies disclose GHG emissions on the ground that some investors have made net-zero commitments, regardless of whether the emissions data would be financially material to the operating company.

Well, this morning, I learned about a new SEC enforcement action against Inspire Investing.  Like Wahed, Inspire is a religious investment advisor, and like Wahed, it purported to engage in a “biblically responsible” investment strategy that required it to use sophisticated data analysis to ensure no companies in its ETFs engaged in certain prohibited activities.  In fact, its methods were…

The SEC’s ongoing sweep recently resolved potential claims against nine different SEC-registered investment advisory firms for violations of its Marketing Rule.   The firms paid civil penalties ranging from $60,000 to $325,000.  In total, the SEC secured about $1.2 million in civil penalties.

Marketing Rule enforcement sits in an interesting place after the Jarkesy decision.  The Marketing Rule is Advisers Act Rule 206(4)-1.  It’s codified at 17 C.F.R. 275.206(4)-1.  Section 206 of the Advisers Act is an anti-fraud provision.

Jarkesy would seemingly apply to give respondents the right to a jury trial and a federal court proceeding. Although addressing a different portion of the securities laws, the Jarkesy majority put it this way:

According to the SEC, these are actions under the “antifraud provisions of the federal securities laws” for “fraudulent conduct.” App. to Pet. for Cert. 72a–73a (opinion of the Commission). They provide civil penalties, a punitive remedy that we have recognized “could only be enforced in courts of law.” Tull, 481 U. S., at 422. And they target the same basic conduct as common law fraud, employ the same terms of art, and operate pursuant to similar legal principles. See supra, at 10–12. In short, this action

…