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I really enjoyed Matthew Wansley’s new paper, Moonshots, forthcoming in the Columbia Business Review.  He focuses on the complicated incentives involved in performing “moonshot” research, that is, highly risky projects that could dramatically advance a field, but that will take years to develop.  He argues that the venture carveout structure – whereby a startup has public company parents alongside other private investors, and employee incentive ownership, is designed to mitigate the various conflicts and agency costs that would exist among the players, and uses autonomous driving as the major case study.

I haven’t seen much about corporate investment in outside entities – though I gather there has been more written in the business literature, the only other legal paper I’m familiar with is Jennifer Fan’s Catching Disruptions: Regulating Corporate Venture Capital, 2018 Colum. Bus. L. Rev. 341, which offers a detailed descriptive account of how corporate venture capital functions and how it differs from traditional venture capital.  But the two papers together convince me that this is a phenomenon that needs more attention in the legal scholarship.

Professor Julie Hill recently posted Bank Access to Federal Reserve Accounts and Payment Systems.  It’s an excellent and important article.  As I’ve blogged about (here) and written about (here), access to a master account at the Fed is an arcane, but highly important issue.      

Here’s the abstract for Professor Hill’s article:

“Should the Federal Reserve process payments for a Colorado credit union established to serve the cannabis industry? Should the Federal Reserve provide an account for a Connecticut uninsured bank that plans to keep all its depositors’ money in that Federal Reserve account? Should the Federal Reserve provide payment services for an uninsured, government-owned bank in American Samoa? What about Wyoming cryptocurrency custody banks? Should they have access to Federal Reserve accounts and payment systems? Although the Federal Reserve has recently considered account and payment services applications from these novel banks, its process for evaluating the applications is not transparent.

This Article examines how the Federal Reserve decides which banks get access to its accounts and payment systems. It explores the sometimes-ambiguous statutory authority governing the Federal Reserve’s provision of accounts and payments and chronicles the Federal Reserve’s longtime policies limiting access…

The blog has previously covered the ongoing litigation over California’s director diversity statutes, with Ann contributing this insightful writeup of an earlier Ninth Circuit decision.  The case has returned to the Ninth Circuit on appeal again after the District Court denied a motion for a preliminary injunction.   The case involves a shareholder claim challenging SB 826 on the theory that the law exerts pressure on shareholders to unconstitutionally discriminate when they cast their votes for directors in shareholder elections out of fear that electing a board without enough women will subject the corporation to a fine.

I joined with seventeen other securities and business law scholars to file an amicus brief arguing that the shareholder claim should be classified as a derivative claim.  Many thanks to all who joined and many apologies to Faith Stevelman who joined before the filing deadline and sent thoughtful comments.  In the rush to finalize the brief, I didn’t get her name on the final list of amici.  

This is the summary of the argument:

This shareholder derivative litigation should be decided under ordinary rules for shareholder litigation.  Plaintiff has asserted claims and sought a preliminary injunction as a shareholder of OSI Systems, Inc. (OSI). 

…

By now, I’m sure everyone is very much aware that Elon Musk took a giant stake in Twitter, was late filing his Schedule 13G (and failed to include a certification that he intended to hold passively), was added to Twitter’s board, and updated his Schedule 13G to a 13D, leaving a question whether he should have been filing on 13D all along.  Once Musk did reveal his stake, Twitter’s stock price shot up.

The SEC has not historically policed the Schedule 13G/Schedule 13D filing requirements with great vigor, though Gary Gensler has highlighted the potential harm to traders/markets when they trade in ignorance of the presence of a potential activist investor; see also United States v. Bilzerian, 926 F.2d 1285 (2d Cir. 1991) (“Section 13(d)’s purpose is to alert investors to potential changes in corporate control so that they can properly evaluate the company in which they had invested or were investing.” (quotations and alterations omitted)).

Matt Levine asks whether this means Elon Musk engaged in insider trading, since he managed to save maybe $143 million by continuing to amass Twitter stock before finally revealing his holdings.

I’m going to ask something else: do the traders who sold between the time he was supposed to file the 13G, and the time he actually filed it, have a claim?  And it seems pretty much, yes they do.

And boy howdy this got long, so, under the cut it goes:

Recently, I had the pleasure of attending “Avoiding Fraud in the ERA of NIL and Student Athletes,” the inaugural event of the Wilkinson Family Speaker Series at the University of Oklahoma College of Law.  I learned so much and had a chance to meet several of the incredible speakers!  I wanted to share with BLPB readers a summary from Laura Palk, the Assistant Dean of External Affairs, so that those interested in these topics will be on the lookout for future events in this series. 

“OU Law Dean Katheleen Guzman in collaboration with VP for Intercollegiate Athletics, Joe Castiglione, hosted a two-day discussion regarding investor fraud and the student athlete in light of the new name image likeness rules, starting with a fireside chat with former NFL player, Leonard Davis, and his attorney, Graig Alvarez. They were joined by moderator, Lou Straney, to share their story of how athletes are frequently targeted by trusted friends and advisors and how to avoid becoming a target. The next day, Professor Megan Shaner, along with national experts Jeff Abrams, Lisa Braganca, Robert Cockburn, Richard Frankowski, Professor Nicole Iannarone, Jason Leonard, Robin Ringo and Professor Andrew Tuch, presented a symposium educating the OU community and alumni about various types of investment fraud, how to identify…

So the SEC dropped a couple of hundred pages of proposed new rules governing SPAC transactions. 

I’d say the rules fall into three categories: 

First, there are the ones meant to harmonize the regulatory framework for SPACs and for more traditional IPOs, both in terms of requiring disclosures akin to those in the IPO context, and in terms of imposing similar liability regimes, so that SPAC target companies will be vulnerable to Section 11 liability, financial advisors that shepherd the de-SPAC process will be treated as underwriters, and the PSLRA safe harbor will be unavailable for de-SPAC related projections.

(That last point is tricky: As the SEC acknowledged in its release, and as Professor Amanda Rose points out in a paper, because the de-SPAC is a merger, companies may essentially be required to include projections, like the ones that underlie financial advisors’ opinions, in their proxy statements.  Which would mean, unlike in a traditional IPO, there would be no minimizing liability exposure simply by failing to include projections in the SEC filings.  Couple that with Section 11 liability and it could be pretty intense.  That said, the SEC is proposing to require issuers to include climate-related forward-looking information…

Glad to join in on the virtual  symposium that launched earlier this week. I come to this with a bit of experience in bar preparation.  I’ve helped put together bar preparation lectures for a bar prep company on business associations topics before.  Business law has been tested as a component of the Multistate Essay Examination (MEE) for some time now.  The outline for the future bar exam looks different from the outline for business law subjects tested on the MEE.  Here are some things that the MEE now includes that the draft outline omits:

  1. Duty of Obedience
  2. Inherent Agency
  3. Limited Partnerships
  4. Limited Liability Partnerships
  5. Cumulative Voting
  6. Financing
  7. Dissolution
  8. Transfer Restrictions

This isn’t a comprehensive list. The outline is generally shorter and covers less than the subjects flagged as being on the MEE.  This of course raises questions about why these areas are not important enough to make the cut.  Some of these I would cut myself, such as the duty of obedience and inherent agency doctrines.  But I would be interested to know how the NCBE arrives at the decision that some of these subject headings merited inclusion on the MEE, but do not merit inclusion on the…

Not long ago, the SEC filed an enforcement action against robo-advisor Wahed Invest.  Wahed Invest assured clients that it only selected investments that were compliant with a Shari’ah law.  In fact, according to the SEC, in addition to many other fraudulent practices (it claimed to have funds it didn’t have; it claimed to rebalance and didn’t), it also failed to adopt policies and procedures to assure Shari’ah compliance.  As the SEC put it:

While Wahed Invest advertised its adherence to Shari’ah compliant investing, Wahed Invest failed to adopt and implement written policies and procedures reasonably designed to address its Shari’ah advisory decision-making processes and compliance reviews and oversight.

On the Wahed Invest Website, in its marketing materials, and in interviews, Wahed Invest extensively discussed the importance of its income purification process. For example, the Wahed Invest Website stated that Wahed Invest “go[es] the extra mile to ensure your wealth is pure” by creating a “unique annual purification report” for each robo-advisory client, which were provided to clients.

Despite these representations to clients and prospective clients, Wahed Invest had no written policies and procedures addressing how it would assure Shari’ah compliance on an ongoing basis or how it would calculate

…

I’m continuing to read my way through Hilary Allen‘s Driverless Finance.  The second chapter examines how fintech now alters how the financial system manages risk.

She begins by breaking down different kinds of risks.  Systemic risk, of course, is the biggest risk of them all.  It’s really about risks to the entire financial system, not just winners and losers within it.  For example, it doesn’t matter how well-diversified your portfolio is if nuclear war breaks out.  That’s systemic risk. Managing systemic risk is primarily a job for regulators and government.

Investors often need to manage other kinds or risks.  Market risk is about what might happen in the marketplace.  When we think about interest rate risk for bonds, it’s a market risk. Credit risk refers to the risk that a counterparty might not pay you.  There are all kinds of risks and substantial research has been done to look at how to build a portfolio to manage risk.  Financial firms now construct complex models to game out these risks.  There’s even model risk; the risk that your model doesn’t accurately capture the risks!

Allen brings our attention to machine learning and risk management.  We now have rapidly…