Monday, August 31, 2015
Andrew Vollmer, a law professor at the University of Virginia and a former SEC deputy general counsel, has written two excellent papers on SEC enforcement.
The first, SEC Revanchism and the Expansion of Primary Liability under Section 17(a) and Rule 10b-5, is a critical look at the SEC’s decision in the Flannery administrative proceeding. If you’re a securities lawyer and you’re not familiar with Flannery, you should be. It stakes out a number of broad interpretations of liability under Rule 10b-5 and section 17(a) of the Securities Act. I (and Professor Vollmer) believe some of those positions are inconsistent with Supreme Court precedent, but the SEC’s is clearly trying to set up an argument for judicial deference under Chevron.
Professor Vollmer’s second article is Four Ways to Improve SEC Enforcement. He discusses the problems with SEC administrative proceedings and how to fix them.
Both articles are definitely worth reading.
Friday, August 28, 2015
I don't agree with SEC Commissioner Luis Aguilar on many issues. But I agree with his recent call for transparency in the disqualification waiver process.
A number of SEC rules, such as some of the offering registration exemptions, are not available to companies that have engaged in certain misbehavior in the past. But the SEC has the authority to waive those disqualifications, and it often does. Or, I should say, the SEC staff often does. As Commissioner Aguilar points out, the commissioners are often unaware that a waiver has been requested. And, as with staff no-action letters, it's often unclear why some waivers are granted and others are not.
I'm not a fan of the whole idea of discretionary waivers. Allowing government employees to waive the law on a case-by-case basis with little explanation strikes me as inconsistent with the rule of law. But, if we're going to have them, the process should be as transparent as possible.
Monday, August 24, 2015
I begin my 30th year of law teaching today. I can still remember that hot August day I first stepped into the huge, tiered classroom at SMU. Standing on the raised platform facing a mob of over a hundred eager students. The low hum generated by dozens of pre-class conversations. The feeling of inferiority as all those pairs of eyes checked out the newest professor.
I was scared to death. I had spent the summer reviewing the law of business associations—reading and highlighting the casebook; reading a corporate law treatise; reading law review articles. I had extensive teaching notes in front of me that first day, some of them cribbed from class notes that the late Alan Bromberg had generously shared with me. But I didn’t have a clue how to teach. For the most part, I was mimicking what my own law school professors had done, without realizing why they had done what they did.
It didn’t go well at first. I was shy and hesitant, and students could sense my lack of confidence. Many of the students weren’t as prepared as I’d hoped, and I wasn’t sure how to draw them out and build on what they understood. Some of the students weren’t that eager to learn the law of business associations, and I didn’t have a clue how to motivate them. My first-semester evaluations were horrible.
Things have changed significantly since I began teaching. I’ve changed. I’m no longer afraid as I walk into the classroom; decades of teaching have turned my fear into just a slight tinge of anxiety. The evaluations aren’t as bad; I’ve learned how to teach, and I succeed more often than not. I have even won teaching awards.
The classroom has also changed. When I started teaching, I wasn’t competing with Facebook, online shopping, and email. I don’t think anyone in my first class had a laptop. When I started teaching, PowerPoint wasn’t an option. SMU didn’t even have whiteboards; I had to regularly brush chalk off my clothes. When I started teaching, professors distributed syllabi and supplemental reading via photocopy and e-books weren’t available. Today, I distribute all supplemental material over the Internet and one of my courses is wholly online.
Some things haven’t changed that much. Some of the students are still underprepared. Some of them still aren’t that interested in business associations, taking the class only because they know it will be on the bar. And it’s still a chore to end that hum of pre-class conversations when it’s time to start.
But it’s been a great career. I enjoy what I’m doing, except when administrative hassles interfere with my teaching and research—something that, unfortunately, seems to happen more often with seniority.
If you’re new to law teaching, persevere through the challenges. Learn as your students learn and try to have fun. Law teaching is an awesome responsibility, but, in spite of the struggles, it can be an incredibly rewarding experience. I hope you too can look back after thirty years with a feeling of satisfaction and accomplishment.
If you're a student, give those new teachers a break. They're learning, just like you. Take out your frustrations on the old fogies like me.
Friday, August 21, 2015
One of the hardest things for me as a writer is knowing when I'm done. September's Harvard Business Review (p. 128) has a great quote from Salman Rushdie on that question. They asked him how he knows he's finished a book. He says:
"There's a point at which you're not making it better; you're just making it different. You have to be good at recognizing that point."
Monday, August 17, 2015
Bad PowerPoint is ubiquitous. PowerPoint presentations are like writing: anyone can do them, but few people can do them well. And the number of people who think they do them well is much greater than the number of people who actually do.
As anyone who has attended a legal conference can attest, many of us don't have a clue about how to design effective PowerPoint presentations. The result is distracted audiences, confusing presentations, and ineffective teaching.
The fault is not in the PowerPoint tool. The fault is in how people use the tool. As Peter Norvig has said,
PowerPoint doesn’t kill meetings. People kill meetings. But using PowerPoint is like having a loaded AK-47 on the table: You can do very bad things with it.
As I mentioned in an earlier post, I spoke at this summer’s annual conference of the Center for Computer-Assisted Legal Instruction (CALI). My topic was How to Ruin a Presentation with PowerPoint. That presentation is now available on YouTube.
My presentation focuses on some of the most common mistakes people make in creating PowerPoint presentations and discusses how to improve your PowerPoint presentations. My comments aren’t limited to the Microsoft product. Almost everything I say is also applicable to other presentation software and most of what I say also applies to graphics created for videos.
My focus is on slide design and content, not on the intricacies of PowerPoint. I don’t try to teach you all the magic things PowerPoint can do or make you a power user of PowerPoint. In fact, many of the amazing things PowerPoint can do aren't particularly good for presentations. Instead, I point out the horrors of bad PowerPoint and give people some simple hints for making more effective presentations.
The hour-long presentation is here, if you want to watch it.
The CALI conference, as usual, included a number of excellent presentations on teaching with technology and innovations in legal education. You can see all of the videos here.
If you're an academic interested in technology, you really ought to attend one of the CALI annual conferences. There's a nice mix of law school technologists, librarians, and faculty. I always learn something new. Everyone I know who has gone has come away wanting to go again.
Monday, August 10, 2015
As I continue my (futile?) quest to exhaust my electronic reading pile before the fall semester begins, I recently read a nice article on business lawyering: Praveen Kosuri, Beyond Gilson: The Art of Business Lawyering, 19 LEWIS & CLARK L. REV. 463 (2013), also available on SSRN here.
Kosuri asks what distinguishes great business lawyers, and develops a three-tiered pyramid of the skills that transactional business lawyers need. At the bottom of the pyramid are what Kosuri calls foundational skills: reading and understanding contracts; research and drafting; financial literacy; and a basic knowledge of business law. The next level of the pyramid, which Kosuri calls transitional skills, includes negotiation; structuring deals; risk management; and transaction cost engineering. The top level of the pyramid, which Kosuri calls optimal skills, includes understanding business; understanding people; problem-solving; and advising.
Kosuri then considers who would be best at teaching each of those categories of skills and how to teach them. I don’t agree with everything he says, but the article is insightful and certainly worth reading.
Here’s the abstract:
Thirty years ago, Ronald Gilson asked the question, “what do business lawyers really do?” Since that time legal scholars have continued to grapple with that question and the implicit question of how business lawyers add value to their clients. This article revisits the question again but with a more expansive perspective on the role of business lawyer and what constitutes value to clients.
Gilson put forth the theory of business lawyers as transaction cost engineers. Years later, Karl Okamoto introduced the concept of deal lawyer as reputational intermediary. Steven Schwarcz attempted to isolate the role of business lawyer from other advisors and concluded the only value lawyers added was as regulatory cost managers. All of these conceptions of business lawyering focused too narrowly on the technical skills employed, and none captured the skill set or essence of the truly great business lawyer. In this article, I put forth a more fully developed conception of business lawyer that highlights skills that differentiate great business lawyers from the merely average. I then discuss whether these skills can be taught in law schools and how a tiered curriculum might be designed to better educate future business lawyers.
Monday, August 3, 2015
My law school, the University of Nebraska, is hiring. Here are the details:
Entry-Level or Experienced Faculty Position
The UNIVERSITY OF NEBRASKA COLLEGE OF LAW invites applications for entry-level and lateral candidates for one or more tenure-track or tenured faculty positions. Our curricular needs include Business Associations, Evidence, Wills and Trusts, and Civil Procedure. Other needs include courses related to
- Criminal Law (e.g., Federal Criminal Law or White Collar Crime, Criminal Procedure 2, PostConviction Remedies, or Criminal Sentencing);
- Health Care (e.g., Federal Regulation of Health Care Providers, Health Care Finance, Torts, Administrative Law, Medical Malpractice, Privacy Law, Law and Medicine, Public Health Law, Bioethics and the Law, and the Law of Provider and Patient);
- Litigation Skills and Related Courses (e.g., Trial Advocacy, Civil Rights Litigation, Pretrial Litigation or other litigation skills courses, Conflicts of Laws);
- Business Law (e.g., Corporate Finance, Corporate Governance, Insurance Law, Bankruptcy, Corporate Restructuring, Nonprofit Organizations, Risk Management / Compliance, or White Collar Crime);
- Patent Law and International Intellectual Property;
- Family Law;
- Education Law; and
- Election Law.
Minimum Required Qualifications: J.D Degree or Equivalent, Superior Academic Record, Demonstrated Interest in Relevant Substantive Areas. Title of Asst/Assoc/or Full Professor will be based on qualifications of applicant. Please fill out the University application, which can be found at http://employment.unl.edu/postings/45473, and upload a CV, a cover letter, and a list of references. General information about the Law College is available at http://law.unl.edu/. The University of Nebraska-Lincoln is committed to a pluralistic campus community through affirmative action, equal opportunity, work-life balance, and dual careers. Review of applications will begin on August 20, 2015, and continue until the position is filled. Contact Associate Dean Richard Moberly, Chair, Faculty Appointments Committee, University of Nebraska College of Law, Lincoln, NE 68583-0902, or send an email to email@example.com.
Civil Clinical Position
The UNIVERSITY OF NEBRASKA COLLEGE OF LAW invites applications for entry-level and lateral candidates for a tenure-track faculty position to teach in its Civil Clinic. The position may also include teaching a classroom law school course on evidence, pretrial litigation, trial advocacy, or related subjects. In Fall 2016, Nebraska Law will open a new, state-of-the-art clinic building to house all of its clinics together.
Minimum Required Qualifications: J.D Degree or Equivalent, Superior Academic Record, Demonstrated Interest in Relevant Substantive Areas. Title of Asst/Assoc/or Full Clinical Professor will be based on qualifications of applicant. General information about the Law College is available at http://law.unl.edu/. Please fill out the University application, which can be found at http://employment.unl.edu/postings/45475, and upload a CV, a cover letter, and a list of references. The University of Nebraska‑Lincoln is committed to a pluralistic campus community through affirmative action, equal opportunity, work-life balance, and dual careers. Review of applications will begin on August 20, 2015 and continue until the position is filled. Contact Associate Dean Richard Moberly, Chair, Faculty Appointments Committee, University of Nebraska College of Law, Lincoln, NE 68583-0902, or send an email to firstname.lastname@example.org.
I'm not on our Appointments Committee, but feel free to contact me if you have any questions, particularly about our business law needs.
Should We Include More International Materials in the Basic Business Associations and Securities Regulation Courses?
Joan Heminway’s post last week about comparative corporate law got me thinking about international coverage in my own courses. Joan’s post reviewed a book designed for a stand-alone comparative corporate law course, but I’ve been wondering whether we should include more comparative material in the basic business associations and securities regulation courses.
The case for discussing the corporate and securities law of other countries is clear. Capital markets are becoming increasingly global. U.S. companies are selling securities in other countries and U.S. investors are investing in foreign companies. Initially, globalization affected primarily large multinational companies, but with the expanding use of the Internet to sell securities, even the smallest business can offer securities to investors in other countries.
Under the internal affairs rule, it’s the corporate law of the country of incorporation that’s important, no matter where the lawyer is practicing or where the corporation or the shareholder is located. And a company selling securities to investors outside the U.S. needs to consider the effect of other countries’ securities laws. Foreign counsel may be retained to deal with such issues, but shouldn’t the U.S. lawyer have at least a rudimentary understanding of foreign corporate and securities laws and how they differ from U.S. law?
I spend no time on comparative analysis in either my business associations or my securities regulation course.
I could blame the textbook authors. The book I use in Business Associations includes almost nothing about corporate law outside the United States. That’s typical. Franklin Gevurtz has written a wonderful supplement on comparative corporate law, Global Issues in Corporate Law, but business associations casebooks generally ignore comparative issues.
The book I use for Securities Regulation covers the application of U.S. registration requirements and antifraud rules to transactions outside the United States, but it doesn’t discuss foreign securities law. (A prior edition did, but that material was eliminated from the most recent edition.) This book’s approach is also typical. Other securities regulation casebooks cover the extraterritorial application of U.S. law, but offer little or no comparative analysis of the law of other jurisdictions.
The casebook authors ought to do more, but that’s an inadequate excuse. I include a lot of supplemental material that isn’t in the textbook, especially in Business Associations. It wouldn’t be too hard for me to create supplemental material to add a comparative perspective to my courses.
Perhaps this is just one of those areas where I have fallen into the rut of teaching what my professors taught me. My memory may be faulty, but I don’t recall any international coverage when I took those courses 30+ years ago—which is interesting, because my Corporations professor, Detlev Vagts, was a noted international law scholar.
But it’s mostly an issue of time. At most law schools, corporate and securities law is crammed into a few credit hours, unlike constitutional law other, more favored subjects I won’t name. I, like most corporate law teachers, don’t have the luxury of adding topics. It’s hard enough to cram agency, partnership, limited partnership, limited liability companies, corporations, and some securities law into a single four-hour Business Associations course.
Nevertheless, I’m going to review my coverage carefully and see if I can sneak in more comparative materials. In today’s global environment, even students in Nebraska ought to be exposed to at least some foreign corporate and securities law.
Monday, July 27, 2015
As the summer progresses, I have been slowly catching up on all the giant electronic reading pile I slowly built up during the school year. I recently read a very interesting article on personal jurisdiction, of all things. It’s Tanya J. Monestier, Registration Statutes, General Jurisdiction, and the Fallacy of Consent, 36 Cardozo L. Rev. 1343 (2015), available on SSRN here. It's definitely worth reading, whether you're a corporate litigator or just interested in corporate law.
Here’s the abstract, which explains the article much better than I could:
In early 2014, the Supreme Court issued a game-changing decision that will likely put corporate registration as a basis for personal jurisdiction center stage in the years to come. In Daimler AG v. Bauman, the Court dramatically reined in general jurisdiction for corporations. The Court in Daimler held that a corporation is subject to general jurisdiction only in situations where it has continuous and systematic general business contacts with the forum such that it is “at home” there. Except in rare circumstances, a corporation is “at home” only in its state of incorporation and the state of its principal place of business. Plaintiffs who are foreclosed by Daimler from arguing continuous and systematic contacts with the forum as a basis for jurisdiction will now look to registration statutes to provide the relevant hook to ground personal jurisdiction over corporations.
Each of the fifty states has a registration statute that requires a corporation doing business in the state to register with the state and appoint an agent for service of process. A considerable number of states interpret their registration statutes as conferring general, or all-purpose, jurisdiction over any corporation that has registered to do business under the state statute. Those states that regard registration as permitting the exercise of general jurisdiction usually justify the assertion of jurisdiction on the basis of consent. That is, by knowingly and voluntarily registering to do business in a state, a corporation has consented to the exercise of all-purpose jurisdiction over it.
Registration to do business as a basis for general jurisdiction, however, rests on dubious constitutional footing. Commentators have approached the analysis from a variety of perspectives over the years. The analysis tends to focus on how courts have misread historical precedent and failed to account for the modernization of jurisdictional theory post-International Shoe Co. v. Washington. Largely unexplored, however, is the premise underlying registration-based general jurisdiction: that registration equals consent. In this Article, I argue that general jurisdiction based on registration to do business violates the Due Process Clause because such registration does not actually amount to “consent” as that term is understood in personal jurisdiction jurisprudence. I comprehensively explore why it is that registration cannot fairly be regarded as express (or even implied) consent to personal jurisdiction. First, I look at other forms of consent in the jurisdictional context — forum selection clauses and submission — and analyze the salient differences between these and registration. Second, I examine the nature of the consent that is said to form the basis for general jurisdiction and argue that it is essentially coercive or extorted. Coerced consent, an oxymoron, cannot legitimately form the basis for the assertion of general jurisdiction over a corporation. From there, I situate registration statutes in a larger conversation about general jurisdiction. I maintain that registration-based jurisdiction does not fit well into the landscape of general jurisdiction: it could eliminate the need for minimum contacts altogether; it results in universal and exorbitant jurisdiction; it is conceptually misaligned with doing business as a ground for jurisdiction; and it promotes forum shopping.
The subject is not one that I would be naturally attracted to. I don’t teach civil procedure and I don’t spend a lot of my professional time focusing on litigation issues. But I found Professor Monestier’s article very interesting and enjoyable. Even if you, like me, aren't a civil procedure junkie, it's worth checking out.
Friday, July 24, 2015
Cynthia Bond, a professor at John Marshall Law School, is surveying law professors on their use of popular culture in teaching. Here's Professor Bond's call for participants:
Greetings Law Teacher Colleagues:
I am working on an article this summer on uses of popular culture in the law school classroom. I am defining popular culture broadly to include mass culture texts like movies, TV shows, popular music, images which circulate on the internet, etc, and also any current events that you may reference in the classroom which are not purely legal in nature (i.e. not simply a recent court decision).
To support this article, I am doing a rather unscientific survey to get a sense of what law professors are doing in this area. If you are a law professor and you use popular culture in your class, I would be most grateful if you could answer this quick, anonymous survey I have put together:
Thanks in advance for your time and have a wonderful rest of summer!
The John Marshall Law School
The survey only takes a few minutes, so, if you're a law professor, it won't take much time to support a colleague's research.
Monday, July 20, 2015
The people at New Media Rights, a non-profit affiliated with the California Western School of Law, have developed an interesting new legal app called The Fair Use App. It is designed to help filmmakers and video editors understand the fair use doctrine in U.S. copyright law. The app runs users through a series of questions about their use of others’ content and explains how their answers to each question affect the availability of the fair use doctrine. In effect, it’s a digital flowchart.
Fair use is a complicated, multi-factor analysis, so there is no final yes-no answer. But this app would be a good start for a filmmaker trying to understand the law.
The app’s not perfect. For example, at one point, it asks if the content being used is in the public domain, with no explanation of what that means. I doubt most lay people would know exactly what that means. And I’m not a copyright expert, so I can’t say whether it’s substantively correct on all points. But, assuming it is, it’s a good tool. Consulting with an experienced copyright lawyer would be better, but most of the people using this app wouldn’t consult a lawyer anyway because they can’t afford a lawyer. This app is better than their alternative—no help at all.
I think there should be more tools like this, aimed at people who can’t afford lawyers. For some time, I have been thinking about developing something similar to explain the Securities Act registration requirements and exemptions to startup entrepreneurs raising capital. Many of those people start raising funds without consulting a securities lawyer, and many of them inadvertently violate the law (one reason I think there should be an unconditional de minimis exemption for offerings below a certain amount). An app like this could at least warn them of the dangers.
Legislators and regulators often forget that there is a tier of regulated people out there who can’t afford counsel and won’t understand the regulations. Thanks to people like New Media Rights for doing something to serve those people.
It doesn't take long to run through the app. If you're interested, it's available here.
Monday, July 13, 2015
Hi, my name is Steve, and I'm an academic.
I'm paid to express my opinions. The more I publish, the greater the rewards: tenure, promotion, raises, summer research grants, chaired professorships, conference invitations.
My situation isn't unique. The reward structure is the same at most law schools and in the rest of higher education. The more you write, the more you get.
I once asked a dean (who shall remain nameless) what would happen if a faculty member received a summer research grant and the research didn't pan out, didn't produce anything worth publishing. The dean said that never happens because you can find an outlet to publish almost anything.
But do we really need all that "scholarship"? Would the world be any worse if I and other academics spent more time thinking and crafting a few high-quality articles that really added to the discussion, instead of trying to keep up the stream of constant publication? Would law and legal education suffer if we cut the number of law review articles in half?
Incentives are part of the problem. I have been in law teaching for 29 years, and my sense is that the pressure to publish is increasing. Quantity is surpassing quality as the prime criterion. When I entered legal education, two good articles was probably sufficient for tenure. Now, many untenured professors tell me they feel pressured to produce at least one article every year.
Another part of the problem is us. Sometimes, you don't have anything worthwhile to say. Sometimes, you realize you don't have anything worthwhile to say. Unfortunately, academics have big egos and, for many of us, the latter set is much smaller than the former, as illustrated by this Venn diagram.
And maybe part of the problem is generational. (WARNING: OLD FART ABOUT TO RANT ABOUT THE YOUNGSTERS) In a world where everything immediately goes to Facebook or Twitter, constant publication of low-quality material has become the norm. But, in defense of younger academics, the problem may be getting worse, but it's not new.
For whatever reason, we're overindulging in scholarship. Perhaps we need an Academics Anonymous, with a sponsor to call every time we're about to add more fodder to law reviews. "Hi, my name is Steve, and I'm an academic."
Monday, July 6, 2015
I have been reading Paul Mahoney’s brilliant new book, Wasting a Crisis: Why Securities Regulation Fails (University of Chicago Press 2015). You should too.
Mahoney attacks the traditional market failure rationale for our federal securities laws. He argues that contrary to the traditional narrative, market manipulation was not rampant prior to 1933 and the securities markets were operating reasonably well. Mahoney concludes that “‘lax’ regulation was not a substantial cause of the financial problems accompanying the Great Depression and . . . most (although not all) of the subsequent regulatory changes were largely ineffective and in some cases counterproductive.”
Mahoney looks at state blue sky laws, the Securities Act, the Exchange Act, the Public Utility Holding Company Act, and, regrettably only briefly, the Investment Company Act. He concludes by discussing the Sarbanes-Oxley and Dodd-Frank Acts. He discusses the rationales for each regulation and whether those rationales are supported by the facts. Mahoney backs up his argument with a great deal of empirical research, some of which has appeared in earlier articles. Warning: Some of that discussion may be a little difficult for those without a background in regression analysis or financial economics, but you can follow Mahoney’s conclusions without understanding all of the analytical detail.
Mahoney’s work is a nice counterpoint to the narrative that prevails in most securities treatises and casebooks. Every law library should have a copy. Everyone interested in securities regulation policy, and certainly everyone who teaches a securities law course, should read this book. Whether or not you ultimately agree with Mahoney (as it happens, I generally do), his arguments must be dealt with.
Monday, June 8, 2015
I was reading an article on securities crowdfunding in China and came across this description of Chinese practice:
Generally, in China, equity-based crowdfunding capital-seekers rely on the strength of experienced, leading investors to advise “follow-up” investors in locating investment projects. Leading investors are usually professionals with rich experience in private offerings and label themselves as holding innovative techniques in investment strategies and possessing sound insights. On the contrary, follow-up investors usually do not have even basic financial skills, but they do ordinarily control certain financial resources for investment. When a leading investor selects a target investment project through an equity-based crowdfunding platform, the leading investor usually invests personal funds into the project. Crowdfunding capital- seekers then take advantage of the leading investor’s funds to market the project to follow-up investors.
(This is from a recent article by Tianlong Hu and Dong Yang, The People’s Funding of China: Legal Developments of Equity Crowdfunding-Progress, Proposals, and Prospects, 83 U. CIN. L. REV. 445 (2014).)
This is not unique to China. Private offerings to accredited investors in the United States often follow a similar path. Smaller investors are more likely to commit once a well-known, sophisticated investor has made a commitment. But the article made me wonder if we could use that structure to create a new securities offering exemption—one that responds to some of the policy concerns people have about the existing exemptions.
Most unregistered primary offerings of securities in the United States are pursuant to Rule 506 of Regulation D, the regulatory safe harbor for the private offering exemption in the Securities Act. Offerings pursuant to Rule 506, either by law [Rule 506(c)] or for practical reasons [Rule 506(b)], are limited to “accredited investors,” a defined term.
Many people have argued that the definition of accredited investor in Regulation D is too broad. Some of the investors covered by the definition are sophisticated institutional investors who clearly can fend for themselves. But the definition also includes many unsophisticated individuals who meet relatively low net worth and income requirements. Many of these investors, it is argued, cannot adequately evaluate the merits and risks of Rule 506 private offerings.
On the other hand, some people have complained that limiting these offerings to accredited investors privileges wealthy people at the expense of “ordinary” investors. Rich people have the opportunity to participate in these sometimes-lucrative offerings, but the rest of us cannot. That was one of the arguments for the not-yet-implemented section 4(a)(6) crowdfunding exemption added by the JOBS Act.
One way to resolve the tension between these two arguments, and deal with both concerns, would be to allow unsophisticated investors to invest in an offering only after a sophisticated investor has made a commitment. Ordinary investors might not be able to protect themselves, but they could free ride on the sophisticated investor’s evaluation of the offering.
We could create a new category of super-accredited investors, consisting only of institutions or individuals who clearly have the sophistication to protect themselves. Once one of those investors purchases a significant stake in an offering, other investors could purchase on the same terms.
For example, if Startup Corporation wanted to raise $50 million in an unregistered offering, it could first sell $10 million of the securities to a large venture capital firm. After that, it would be free to sell the remaining $40 million on the same terms to any investor, accredited or non-accredited, wealthy or not.
The lead investor’s evaluation of the offering wouldn’t completely protect the other investors. In particular, the lead investor’s tolerance for risk might be much higher than most ordinary investors’. But lead investor's evaluation would help protect against fraud and overreaching by the issuer.
The exemption would have to include some additional requirements to make sure that the other investors can reasonably rely on the lead investor’s decision to invest:
1. No conflicts of interest. The lead investor could not have a relationship to the issuer. Otherwise, the lead investor’s decision to invest might be due to that relationship, not because it believes the investment is a good one.
2. Minimum Investment. There should be a minimum investment requirement for the lead investor, to give the lead investor sufficient incentive to review the deal. To take an extreme example, a lead investor’s decision to invest $1 in a $50 million offering tells us little about the quality of the deal.
3. Same Terms. The lead investor must be investing on the same terms as the subsequent investors. The lead investor’s decision that an investment is worthwhile offers no protection at all to subsequent investors if those subsequent investors are getting a materially different deal.
4. Exit. If the lead investor’s decision to invest provides a signal to the other investors, so does the lead investor’s decision to exit the investment. At a minimum, the lead investor should have to disclose to the other investors when it sells. And, if the issuer is repurchasing the lead investor’s securities, we might want to impose a requirement that the issuer also offer to repurchase the securities of the other investors who purchased in the exempted offering.
This is just a sketch of what such an exemption would look like, about as far as one can go in a blog post. The proposed exemption would not be perfect. It wouldn’t guarantee that investors were getting a good deal, or even that the offering was not fraudulent. But even registration can’t do that. And I think the proposal is a nice compromise between investor protection and capital formation concerns.
Monday, June 1, 2015
I just read an interesting essay on the debate about creating “practice-ready” graduates: Robert J. Condlin, “Practice Ready Graduates”: A Millennialist Fantasy, 31 TOURO L. REV. 75 (2014), available on SSRN here.
Condlin rejects the notion of making law school graduates practice-ready. He argues that the practice-ready movement is a mistaken response to the downturn in the market for lawyers and that law schools cannot and should not make law students practice-ready. Regardless of your position on this issue, Condlin’s article is definitely worth reading.
Friday, May 29, 2015
A while ago, I noted a New York Times article about the effect of SEC Chair Mary Jo White's recusals from cases because of her husband's work at Cravath. The Times has a follow-up today. Apparently, the 2-2 split that results when Ms. White recuses herself is causing some real enforcement headaches, including missing a statute-of-limitations deadline.
Monday, May 25, 2015
In Flanders fields the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.
We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie
In Flanders fields.
Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields.
-John McCrae, In Flanders Fields
Today is Memorial Day. Before you run to the beach or the park, or wherever you’re spending the holiday, take a moment to remember those dear soldiers who have fallen. They won’t be going to the beach or park today. They gave their lives so you could live.
You may think, as I do, that some of our more recent battles were better not fought, but that doesn’t make the sacrifices of the soldiers who fought in them any less noble or honorable. The loss of life is even more tragic or regrettable when stupid politicians needlessly send young men and women off to die.
To those of you who have lost loved ones in battle, my heartfelt condolences. To those who have fallen, my eternal gratitude for your sacrifice.
Monday, May 18, 2015
You may recall my blog post this fall about the Delaware Chancery Court opinion in In Re Nine Systems Corporation Shareholders Litigation. That case discusses what happens when a self-dealing transaction results in a fair price, thus causing no damage to the corporation, but the process followed was fair. The court held that the plaintiff could still recover attorneys' fees and costs. I noted that the only people likely to be satisfied with that result were plaintiffs' attorneys. (It makes no difference to the plaintiffs in the case because they had a contingent fee agreement with their attorneys-no recovery, no attorneys' fees to be paid.)
The Chancery Court just entered its order awarding plaintiffs' counsel, Jones Day, $2 million dollars in attorneys' fees and expenses. That's right, the attorneys get $2 million even though, as the Vice Chancellor notes, "the quantifiable benefit obtained in this litigation was $0." Thus, the defendants have to pay $2 million to counsel for helping the court determine that nothing they did harmed the corporation or its shareholders.
It could have been worse; plaintiffs' counsel asked for $11 million.
I'm afraid that this opinion will give plaintiffs' attorneys an incentive to search for problems with the process in conflict-of-interest cases just so they can get in on the Nine-Systems action and collect attorneys' fees. No harm to the corporation? No problem!
Thursday, May 7, 2015
Last year, I blogged about a Fourth Circuit case, Prousalis v. Moore, which held that the Janus Capital definition of “maker” in Rule 10b-5 did not apply in criminal cases. For those who are interested, a short article on wrote on that topic, “Make” Means “Make”: Rejecting the Fourth Circuit’s Two-Headed Interpretation of Janus Capital, is now available on SSRN.
The paper is to be included in a symposium honoring the late Alan Bromberg, an outstanding securities scholar, as well as a mentor and friend.
Monday, May 4, 2015
In some European countries, bank interest rates have dropped below zero. (See here and here.) That’s right; it actually costs you to put your money in the bank. You put $1,000 in a savings account and the bank promises to pay you, say, $999, in a year.
I came of age in the Gerald Ford/Jimmy Carter years, when annual inflation rates were in the double digits. Whip Inflation Now! (Yes, children, I’m ancient.) I find it almost unbelievable that nominal interest rate (and bond yields) could drop below zero.
That hasn’t happened in the United States (yet), but what if it did? Set aside the huge macroeconomic issues, and let’s focus on a topic of greater interest to the readers of this blog—the effect on federal securities law, particularly the core notion of what constitutes a security.
The most important case in defining the scope of federal securities law is probably SEC v. W.J. Howey Co., 328 U.S. 293 (1946). Howey says that an investment is an investment contract, and therefore a security, if people invest money in a common enterprise with an expectation of profits coming from the efforts of others.
The “expectation of profits” part of the Howey test is the problem in a negative-interest-rate economy. Assume, for example, that an entrepreneur asks people for money to start a business and promises to return that money, without interest, in two years. In other words, you put in $1,000 and he’ll pay you back $1,000 in two years.
That investment would not ordinarily be treated as a security because there’s no profit. That’s how the Kiva crowdfunding site, which is based on no-interest lending, can avoid federal securities law. But, in a negative-interest world, a mere return of your principal is, in effect, profitable. Considering your opportunity cost, you come out ahead.
If we ever have negative interest rates and the courts hold that no-interest investments are securities, remember that you read it here first.