Monday, August 25, 2014
This follows on Ann's post yesterday on Gender and Crowdfunding. Ann, so glad you've joined me and Steve Bradford as securities crowdfunding watchers! Delighted to have you in that informal, somewhat disgruntled "club."
I have been interested in whether securities crowdfunding will democratize business finance. (I note here that Steve Bradford's comment to Ann's post raises the broader question of crowdfunding's ability to better engage underrepresented populations in general.) My interest has, however, been more on the investor (backer) side of the crowdfunding equation than on the business (entrepreneur) side.
As Ann notes, given the delay in the Securities and Exchange Commission (SEC) rulemaking under Title III of the Jumpstart Our Business Startups (JOBS) Act, the information on gender and crowdfunding that we have so far comes from other types of crowdfunding. This information may or may not map well to markets in securities crowdfunding. But it's still worth reviewing the information that we do have.
Students often ask me how they can improve their performance in my classes. There’s one thing they can do that will increase their learning with no additional work on their part: stop multitasking.
Multitasking is bad. The research is clear: students, even today’s students who grew up multitasking, learn less when they’re doing other things at the same time. See, for example, here and here. It’s a very simple point: if you surf the Internet, email, text, instant message, talk on the phone, or watch TV while you’re studying (or in the classroom), you learn less. Effective study (and work) requires focus.
It's such an easy, effortless way to improve learning: just focus exclusively on what you’re reading, without any distractions. Turn off instant messaging. Close the web browser and the email program. Silence your phone. Turn off the TV.
I make that point to my students at the beginning of my classes. but, for some of them, it just doesn’t sink in. I guess that shouldn't surprise me: people text while they're driving even as the casualties continue to mount.
I recently found an exercise on the Internet that illustrates the point in a straightforward, simple way. I’m going to distribute it to my students this year (with the author’s permission) and see if it helps. (For what it’s worth, it took me 34 seconds to complete the exercise without multitasking and 52 seconds to do it multitasking.)
Monday, August 18, 2014
I have read about the economic boom in North Dakota. The state has the highest economic growth rate and the lowest unemployment rate in the nation, primarily due to energy production using hydraulic fracking. But I didn’t really appreciate the statistics until I recently had an opportunity to see what that boom looks like “on the ground.”
Last week, my wife and I went to western North Dakota, the heart of the fracking industry, to backpack in Theodore Roosevelt National Park. When we weren’t backpacking, we got a chance to see the North Dakota economy first-hand. What we saw amazed us:
- Motels in remote places like Dickinson and Watford City charging more than $200 a night. Not four-star hotels. Chains like AmericInn and La Quinta. And these are not prime tourist locations. Look for Watford City on a map; it’s in the middle of nowhere. (No disrespect intended to any North Dakota readers, but you have to admit that, but for the fracking boom, Watford City is not prime real estate.)
- Temporary housing everywhere. One reason the hotel rates were high is that many of them are housing workers on a permanent basis. There is a serious housing shortage. We saw literally dozens of mobile home encampments, and apartment rents have skyrocketed.
- Jobs begging for workers. Almost every business we visited had some sort of “jobs available” sign. We saw a sign at one hotel offering bonuses of $500 to $1000 for housekeepers.
- Immigration. Not surprisingly, the low unemployment rate, the relatively high pay, and the available jobs have drawn people from outside the state. Many of the people we talked to were not natives and their time in the state was typically measured in months, and sometimes just weeks.
- Construction everywhere—motels, apartment complexes, grocery stores, strip malls, and roads.
- Thriving businesses. We visited a large grocery store in Watford City, a small town of a few thousand people. Although we were there at early afternoon on a Monday, we were surprised to see every check stand open, with three or four carts lined up for each checker. We asked a local why the store was so busy on a weekday afternoon and he told us it was always that busy.
- Traffic, traffic, traffic. Because of the boom, the infrastructure has not always kept up with the economy. The roads in western North Dakota were packed with oil trucks, pickups, and almost every kind of business vehicle imaginable. At one rural highway intersection in the middle of the fracking area, we waited almost 20 minutes to get through the light.
It’s one thing to read about the boom; it’s another thing entirely to see it.
I don’t know what the effect of all this has been on business lawyers in North Dakota, but my guess is their practices are booming. Someone has to draft all the leases and employment contracts, and at least some of that work is being done within the state. And I suspect there’s a big boom for criminal lawyers as well. As one local told us, there’s a lot of testosterone (most of the oil workers are male) and a lot of liquor, and that’s not a good combination.
Monday, August 11, 2014
Underhill recently released a book, The Emergency Sasquatch Ordinance. The book is a collection of silly, weird, and humorous laws, with commentary by Underhill. The title comes from an ordinance adopted by the board of commissioners of Skamania County, Washington that made it illegal to slay Bigfoot. Apparently, the threat was serious because the county commissioners designated it as an emergency ordinance so it could become immediately effective.
Both Underhill’s selection of laws and his commentary are a little uneven. Some of the laws he features are not that interesting (or funny). And Underhill’s commentary on the laws, while often quite funny, sometimes falls flat. I also wish Underhill would have provided more legislative history. He sometimes does, but not always, and it would be interesting to know what motivated some of these strange laws. But the book contains some real gems, and that alone makes it worth reading.
Some of the laws are funny because of their clear unconstitutionality. In 2011, for example, the Gould, Arkansas city council passed a law that (1) requires city council approval for the mayor or council members to participate in a meeting of any organization; (2) bans the Gould Citizens Advisory Council from doing business in the city; and (3) requires city council approval for any new organization in the city.
Some of them are just weird. A California law, for example, provides that
It is unlawful for any person to immerse or soak the carcass of any slaughtered rabbit in water for a period longer than necessary to eliminate the natural animal heat in the carcass and in no event for a period longer than 2 ½ hours.
Many of them make you wonder whether the legislative body didn’t have more important things to do. One Arkansas law, for instance, specifies how to pronounce Arkansas and another specifies the possessive form of Arkansas. (In case you were wondering, it’s pronounced “By Texas” and the possessive form is “Our’n.”) A Massachusetts statute that I’m sure my wife the law librarian will love makes it illegal to disturb people in a public library by making noise.
But my favorite law from the Underhill book confirms my view of tax law and tax lawyers. According to an Australian law, the tax commissioner may
- Treat a particular event that actually happened as not having happened;
- Treat a particular event that did not actually happen as having happened and, if appropriate, treat the event as having happened at a particular time and having involved particular action by a particular entity; or
- Treat a particular event that actually happened as having happened at a time different from the time it actually happened, or having involved particular action by a particular entity (whether or not the event actually involved any action by that entity).
The Emergency Sasquatch Ordinance is an easy read and each law is in a separate chapter, so it’s easy to pick and choose. It’s worth a look.
Monday, July 28, 2014
The new crowdfunding exemption in section 4(a)(6) of the Securities Act will, once the SEC adopts the rules required to implement it, allow ordinary investors to invest in unregistered securities offerings. Will those unsophisticated investors go down in flames or will they be able to make rational investment choices?
Some proponents of crowdfunding argue that crowdfunding benefits from the so-called “wisdom of the crowd": that the collective, consensus choice that results from crowdfunding is better than what any individual could do alone, and often as good as expert choices. A recent study seems to support that view.
Two business professors—Ethan R. Mollick at the Wharton School and Ramana Nanda at Harvard—looked at crowdfunding campaigns for theater projects. They submitted those projects to people with expertise in evaluating theater funding applications and compared the expert evaluations to the actual crowdfunding results.
Mollick and Nanda found a strong positive correlation between the projects funded by the crowd and those rated highly by the experts. In other words, crowds were more likely to fund the campaigns the experts preferred. In addition, projects funded by the crowd that were not rated highly by the experts did just as well as the projects chosen by the experts.
Of course, theater projects aren’t the same as securities, but this study should certainly be of interest to those following the securities crowdfunding debate. The full study (44 pages) is available here. If you don’t have time to read the full study, a summary is available here.
Tuesday, July 22, 2014
Steve Bainbridge has an interesting response to yesterday's post on law reviews, linking to a number of other interesting posts he has written. Definitely worth reading. (He agrees with me, so he must be correct.)
A number of you commented on my post yesterday. I will get those posted sometime today. Sorry for the delay. My wife and I got back home this morning at 2:30 a.m. from a wonderful vacation trip to San Diego. (Yesterday's post was scheduled in advance; we have a firm no-work rule during vacations.)
Monday, July 21, 2014
A couple of weeks ago, I posted a review of an article on mutual fund fee litigation. In my post, I apologized for reviewing the article “late.”
I thought about the use of the word “late” after I posted. The article has been available on SSRN, the Social Science Research Network, since March, but it has not yet been published in a law review. But, in the world of blogs and instant access to everything, waiting until publication in print truly is late.
Most legal articles are now posted on SSRN as soon as they are finished, and I, like many other law professors, don’t wait until publication to read articles in my areas of interest. I pull those articles straight off SSRN. SSRN helpfully provides subject-specific emails with abstracts and links to newly posted articles.
My first crowdfunding article had hundreds of downloads before it appeared in print. It came out in a law review at almost the same time the final crowdfunding bill passed Congress; if I had not posted it on SSRN, it would have had no chance to affect the debate. (I’m not sure it had much effect anyway. The drafters of the final bill may have heard some of the notes of my composition, but they certainly missed the melody.)
So, in a world where articles are publicly available and read long before they appear in law reviews, what exactly is the value of law reviews? Most of their content is stale by the time it’s published.
Law reviews as filters
Law reviews certainly don’t do much to filter “unworthy” publications. Law reviews have proliferated to the point that almost anything can be published in a law review somewhere.
Law reviews as signals of quality
The law review in which an article appears may signal the article’s quality; if so, that signal usually comes too late. By the time an article appears in print, I and many others have already decided whether to read it. And reading an article’s abstract and introduction usually provides a much better sense of its quality than the journal name attached to it. Faculty members and expert practitioners are much better judges of the quality of articles in our fields than a student editor without significant expertise in the area. I know this is heresy, but even Harvard and Yale sometimes publish crap.
Law review placement also shouldn’t be used as a quality signal in evaluating untenured faculty members. Tenured faculty members who cede judgments of quality to second and third year law students, even the law review editors at prestigious law schools, aren’t doing their job.
Law reviews as editors
Law reviews provide editing, but, in my experience, that editing is as likely to reduce the quality of an article as to improve it. I can think of several instances where student editing made my article marginally better—including one brilliant addition to a footnote in a humorous article I wrote. (Thank you, Northwestern Law Review editors.) But I can also think of several edits inserted at the last minute without my approval that made articles significantly worse. I can’t think of a single instance where student editing kept me from making a serious substantive mistake.
Law reviews and accessibility
Once articles are published in law reviews, they’re available on Westlaw and Lexis, and thus more broadly accessible. But there’s no reason why availability needs to be tied to law review publication. If law reviews didn’t exist, Westlaw and Lexis would find a way to tie into the SSRN system. Or the free, publicly available SSRN system might eventually supplant Westlaw and Lexis, at least for law review articles.
Law review as an educational experience
I have been focusing on the needs of authors and readers. But what about the student editors? Don’t law reviews provide them with a valuable educational experience?
I see little value in educating students in the fine minutiae of Bluebook citation form, and most actual editing is done by students with little or no professional instruction or supervision. Advanced courses in writing, editing, and legal research could provide better instruction more efficiently.
So I repeat—what’s the value of law reviews?
Monday, July 14, 2014
My favorite economic fallacy, which the Reason article doesn’t discuss, is the use of multipliers to falsely exaggerate the effect of government spending. Universities tend to do this a lot: “Every taxpayer dollar spent at Enormous State University results in a $50 gain to the state economy.” To justify claims like this, you simply trace the dollars spent through multiple levels. If the university spends $100 to repair a window, that’s $100 of additional business for a local company. That company, in turn, uses the $100 to pay an employee. The employee uses the $100 to buy groceries at a local grocery store. The store then pays the $100 to a local farmer for her produce. The farmer then spends the $100 to buy supplies, etc. We’re already up to a $500 effect, and there’s no need to stop there. If you trace it through a sufficient number of transactions, the effect is enormous, even though it’s still only $100.
Using that same reasoning, it’s obvious that the key to economic recovery is to significantly increase my salary. Each dollar I receive has an enormous effect on the national economy. I use some of the money to buy groceries, gas, books, and a number of other consumer goods, helping to sustain a variety of retailers and service providers. They in turn, use my money to hire employees and buy products from producers, who in turn hire additional employees and buy additional goods and services. The money I don’t spend is put into accounts at banks and mutual funds, which use the money to invest in new and existing businesses, promoting economic growth and facilitating the hiring of additional employees.
Given the enormous multiplier effect paying me has on the economy, the solution to our current economic stagnation is obvious: pay me more.
Thursday, July 3, 2014
Monday, June 30, 2014
I have been catching up on my long backlist of reading and recently read an excellent article on litigation challenging the fees of mutual fund advisers: Quinn Curtis and John Morley, The Flawed Mechanics of Mutual Fund Fee Litigation.
As you may know, section 36(b) of the Investment Company Act of 1940 gives mutual fund investors and the SEC a cause of action to challenge excessive investment adviser fees.
Section 36(b) has generated quite a bit of academic commentary; Curtis and Morley’s footnote listing those articles (fn. 4, if you’re interested) takes up more than a page of single-spaced text. The Supreme Court has also recently chimed in on section 36(b). Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010) discussed the standard for reviewing advisors’ fees under section 36(b).
Don’t worry; Curtis and Morley don’t rehash all of the earlier commentary. Instead, they take the existence of a section 36(b) cause of action as a given and ask how it can be improved to better achieve its purposes. Here’s the abstract:
We identify a number of serious mechanical flaws in the statutes and judicial doctrines that organize fee liability for mutual fund managers. Originating in section 36(b) of the Investment Company Act, this form of liability allows investors to sue managers for charging fees above a judicially created standard. Commentators have extensively debated whether this form of liability should exist, but in this paper we focus instead on improving the mechanics of how it actually works. We identify a number of problems. Among other things, statutes and case law give recoveries to investors who did not actually pay the relevant fees. Statutes and case law also impose no penalties to provide deterrence; they treat similar categories of fees differently; they create an unusual settlement process that prevents litigants from settling their full claims; they expose low-cost advisers to serious litigation risk; they exhibit deep confusion about what makes fees excessive; and they provide unduly small incentives for plaintiffs’ lawyers that are only adequate in cases of low merit. Most of these problems appear to be the unintended results of accidents and confusion, rather than deliberate policy choices. We conclude by offering specific ideas for reform.
The article, to be published in the Yale Journal of Regulation, was posted on SSRN in March, but it’s been sitting in my computer reading file since then. Better late than never. If you’re interested in the regulation of mutual funds and investment advisers, it’s definitely worth reading.
Monday, June 9, 2014
Today, rather than my usual profound insights, I’m going to pose a question to our readers. (What do you mean, what “usual profound insights”?)
I have been thinking about applying for a Fulbright to teach overseas. The problem is that Fulbright applications are country-specific and I’m having trouble deciding where I would like to teach.
There are several ways to approach this problem. The first approach would be to look for the greatest possible geographical distance from Lincoln, Nebraska. I think this would be my Dean’s preference. But, as my Dean will tell you, pleasing her is almost never one of my criteria.
The second approach would be to choose the place with the greatest beach. This seems like a sound approach to me, but there seems to be a serious shortage of teaching opportunities in places like Tahiti.
That leaves but one possibility—choosing a location that best fits my particular teaching and research interests. My primary focus is securities regulation, particularly the application of securities law to small businesses. Given that focus what would be the best country to visit? Where would I find both (1) interesting things going on in securities regulation of small businesses and (2) people interested in learning about the U.S. approach to these issues?
China is an obvious choice, but what other countries would make sense? (I’m a coward, so please don’t suggest any countries that would require me to dodge bullets.)
Here’s your chance, blog readers: tell me where to go. (Keep it nice.)
Monday, April 14, 2014
Delaware, like most states, has a provision in its corporate statutes allowing corporations to limit directors’ liability for breaches of fiduciary duty. Delaware section 102(b)(7) allows corporations to include in their charter “a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages" for certain breaches of fiduciary duty.
A recent Delaware case plows a huge hole through the protection provided by a section 102(b)(7) charter provision. In the Rural Metro case [In Re Rural Metro Corp. Stockholders Litigation, 2014 WL 971718 (Del. Ch. Mar. 7, 2014)], the Delaware Court of Chancery held that a 102(b)(7) provision does not protect against claims that non-directors aided and abetted a duty-of-care violation by directors, even when the directors themselves are protected.
The Chancery Court’s reasoning is sound. Section 102(b)(7), and the associated charter provision, don’t say there’s no breach of fiduciary duty, just that directors aren’t personally liable for damages. The underlying conduct by the directors is still a breach of fiduciary duty, and injunctive relief is still available, just no money damages.Since there’s still a breach of duty, and the statute says nothing about the liability of aiders and abettors, the court concluded that aiders and abettors can still be liable if: (1) the directors breached their fiduciary duties; (2) the third party knew the directors were breaching their fiduciary duties; and (3) the third party participated in the breach.
The court ultimately held that RBC Capital Markets, LLC was liable for aiding and abetting. I can't do justice to the facts in the space available here; I highly recommend a reading of this important opinion.
The real question is whether the Delaware legislature will let this holding stand. The Chancery Court’s statutory reasoning is sound, but that doesn’t mean the result is necessarily good policy. Investment bankers, brokers, accounting firms, and other third party providers, perhaps even lawyers in some cases, are exposed to the risk of liability under this holding. Even if they ultimately win on the merits, as I suspect many will, the litigation itself will be costly. That cost will, of course, be passed on to the corporations using the services of those third parties.
There’s a possible gain associated with that cost, of course: the possible increased deterrence of breaches of fiduciary duty by corporate directors. But the Delaware legislature, in adopting section 102(b)(7), has already decided that other considerations outweigh the deterrent effect of imposing liability on the directors themselves.
Two Legislative Options
Plugging the Rural Metro hole is easy. A simple amendment to 102(b)(7) would do the trick. But how the Delaware legislature chooses to amend the statute (if it does) is important.
One way would be to authorize corporations to include provisions in their charters protecting not only directors, but also people who aid and abet violations by the directors. If that's all the Delaware legislature did, the protection from liability would not be automatic. Companies with 102(b)(7) exculpation provisions would have to amend their charters to protect aiders and abettors.
A simpler, neater solution would make the protection of aiders and abettors automatic. The legislature could just add a sentence at the end of 102(b)(7) providing that aiders and abettors are not liable when the directors themselves are protected from liability. Something like the following would work: “Unless otherwise specified in the certificate of incorporation, no person shall be liable for money damages for aiding and abetting an action protected by such a provision.” If the legislature did this, no further corporate action would be needed to make this protection effective. Only companies that did not want aiders and abettors protected would have to amend their charters.
Stay tuned to see what, if anything, the Delaware legislature does.
Monday, March 24, 2014
Two of the reference librarians at my school, Marcia Dority Baker and Stefanie Perlman, have compiled and published a bibliography of all the scholarship by Nebraska College of Law faculty going back to 1892: Marcia L. Dority Baker & Stefanie S. Perlman, A BIBLIOGRAPHY OF UNIVERSITY OF NEBRASKA COLLEGE OF LAW FACULTY SCHOLARSHIP 1892-2013 (2014).
I don’t know if others schools have done anything like this, but I think it’s a great idea. It’s really interesting to look at what people were writing one hundred years ago, and to consider the body of work of my current colleagues, only a couple of whom I believe were here a hundred years ago. I found the 14 pages of entries for the great legal scholar Roscoe Pound, including dozens of books, humbling.
On the domestic front, I’m happy to report that my listing is twice as long as my wife’s, although I’m not sure she will be happy to know that I reported that. I want to make it clear that she was not here a hundred years ago.
Monday, March 10, 2014
The federal restrictions on offering securities are a mess. Section 5, even with the recent additions of subsections (d) and (e), is short—less than 600 words by my count. However, as every Securities Regulation student comes to appreciate, that brevity is deceptive. Section 5 is incredibly complex. The SEC regulations increase that complexity: almost everything in Section 5 has been modified or displaced by SEC regulations.
Consider just the question of what an issuer may say before filing its registration statement. Section 5(c) says the issuer may not make an offer to sell the securities. But the SEC says “offer to sell” means more than just asking people to buy the securities. It includes any communication, even if you don’t mention the offering, that might generate public interest in buying the security, what the SEC calls conditioning the market. But, if it’s more than 30 days prior to when you’re going to file your registration statement, see Rule 163A. After that, see Rule 163, Rule 168, or Rule 169, depending on what type of company you are. But don’t mention the offering in any of those communications, unless, of course, you fit within Rule 135.
Or consider section 5(b)(1)’s bar on transmitting a written offer to sell. Rule 433, the free-writing prospectus rule, has rewritten that statutory prohibition so extensively that the Rule 433 tail now wags the section 5(b)(1) dog. And then there’s Rules 172 and 173, which almost completely displace the final prospectus delivery requirements of sections 5(b)(1) and 5(b)(2).
Many of these regulations improve the statutory scheme, although simpler rules would be even better. But isn’t it about time to revise the statute, instead of constantly engrafting regulatory exceptions and rewrites on to the aging, obsolete statutory structure?
A statute that says “x” and a rule that says “but not x” don’t exactly promote public respect for the rule of law. Consider the way Rule 172(b) is written—it essentially says that any obligation under section 5(b)(2) to deliver a prospectus is satisfied if you don’t deliver a prospectus.
Wouldn’t it be better to have the rules assembled in an organized, coherent whole, instead of having to jump from place to place to figure out what’s allowed and what isn’t? If the SEC’s approach makes more sense, and in many cases I think it does, then let’s change the statute to reflect the SEC’s approach. In many cases, all the existing statute does is complicate the SEC’s rulemaking task.
It’s against my interest to suggest this. I teach two securities law classes, and statutory changes just mean more work for me. But I think it’s time we rewrote the Securities Act.
Monday, March 3, 2014
What happens if short sellers of stock are unable to cover because no one has any shares to sell? That’s one of the many interesting issues in the new book, Harriman vs. Hill: Wall Street’s Great Railroad War, by Larry Haeg (University of Minnesota Press 2013). Haeg details the fight between Edward Henry Harriman, supported by Jacob Schiff of the Kuhn, Loeb firm, and James J. Hill, supported by J.P. Morgan (no biographical detail needed), for control of the Northern Pacific railroad. Harriman controlled the Union Pacific railroad and Hill controlled the Great Northern and Northern Pacific railroads. When Hill and Harriman both became interested in the Burlington Northern system and Burlington Northern refused to deal with Harriman, Harriman raised the stakes a level by pursuing control of Hill’s own Northern Pacific.
I’m embarrassed to admit that I wasn’t aware of either the Northern Pacific affair or the stock market panic it caused. I had heard of the Northern Securities antitrust case that grew out of the affair; I undoubtedly encountered it in my antitrust class in law school. (Everything the late, great antitrust scholar Phil Areeda said in that class is still burned into my brain.)
I’m happy I stumbled across this book, and I think you would enjoy it as well. Harriman vs. Hill has everything needed to interest a Business Law Prof reader: short selling; insider trading; securities fraud; a stock market panic; a hostile takeover; a historical antitrust case; and, of course, J. P. Morgan. This was a hostile takeover before hostile takeovers were cool (and before tender offers even existed, so the fight was pursued solely through market and off-market purchases).
The book does have a couple of shortcomings. One is a polemic at the end of the book against the antitrust prosecution. The antitrust case was clearly a political play by Theodore Roosevelt, and Haeg may be right that the railroads’ actions were economically defensible, but his discussion is a little too one-sided for my taste. Haeg also has a tendency to put thoughts into the characters’ minds (Hill might have been thinking . . .), but he only uses the device to add factual background, so it isn’t terribly offensive. Finally, Haeg occasionally gets the legal terminology wrong. For example, he refers to the railroad holding company “that the U.S. Supreme Court narrowly declared unconstitutional,” when what he means is that the court upheld the law outlawing the holding company. He only makes legal misstatements like that a couple of times, but those errors are very grating on a lawyer reading the book.
Still, in spite of those minor flaws, this is a very good book and I highly recommend it.
Monday, February 10, 2014
The SEC is taking some flak from crowdfunding proponents for its crowdfunding rules. Sherwood Neiss, one of the early proponents of a crowdfunding exemption, has taken the SEC to task, as has Representative Sam Graves, the chair of the House Committee on Small Business. See also this article.
These critics point out, correctly, that the crowdfunding exemption is too expensive and restrictive. The problem is that the critics are aiming at the wrong target. I’m no SEC apologist; I have criticized its approach to small business and the structure of its exemptions on a number of occasions. But, in this case, it’s not the SEC that deserves the blame. It’s Congress.
Almost everything the critics are concerned about originates in the statute itself, not in the SEC’s attempt to implement the statute. I pointed out the many problems with the JOBS Act’s crowdfunding exemption almost 18 months ago. The unnecessary cost, complexity, and liability issues the critics are currently complaining about are statutory problems.
Yes, the SEC has some discretion to change some of the objectionable provisions, but one should hardly expect the SEC, with no experience whatsoever with crowdfunding, to overrule the express requirements adopted by Congress. If anything, as I have pointed out here and here, the SEC is to be commended for cleaning up some of the problems created by the statute.
The crowdfunding exemption is terribly flawed, but it’s not the SEC’s fault. If you’re looking for someone to blame, Congress is the place to start, particularly the Senate, which is responsible for the substitute language that became the final crowdfunding bill. The crowdfunding exemption needs to be fixed, but it’s Congress that will have to fix it.
Thursday, January 23, 2014
Aaron George at Under30CEO has a nice post on the top five legal mistakes made by startups. Not much new to those of us who are lawyers, but it's a nice summary of some of the mistakes startups can make.
I could quibble with his list. I think selling securities without complying with securities law ought to be there somewhere, and I think his No. 5--not hiring a lawyer--ought to be No. 1. But his list does include some of the common legal mistakes made by budding entrepreneurs.
Monday, January 6, 2014
Stephen Bainbridge has an excellent post on the need for academics to disclose conflicts of interest--specifically, who's funding their research. I agree with Steve 100%. If someone's paying an academic for research or for consulting related to the research, I want to know about it.
A conflict of interest does not mean the research is unreliable. (I'm sick of both the left and the right dismissing research out of hand because it was funded by the right-wing [Fill-in-the-blank] Foundation or the left wing [Fill-in-the-blank] Institute.) But, if someone's paying an author for the work, I am going to pay much closer attention to the methodology and the analysis, even if the author otherwise has a good reputation.
Adi Osovsky, an S.J.D. candidate at Harvard Law School, has posted an interesting new article on SSRN, The Curious Case of the Secondary Market with Respect to Investor Protection.
Here's the abstract:
The primary mission of the U.S. Securities and Exchange Commission is to protect investors. However, current securities regulation clearly separates between public markets and private markets with respect to investor protection. While the federal securities laws impose strict and costly disclosure and anti-fraud requirements on issuers that offer their securities to the public, they exempt private offerings from such rigid regime. The liberal approach toward private offerings is based on the assumption that investors in private markets are sophisticated and thus can "fend for themselves".
This Article explores the validity of such traditional dichotomy between the public market and the private market in a relatively new, organized secondary market for ownership interests in private companies with retail investor access (the "Secondary Market"). The Secondary Market provides investors and employees with an opportunity to sell their holdings even before the first exit event. It also allows greater flexibility in capital formation, which may enhance productivity and job growth. However, the Secondary Market raises serious problems with regard to investor protection.
As this Article shows, the rise of the Secondary Market has revealed conspicuous cracks in the wall traditionally separating the public and the private markets and the two markets’ participants – the sophisticated investors versus the unsophisticated investors. This separation was undermined by the penetration of unsophisticated investors to the private market sphere and by the erosion of the assumptions regarding the ability of Secondary Market’s participants to fend for themselves.
The Article suggests that the erosion of the sophistication presumption deems the classic dichotomy between the heavily regulated public market and the lightly regulated private market artificial. It calls for a reexamination of the current regulatory regime with respect to investor protection. Such reexamination is of particular importance in light of the new Jumpstart Our Business Startup (JOBS) Act that would enable private companies to stay private longer, and the Secondary Market to thrive.
I haven't read the article yet, but the issue Osovsky addresses is an important one. Even if accredited investors are able to protect themselves in exempted private offerings, the Internet (in conjunction with the liberalization of Rule 144) now makes it much easier for them to resell those securities to unsophisticated investors.
Secondary purchasers will have access to at least some information about the issuer. Rule 144 protects those resales only if the issuer is a reporting company [Rule 144(b)(1)(i)] or if current public information is available about the issuer [Rule 144(b)(1)(ii) and (b)(2), in conjunction with 144(c)]. But is the information required by Rule 144(c)(2) for non-reporting companies sufficient?
Monday, December 30, 2013
For those of you interested in crowdfunding and the new federal exemption for crowdfunded securities offerings, the University of Cincinnati College of Law is planning a symposium on crowdfunding, to be held on March 28. I and several leading crowdfunding scholars will be presenting papers, and those papers will eventually be published in the University of Cincinnati Law Review.
I will post more details when the official conference announcement is released.