Friday, March 13, 2015
One of my pet peeves when I was in practice was working with junior lawyers or student interns who refused to take a position on anything when I asked for research. Perhaps because of the way law schools teach students, they tended to answer almost every question with “on the one hand but on the other hand.” This particularly frustrated me during my in house counsel years when I was juggling demands from internal clients in over a dozen countries and just wanted to know an answer, or at least a recommendation. Over at Legal Skills Prof Blog and PrawfsBlawg, they lay part of the blame on issue spotting exams. I use issue spotting essay exams, so perhaps I am perpetuating the problem, but I find that students have a love-hate relationship with ambiguity. They like to be ambiguous in essays but hate ambiguity in multiple choice questions.
I just finished administering multiple choice exams to my civil procedure and business associations students. Typically, I use essays for midterms and a combination of testing techniques for the final exam. I’m not a fan of multiple choice because I believe that students can get lucky. On my final exams I use some standard multiple choice but I also use a hybrid style where students have to pick the correct answer and then write one sentence about why each other choice was wrong. It's a pain to grade, but I get an idea as to how much they really understand. But with a combined 130 exams for midterms, I decided to go with the straight multiple choice. In addition to making life easier for me with grading, it will help prepare the students for the bar exam.
I chose to ask particularly complex multiple choice questions. The civil procedure students didn’t just have to answer about personal jurisdiction. Most answers combined at least two other topics or federal rules, in some instances with at least one part that could be incorrect. The BA exam was similar. After both exams a number of students complained that the questions were too ambiguous and they would have preferred essays. Ironically, many of the students who were most concerned about the nature of the questions did very well on the exam, which leads me to believe that some of them lack the confidence in their own analytical abilities.
I think students prefer essays because of the freedom to do the “this/that” or “throw everything on the wall and see what sticks” type of "analysis." With the multiple choice questions that I used, the students had to do a much deeper level of analysis to choose the right answer- or to determine that none of the answers fit- which they hate. Often the concepts were restated in a way that probably wasn’t in their notes or the book. Those who memorized suffered the most.
Yesterday, I reminded my students that the law is ambiguous. Lawyers must think on multiple levels very quickly to answer what may seem like a simple question. In the alternative, often students overthink issues when the answer is more obvious.
If you have any thoughts on how to get students more comfortable with deeper levels of analysis and navigating through ambiguity, please post comments below or email me at firstname.lastname@example.org.
At Belmont, we have been basking in the glow of a dramatic win in the men’s basketball OVC championship game.
While I could not be prouder of all the members of our team, many of whom are majoring in business, I am most proud of the way they played and conducted themselves – with heart, effort, intelligence, humility, confidence, and class. Murray State, holder of a 25-game win-streak and ranked #25 in the country coming into the game, played just as hard and conducted themselves with class as well.
The OVC championship game was the best basketball game I have ever seen and it was a shame that either team had to lose. In the unlikely event that any selection committee members are reading this, I think Murray State deserves a spot in the NCAA tournament as well; how do you justify dropping a team from #25 to outside the top-68 teams after a well-played 1-point loss to another strong team?
Since that basketball game, I have been thinking a lot about “winning” as compared to “how you play the game.” Growing up, I was insanely competitive and was obsessed with winning. I loved the quote attributed to Vince Lombardi: “winning isn’t everything, it is the only thing” and I despised the claim that “it isn’t whether you win or lose, it is how you play the game.” (Interestingly, some argue that Lombardi never said those words, claiming instead that he said “[w]inning is not everything, but making the effort to win is,” which is much closer to the statement I despised.)
Perhaps, I am getting softer as I age or maybe it is being a father that is changing me, but I now believe that how you play the game is much more important than whether you win or lose. Results of games, like Belmont’s recent one, could turn on a fraction of an inch, but conduct during the entire game (and before and after the game) tells you a great deal more about the character of the competitors.
I am still not in the “everyone gets a trophy” camp and I still think winning and losing are important parts of competition, but I do think that “winning” should be subordinated to certain overriding principles. When the overriding principles govern, you get things like Bobby Bowden sharing his playbook with the Marshall University team that lost most of its members in a plane crash OR the carrying of an injured opponent around the bases OR the helping of a fallen runner. When winning is seen as “the only thing,” teams and individuals skirt rules to gain an advantage (doping in baseball, cycling, and track; recruiting violations; spygate; deflategate; etc.)
Next week I will apply some of these concepts to business.
Thursday, March 12, 2015
This Sunday, the NCAA will announce the 68 basketball teams that are scheduled to participate in this year's men's basketball tournament. Then, the true "madness" begins.
At many schools, one or more professors will likely organize an NCAA Tournament pool. The pool will likely include entry fees and prize money. The pool's rules and standings will often appear on a public website.
All of this may sound like innocuous fun -- especially during the anxiety-ridden days of waiting for ExpressO and Scholastica acceptances to arrive. However, law professors playing in online, pay-to-enter NCAA Tournament pools technically are acting in violation of several federal laws -- albeit, laws that are rarely enforced,
One federal law that seems to prohibit online, pay-to-enter NCAA Tournament pools is the Interstate Wire Act of 1961. This act disallows individuals from “engaging in the business of betting or wagering [through the knowing use of] a wire communication for the transmission in interstate or foreign commerce.” According to various recent court decisions, the Wire Act applies to contests hosted via the Internet, as well as those hosted over the phone. And even though the act was originally passed to crack down on organized crime, even "upstanding" individuals such as law professors, at least in theory, are not immune from prosecution.
A second federal law that seems to prohibit online, pay-to-enter NCAA Tournament pools is the Professional and Amateur Sports Protection Act ("PASPA"). Passed in 1992 at the behest of America’s five premier professional sports leagues (including the NCAA), PAPSA makes it illegal for any private person to operate a wagering scheme based on a competitive game in which “professional or amateur athletes participate." Of course, PASPA includes a grandfather clause that exempts previously authorized government sponsored sports gambling in four states -- Nevada, Delaware, Oregon, and Montana. But it doesn't include any exception whatsoever for private March Madness pools.
Finally, a third federal law that may disallow online, pay-to-enter NCAA Tournament pools is the Uniform Internet Gambling Enforcement Act. This act, which was passed most recently in 2006, makes it illegal for those "engaged in the business of betting or wagering" to “knowingly accept” funds in connection with the participation of another person in unlawful Internet gambling. Although the UIGEA offers a special carve-out provision for “fantasy sports,” this carve-out does not apply to March Madness pools because winning outcomes are based on the final score of actual game results, and not individual player performances.
Of course, the likelihood of anyone going to jail for simply participating in an online NCAA Tournament pool may seem next to nil. But if you are going to play in one of these contests, I have two simple recommendations: (1) let someone else other than you collect the money; and (2) encourage the host to 'grade' the brackets by hand, rather than posting contestant names and picks on an Internet website.
Wednesday, March 11, 2015
As someone who likes to write from time to time on women on corporate boards, I sometimes feel like I am writing about last year's "news." In other words, not much seems to sound new. So, I am always in search of a novel problem to explore or a different vantage point through which fresh insights can be obtained.
My most recent contribution in this regard is a symposium piece that looks at women on boards through the lens of the literature on crowds--whether they be mad or wise. Boards can be crowds (albeit small ones), based on prevailing definitions. Moreover, crowd behaviors can be gendered. So, it seemed like a reasonable idea.
The fruit of this labor is my most recent article, Women in the Crowd of Corporate Directors: Following, Walking Alone, and Meaningfully Contributing. The substantive portion of the abstract is as follows:
With the thought that new perspectives often can be helpful in addressing long-standing unresolved questions, this article approaches an analysis of women’s roles on corporate boards of directors from the standpoint of crowd theory. Crowd theory — in reality, a group of theories — explains the behavior of people in crowds. Specifically, this article describes theories of the crowd from social psychology and applies them to the literature on female corporate directors, looking at the effects on both women as crowd members and boards as decision-making crowds.
Unfortunately, while the crowd theory perspective provides some insights, they are not altogether conclusive. Specifically, while women may bring distinct ideas and experience to boards of directors when they become board members, crowd theory does not provide a clear picture of the nature or extent of those differences or how they may contribute to productive, efficient board decision making. More work still is needed in this area. However, existing research does indicate that women encourage productive board development activities — activities that may include, for example, introducing the board to structures and policies that may promote board wisdom. This is a useful insight that should be further explored.
This is, as the abstract indicates, a preliminary exploratory piece. But it does at least represent a change from the current literature in the field, which focuses on (among other things) the search for an alternative to gender quotas (see, e.g., here and here).
I had the opportunity to present the paper at William & Mary a few weeks ago. Unfortunately, the school was closed that morning as a result of a snow storm the day before. Since I was already in Williamsburg (but could not stay to present the paper later in the day), current and incoming editors of the William & Mary Journal of Women and the Law invited me to deliver the paper to them over breakfast in a local restaurant. The impromptu forum turned out to be a lovely way to discuss the paper with the students--a number of whom had read the piece carefully and had interesting questions and observations. I hope that some of you enjoy the article as much as those students did!
Tuesday, March 10, 2015
Today in my Energy Law Seminar, I sprung an exercise on my class. I gave each member of the class a confidentiality and non-disclosure agreement (NDA). Half the class works for a venture fund and the other half works for a technology inventor who was seeking investment. (I give them some more details about the proposed deal the NDA would help facilitate. (The exercise is based on an issue I worked on some years ago.)
I instruct them to read the NDA, then they can meet with others assigned the same side. They can come up with their negotiating points, then I turn them loose with the other side.
I always enjoy watching students work like this. They are forced to react, and it lets them be a little creative. I also like this exercise, because it has multiple layers. They get to ask me me what they need to know for the business points, and I later get to talk to them about the options they may not have considered.
I have done this a few times, and the students always negotiate what they see as the key issues. Their issue spotting is usually good, but they often miss a big option (a couple students do often have an idea what's up). Here's the twist: the NDA I give them is absurdly one-sided and in fact reserves the secret information for the venture fund (who is only providing money), and not the inventor (who has the technology and information they want kept secret).
They can, of course, negotiate with this document and try to get a workable NDA based on the deal points, but the better answer for the investor representatives is to decline the entire document. The NDA is so one sided, there is no fixing it. The better answer is to ask for a more balanced version or to offer to draft one for the potential counterparty to consider.
Sometimes, of course, you have no room for negotiations, such as when you rent a car. You can mark up the contract, but with Avis, it's take it or leave it. The same can be true for certain clients who need funding or a supply contract, but often, there is room to talk. The real life version of the negotiation provides a perfect example: I told the venture fund the NDA was too one-sided and that it couldn't work for us. I suggested that we could try a draft or that we'd be happy to look at a different option. The venture fund's reply: "Oh sure, we have one that is far more balanced that doesn't have the provisions that seem to concern you most. You'll have an email in a few minutes."
When we talk about deal points and key issues, sometimes it's easy to forget to teach students some other big keys to business law. The takeaways:
(1) If at all possible, only use draft documents that reflect a sense of mutuality (e.g., reciprocal indemnification clauses). "Fixing" one-sided documents is fraught with risk.
(2) Don't be afraid to ask. Often, though I don't care for it, people like to start with offers to "see what I can get." (I see this as counterproductive, at least where a long-term relationship could be built.)
(3) Negotiate in proportion to the issue before you. The NDA is often so you can negotiate the deal. If you make that initial part too antagonistic, you may never even get to negotiating the actual deal, which can mean everyone loses.
Monday, March 9, 2015
Western Carolina University has posted an opening for an assistant professor of legal studies. More information is available here. The position is fixed-term and non-tenure-track, though it comes with the title "assistant professor."
Last year, I greatly enjoyed my time presenting at Western Carolina University. WCU is in a beautiful part of the country, about an hour from Ashville, NC. WCU has a strong group of legal studies professors and has one of the nation's few Business Administration and Law degrees at the undergraduate level.
I've updated my list of legal studies professor positions in business schools. Many of the positions have now been filled, but I placed the newer postings in bold font.
Sergei Magnitsky. Remember that name any time you’re considering doing business in Russia or any other country in which the "rule of law" is a meaningless masquerade for the uncontrolled whims of the powerful.
Magnitsky was a young Russian accountant working for the Hermitage Capital Management firm created by Bill Browder to invest in Russia. When Browder stepped on the toes of some of the Russian business oligarchs, Magnitsky was thrown into prison, beaten, refused essential medical care, and basically murdered.
I learned Magnitsky’s story in a new book by Bill Browder, Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice. Browder created Hermitage Capital shortly after the breakup of the Soviet Union. The book details Hermitage’s dramatic rise and, when Browder publicly fought the attempts by the Russian oligarchs to dilute his minority investments, Hermitage’s eventual fall. Browder and almost everyone else associated with Hermitage managed to flee Russia, some after being detained, but Magnitsky, the firm's young accountant, refused to leave. When he was imprisoned and questioned, he refused to tell his captors the lies they wanted to hear, and his refusal eventually resulted in his death.
The story is captivating; the book reads like a novel. It’s also enlightening. I didn’t really understand the economic side of Putin’s Russia until I read this book. The word “corruption” only begins to describe what’s going on.
Red Notice has something for everyone. If you’re interested in the investment management business, if you’re interested in the rule of law, if you’re interested in investor rights, if you’re interested in modern Russia, or if you’re just interested in a well-told story, you will enjoy Browder’s book. I highly recommend it.
Sunday, March 8, 2015
"Lacking a voice, the court continued, a corporation cannot testify... Without a conscience, it cannot take an oath." http://t.co/zFlAJjZz6o— Stefan Padfield (@ProfPadfield) March 4, 2015
"The principles call on institutional investors to report to...stakeholders...how they are fulfilling their duties" http://t.co/ChFTbMBLi4— Stefan Padfield (@ProfPadfield) March 5, 2015
"corporate criminal prosecutions have turned the Justice Department into a kind of protection racket" http://t.co/Z0EqUZEoIv— Stefan Padfield (@ProfPadfield) March 6, 2015
"'tsunami' of unregistered & unlisted shares of small businesses expected to come on the market due to new rules" http://t.co/btkF7TB2n3— Stefan Padfield (@ProfPadfield) March 7, 2015
Saturday, March 7, 2015
There’s been a lot of controversy recently over the SEC’s use – or perhaps I should say, non-use – of the automatic “bad actor” disqualifications for firms that commit securities violations. The disqualification provisions place certain limits on the activities of firms that are found to have committed securities violations. Dodd Frank added a big stick to the list of penalties: It added an automatic disqualification from participating in private placements under Rule 506 of Regulation D. It’s a severe penalty; private placements are extremely lucrative.
But the SEC can waive the automatic disqualification – and frequently does, even for “recidivist” firms that repeatedly rack up securities violations. It imposes fines, perhaps outside monitoring, but it waives disqualifications – especially the Rule 506 disqualification.
The issue has recently hit the public eye because Democratic Commissioners Luis Aguilar and Kara Stein have been objecting to the grant of waivers to recidivist firms. In their view, waivers are an important tool for deterring securities violations, and the SEC has improperly adopted a policy of granting them “reflexively.”
In light of all of this, the SEC has promised to issue guidelines as to how Rule 506 waiver decisions are made; Commissioner Daniel Gallagher thinks the matter may ultimately have to be resolved by Congress.
Until recently, hasn’t been clear just how often these waivers have been granted, and who has received them. But Urska Velikonja just posted a new paper that gathered data on 201 waivers issued between 2003 and 2014. These waivers involved Regulation D disqualification, Regulation A disqualification, and also disqualification from the use of automatic shelf registration statements to raise capital. Velikonja finds that: (1) large financial firms received over 80% of the waivers; smaller firms and nonfinancial firms rarely receive them even though they are much more likely to be the target of an enforcement action; (2) the SEC typically does not offer any real justifications for its decision to grant or withhold a waiver, but the pattern appears to be that the Commission does not grant waivers for firms accused of offering fraud or issuer disclosure violations; usually, they’re granted for firms accused of unrelated misconduct, such as violations of the broker-dealer and investment adviser rules – presumably because the Commission views the latter firms as presenting a lower recidivism risk; and (3) the number of waivers has declined over time, and the SEC has recently begun utilizing partial waivers.
(More under the jump)
Friday, March 6, 2015
Social enterprise has made two relatively recent appearances in the mainstream media:
(1) David Brooks on "How to Leave a Mark" in the NYT.
(2) George Roberts on "Bringing a Business Approach to Doing Good" in the WSJ.
In addition, a few law schools have started focusing more on social enterprise, including through the Georgetown Social Enterprise and Nonprofit Clinic and the Social Enterprise Law Association at Harvard Law School.
Interest in social enterprise is and has been increasing, but the legal frameworks could still use significant work as my co-blogger Joan Heminway noted last month.
Ten days from now will mark the start of the 2015 NCAA men's basketball tournament -- one of the most watched sporting events of the year. Recently, the NCAA sold 14 years worth of television broadcast rights to the NCAA Tournament for $10.8 Billion. On an annual basis, that comes to an annual sum of $770 Million per year.
The athletes who play in these games, by contrast, do not receive any share of the derived revenues, nor are they allowed to endorse products or sign autographs for money. In addition, the most successful teams in this tournament will have athletes that are required to miss upwards of nine class days based on a tournament schedule that is created to accommodate television broadcasts.
As a guest blogger for the month of March, I will be discussing the legal issues related to NCAA amateurism and the economic realities of the NCAA men's basketball tournament. Some of the topics I will discuss include why the NCAA is indeed an economic cartel, why the U.S. district court's decision in O'Bannon v. NCAA does not go far enough to protect college athletes, why perhaps the National Labor Relations Board should grant college athletes the right to unionize, and how the NCAA men's basketball tournament could be structured differently if student education, rather than athletic revenues, were truly a top priority.
Thank you to Haskell Murray for providing me with this wonderful forum to share my ideas and scholarship. And to all of the Business Law Prof Blog readers, please do not worry: I have no plans to be a Debbie Downer. I will, however, talk seriously about the economic and legal realities of college sports and how we, as academics, can make a difference.
It’s always nice to be validated. Day two into torturing my business associations students with basic accounting and corporate finance, I was able to post the results of a recent study about what they were learning and why. "Torture" is a strong word-- I try to break up the lessons by showing up to the minute video clips about companies that they know to illustrate how their concepts apply to real life settings. But for some students it remains a foreign language no matter how many background YouTube videos I suggest, or how interesting the debate is about McDonalds and Shake Shack on CNBC.
My alma mater Harvard Law School surveyed a number of BigLaw graduates about the essential skills and coursework for both transactional and litigation practitioners. As I explained in an earlier post, most of my students will likely practice solo or in small firms. But I have always believed that the skills sets are inherently the same regardless of the size of the practice or resources of the client. My future litigators need to know what documents to ask for in discovery and what questions to ask during the deposition of a financial expert. My family law and trust and estates hopefuls must understand the basics of a business structure if they wish to advise on certain assets. My criminal law aficionados may have to defend or prosecute criminal enterprises that are as sophisticated as any multinational corporation. Those who want to be legislative aides or go into government must understand how to close loopholes in regulations.
What are the top courses students should take? The abstract is below:
We report the results of an online survey, conducted on behalf of Harvard Law School, of 124 practicing attorneys at major law firms. The survey had two main objectives: (1) to assist students in selecting courses by providing them with data about the relative importance of courses; and (2) to provide faculty with information about how to improve the curriculum and best advise students. The most salient result is that students were strongly advised to study accounting and financial statement analysis, as well as corporate finance. These subject areas were viewed as particularly valuable, not only for corporate/transactional lawyers, but also for litigators. Intriguingly, non-traditional courses and skills, such as business strategy and teamwork, are seen as more important than many traditional courses and skills.
Did you take these courses? Has your school started adding more of this type of coursework and does your faculty see the value? Do you agree with the results of this survey? Let me know in the comments or email me at email@example.com.
March 6, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Jobs, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (2)
Wednesday, March 4, 2015
In response to my earlier post entitled "So . . . You Think You Want a Business Law Job . . . .," a reader commented as follows:
I have also seen the shift of students in my college going from other areas of law into corporate law. . . . What advice in general would you offer up? Is it a good, secure job market to want to get into in this economy?
My initial response was that, " . . . in general I would not suggest that anyone become a lawyer of any kind merely because it is a good job in this or any other economy. You should want to be a lawyer before venturing off to law school."
Bottom line: the market for business law or any other legal jobs is not a uniformly good, secure job market. Law school is not and never has been a "job ticket" in any case. But those who have a desire to be business lawyers and work intelligently and diligently at finding a job in business law typically will be business lawyers. I undertook to post further this week.
So, what else shall I say to pre-law students and law students interested in business law? I will be relatively brief here and in my posts for a number of weeks since I am typing with one hand (my left, non-dominant hand) due to a broken right wrist--an extra-articular distal radius, or Colles', fracture. But I invite further observations in the comments.
Tuesday, March 3, 2015
The Fordham Journal of Corporate and Financial Law recently published a March 6, 2014, lecture from Former Delaware Supreme Court Chief Justice Myron T. Steele, Continuity and Change in Delaware Corporate Law Jurisprudence (available on Westlaw, but fee may apply). As an aside, I'll note that it appears to have taken a full calendar year for this to get published (at least on Westlaw), which seems crazy to me. If there's any question why legal blogs can fill such a critical role in providing timely commentary on legal issues, this is a big part of the answer.
In the lecture, Chief Justice Steele discusses three main areas: (1) multi-forum jurisdiction, (2) shareholder activism, and (3) the Nevada, Delaware, and North Dakota Debate (a "competition for charters").
As to multi-forum jurisdiction, he makes the unsurprising point that Delaware courts are of the view that first impressions of the Delaware General Corporation Law or other "internal affairs doctrine" issues should be handled in Delaware courts. Of note, he explains that the Delaware constitution (art. IV, § 11(8)) now allows federal courts, the top court from any state, the SEC, and bankruptcy courts to certify questions directly to the Delaware Supreme Court. This option is one that lawyers litigating such cases in other forums won't want to miss.
With regard to shareholder activism, Chief Justice Steele states,
In my preferred system for the world, and I think in the minds of all Delaware judges, engaged if not antagonistic stockholders add positive value as a check on director authority and are a catalyst for corrective accountability, so long as their efforts focus on improved performance and not the advancement of political or personal agendas--a major caveat in my view. Delaware courts, it seems to me, will increasingly recognize the benefits that engaged investors bring to the table.
State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure. See, e.g., ibid; id., §3:2; Del. Code Ann., Tit. 8, §351 (2011) (providing that certificate of incorporation may provide how “the business of the corporation shall be managed”). Courts will turn to that structure and the underlying state law in resolving disputes.
The corporate form in which [an Delaware corporation] operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. . . . Having chosen a for-profit corporate form, . . . directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
Thus, in Delaware a for-profit corporation cannot promote or practice the religious views of even a majority of directors or shareholders where such actions do not promote the value of the corporation for shareholders.
Finally, as to the Nevada, Delaware, North Dakota debate, Chief Justice Steele questions the value of Nevada allowing "charters to exculpate directors for breaches of duty of loyalty," because he thinks such a massive change in widely held views of fiduciary duty law could invite federal "meddling." I think he's exactly right on this. He notes with skepticism the North Dakota Publicly Traded Corporations Act because there are only two companies that have adopted the law, but the law's failure in the competition for charter does not raise the same concerns of a race to the bottom (my words) that Nevada's law provides.
I think Chief Justice Steele's article provides interesting and useful insight into the workings of the Delaware court system, and I recommend the sort read. I just wish I had seen it about nine months ago.
I finally got it together and opened an account on SSRN (I know, I know), and posted two of my forthcoming pieces there.
The first, Searching for Market Efficiency, is a very short comment that will be published in the Arizona Law Review, discussing Donald Langevoort's Judgment Day for Fraud-on-the-Market and Geoffrey Miller's The Problem of Reliance in Securities Fraud Class Actions, both of which will be published in the same issue. The comment discusses the Supreme Court's recent decision in Halliburton, and the reasons behind courts' difficulties in defining market efficiency for the purpose of Section 10(b) class actions.
The second, Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, is a longer article forthcoming in the Georgetown Law Journal, and it deals with the claim that, because corporate governance documents are "contractual," clauses that require arbitration of shareholder disputes must be enforced according to their terms, as required by the Federal Arbitration Act. I've discussed this topic before; the Article spins things out in more depth. I will eventually put up a longer post here summarizing the piece, but if there's anyone who just can't wait for the cliffs notes version, well, you can now download it from SSRN.
Monday, March 2, 2015
The Business Law Prof Blog is pleased to announce that Professor Marc Edelman will be joining us as a guest blogger for the month of March. Quoting from his online bio, "Marc Edelman is an Associate Professor of Law at the Zicklin School of Business, Baruch College, City University of New York. He specializes in sports law, antitrust, intellectual property, and gaming law." During the summers, he also teaches at Fordham University School of Law.
I was previously familiar with Marc Edelman's work through my interest in sports and through a bit of reading in the antitrust area. All of his areas of interest have significant intersections with business law and I look forward to reading his posts. Given that he is one of the most recognized experts in the area of law & sports, we are especially privileged to have him with us right before March Madness.
As many of you know, both I and my co-blogger Joan Heminway have written several articles on crowdfunding. My articles are available here and Joan’s are available here. I think that a properly structured crowdfunding exemption (unfortunately, not the exemption Congress authorized in Title III of the JOBS Act) could revolutionize the finance of very small businesses.
Professor Darian M. Ibrahim, of William & Mary Law School, has posted an interesting and important new paper on crowdfunding, Equity Crowdfunding: A Market for Lemons? It’s available here.
Professor Ibrahim discusses two types of “crowdfunding” approved by the JOBS Act: (1) sales to accredited investors pursuant to SEC Rule 506(c), adopted pursuant to Title II of the JOBS Act; and (2) sales to any investors pursuant to the crowdfunding exemption authorized by Title III of the JOBS Act, but not yet implemented by the SEC. I don’t think the former should be called crowdfunding, but many people call it that, so I’ll excuse Professor Ibrahim.
Title II “Crowdfunding”
Professor Ibrahim points out that traditional investing by venture capitalists and angel investors is characterized by contractual controls and direct personal attention to the business by the investors. This allows the investors to monitor the investment and control misbehavior, and the investors’ participation and advice also provides a benefit to the business.
Ibrahim argues that Title II (506(c)) “crowdfunding” has been successful because it mimics what angel investors have been doing all along. It’s not really revolutionary, just making the existing model of angel investing more efficient by moving it to the Internet.
Title III Crowdfunding
Title III crowdfunding, on the other hand, is revolutionary; it doesn’t resemble anything that currently exists in the United States. If the SEC ever adopts the required rules, issuers will be selling to unaccredited investors who lack the knowledge and sophistication of venture capitalists and angel investors. It’s less obvious how they will judge among the various offerings and protect themselves from misbehavior by the entrepreneur.
Some have argued that the new crowdfunding exemption will appeal only to those companies that are too low quality to obtain traditional VC or angel funding, leaving unaccredited investors with the bottom of the barrel. Ibrahim disagrees, arguing that Title III crowdfunding will appeal to some high-quality entrepreneurs—those who need less cash for their businesses or are unwilling to share control with VCs or angel investors.
But how are we to avoid a “lemons” problem if the unsophisticated investors likely to participate in crowdfunding cannot distinguish good companies from bad? Ibrahim poses two possible answers. The first is the “wisdom of crowds,” the idea that the collective decision-making of a large crowd can approximate or even exceed expert judgments. Possibly, although I’m not completely sure. Collective judgments by non-experts can equal or surpass the judgments of experts, but I'm still unsure that the necessary conditions for that to happen are met on crowdfunding platforms. At best, I think the wisdom of the crowd is only a partial answer.
Ibrahim’s second answer is for the funding portals who host crowdfunding offers to curate the offerings—investigate the quality of the offerings and either provide ratings or limit their sites to higher-quality offerings. I think this is a good idea, but, unfortunately, the SEC’s proposed regulations would prohibit funding portals from doing this. Funding portals required to check for fraud, but that’s all they can do. Any attempt to exclude entrepreneurs for reasons other thanfraud or to provide ratings would go beyond what the proposed regulations allow and subject the portals to regulation under the Investment Advisers Act. Ibrahim has the right solution, but it’s going to require congressional action to get there.
Abstract of the Paper
Here’s the full abstract of Professor Ibrahim’s article:
Angel investors and venture capitalists (VCs) have funded Google, Facebook, and virtually every technological success of the last thirty years. These investors operate in tight geographic networks which mitigates uncertainty, information asymmetry, and agency costs both pre- and post-investment. It follows, then, that a major concern with equity crowdfunding is that the very thing touted about it – the democratization of investing through the Internet – also eliminates the tight knit geographic communities that have made angels and VCs successful.
Despite this foundational concern, entrepreneurial finance’s move to cyberspace is inevitable. This Article examines online investing both descriptively and normatively by tackling Titles II and III of the JOBS Act of 2012 in turn. Title II allows startups to generally solicit accredited investors for the first time; Title III will allow for full-blown equity crowdfunding to unaccredited investors when implemented.
I first show that Title II is proving successful because it more closely resembles traditional angel investing than some new paradigm of entrepreneurial finance. Title II platforms are simply taking advantage of the Internet to reduce the transaction costs of traditional angel operations and add passive angels to their networks at a low cost.
Title III, on the other hand, will represent a true equity crowdfunding situation and thus a paradigm shift in entrepreneurial finance. Despite initial concerns that only low-quality startups and investors will use Title III, I argue that there are good reasons why Title III could attract high-quality participants as well. The key question will be whether high-quality startups can signal themselves as such to avoid the classic “lemons” problem. I contend that harnessing the wisdom of crowds and redefining Title III”s “funding portals” to serve as reputational intermediaries are two ways to avoid the lemons problem.
It’s definitely worth reading.
Andrew Schwartz at the University of Colorado is also working on a paper that addresses the problems of uncertainty, information asymmetry, and agency costs in Title III crowdfunding. I have read the draft and it’s also very good, but it’s not yet publicly available. I will let you know when it is.
Sunday, March 1, 2015
The following comes to us fromJ. Scott Colesanti and Mandy Li Weiner:
To a degree large or moderate, New York shall soon be at the vanguard of Bitcoin regulation. Since last July, observers have been asked to witness the shotgun marriage of the coin of no realm and a daunting state licensing measure; to date, no vows have been taken.
The initial proposal from the Department of Financial Services was truly bold and far-reaching. Eschewing a classification of Bitcoin itself, the Department took aim at parties doing business with State residents by issuing, buying/selling, converting or storing the notorious cryptocurrency (and other, similar virtual currencies). Such entities and operators would have been required to register for the popularly dubbed "Bitlicense" at an indeterminate cost.
The requirements attending the proposed Bitlicense were rich and varied. Traditional State consumer protection provisions focused on customer complaints and record keeping. More novel provisions seemingly borrowed from securities law authorities on business continuity planning and anti-money laundering programs, and from sister State warnings regarding cryptocurrencies as investments. Consequentially, New York's broad, multi-layered protocol would have closed the door of entry to an appreciable number of businesses and startups, as well as related enterprises.
Not surprisingly, last Fall, there emerged on the Internet (albeit in piecemeal fashion) a consistent chorus of domestic, interstate, and international objections. That commentary, from parties including conversion sites and start-up companies, voiced concerns ranging from infringement of free speech to niche resentment at measures designed for financial intermediaries. Meanwhile, support for the initial proposal in the form of public comment letters was hard to locate. And, among federal authorities, only FinCEN has to date directly addressed the question of regulating the ersatz currency.
Still a Shotgun Marriage
Complicating matters is the continuing bad press attached to Bitcoin. Another round of mishaps at conversion exchanges in the past year highlighted issues ranging from questionable marketing to cybersecurity. Other States evidence both the carrot and the stick in the inevitable march towards rules governing the persistent cash alternative. California is considering a measure to coronate the online currency with legal status. Conversely, Missouri voiced its concerns via a June 2014 enforcement action that faulted a company for inadequate disclosures about virtual currencies in general. Concurrently, Congress is entertaining Bills that would shield Bitcoin exchangers from State regulation altogether. The one consistent truth is that supporters of the cryptocurrency seem to have established a daily Internet presence. Here, again, New York has seized the opportunity for regulatory arbitrage: In January, a spokesperson from DFS felt compelled to correct the statement by exchanger/storage repository Coinbase that it had been the first licensed Bitcoin exchange in a plethora of states including New York (no licenses have as yet been issued).
Interestingly, DFS Superintendant Lawsky himself has acknowledged that "The [proposed] rules also generally mirror the types of requirements that other banks, financial institutions, and money transmitters have to live by – with some alterations owing to the unique nature of virtual currencies." Yet the tension among interests appears to be growing, and New York officials no doubt find their efforts pausing to balance the State's heightened interest in protecting consumers (and extinguishing untrustworthy companies) while permitting industry creativity and innovation to flourish. Accordingly, the revised DFS regulation continues to grapple with the dual aims of a stringent standard and enough wiggle room to account for dynamic regulatory and entrepreneurial fields.
The Main Course
Thus, the revised legislation retains many of the original provisions, but it also attempts to appease more parties. For example, Bitlicensees are held to slightly less record-keeping and anti-money laundering protocols.
The price for the Bitlicense has been mercifully capped at $5,000. And the definitional section now makes equally clear that software development and "merchant" payment activities will often be exempt. But the grandest largess takes the form of a 2-year conditional license (granted at the "sole discretion" of the Superintendant), a variation expressly designed for "an applicant that does not satisfy all of the regulatory requirements upon licensing."
Additionally, third parties have benefitted from the revisions: The revised regulations clarify that certain software developers, "miners" (i.e., creators of Bitcoin), those offering customer loyalty programs, rewards (such as airline vouchers) and gift cards are not required to obtain a Bitlicense.
To be sure, the 2015 changes to the 2014 proposal exemplify a newfound DFS responsiveness to the concern of the crossroads of the technology and finance that is virtual currency. However, pure capitalists should note: Even in amended form, the proposal contains substantial costs attending requirements of cash reserves, quarterly reporting, the employ of cybersecurity employees, business continuity planning, transaction records and consumer disclosures. Further, some new obligations have been added – most notably, the requirement that the surety trust account for customers be maintained with a "qualified custodian" (i.e., a banking entity approved by the DFS). The next round of comments should reveal whether the Department's revised approach has achieved meaningful supervision of the industry without concurrently extinguishing some of the characteristics that make virtual currency attractive in the first place.
The revised regulations, which are available at http://www.dfs.ny.gov/legal/regulations/rev_bitlicense_reg_framework.htm, are presently subject to a 30-day comment period. The union of registration and innovation will likely not be decided until late 2015. By borrowing from expansive notions found in securities law and long arm statutes, the seminal State law with the decidedly federal twist will, of course, garner national attention. With objections to strict regulation ranging from Congress to IT developers, wedding guests from both sides of the aisle are still advised to hold onto their receipts.
Mandy Li Weiner, Hofstra University School of Law Class of 2017, is a Business Law Honors Concentration Fellow.
Professor J. Scott Colesanti, a former industry regulator and arbitrator, has taught Securities Regulation at Hofstra since 2002. His 2014 study of the potential application of the securities laws to Bitcoin exchanges is available on SSRN.
Saturday, February 28, 2015
This seems to have been a great week for business stories with a touch of the absurd.
First up, we have Footnoted.org's fantastic catch in Goldman's 10-K. Apparently, Goldman now has a new risk factor:
[O]ur businesses ultimately rely on human beings as our greatest resource, and from time-to-time, they make mistakes that are not always caught immediately by our technological processes or by our other procedures which are intended to prevent and detect such errors. These can include calculation errors, mistakes in addressing emails, errors in software development or implementation, or simple errors in judgment. We strive to eliminate such human errors through training, supervision, technology and by redundant processes and controls. Human errors, even if promptly discovered and remediated, can result in material losses and liabilities for the firm.
We can only speculate as to what specific, as-yet-undisclosed, human error prompted this disclosure, but if I had to make a bet, my money would be on an email address auto-fill mistake that is now the subject of some behind-the-scenes settlement discussions, the details of which will only come to light if negotiations fail and a public lawsuit is filed.
Next up, we have a Hunger-Games inspired video created by Morgan Stanley for its branch managers' meeting. The 10-minute long video depicts branch managers forced to compete to the death to maintain their positions. Apparently, Morgan Stanley shelved the video (which cost $100K to produce) out of concern that it displayed a certain callousness towards the actual real life people who were losing their jobs. So, now, of course, to demonstrate its sensitivity, Morgan Stanley has launched an internal investigation to discover the identity of the person who leaked the video.
Also, the Supreme Court decided Yates v. United States, concerning whether the disposal of undersized fish counted as the destruction of a tangible object intended to impede a federal investigation, in violation of the Sarbanes-Oxley Act. The Court held that it did not. Others have explored the implications of Yates for Obamacare and the case against Dzhokhar Tsarnaev's friends, but I'm far more interested in the headlines the case inspired, including In Overturning Conviction, Supreme Court Says Fish Are Not Always Tangible, Supreme Court: One Fish Two Fish Red Fish Blue Fish (a reference to Justice Kagan's dissent, which cited Dr. Seuss), Fisherman let off the hook in U.S. white-collar crime ruling, High Court SOX Fish Ruling Cuts Hole In Prosecutors’ Net, Supreme Court Throws Prosecutors Overboard in Fisherman Case, Supreme Court tosses ‘fishy’ conviction of Florida fisherman into the drink, and my personal favorite, Cortez case: Small fish, wide net.
Last but not least, the dress may be blue - but it's been nothing but green for the British retailer that sells it. (BuzzFeed didn't do so badly, either; it had to increase its server capacity by 40% to handle dress-related traffic.)
Friday, February 27, 2015
I've enjoyed getting to know a bit about University of Pennsylvania Psychology Professor Angela Duckworth's work on "grit." Duckworth and her co-authors call grit "perseverance and passion for long-term goals," and they claim that grit can be predictive of certain types of success.
Can we, as educators, teach grit? If so, how? Duckworth asks, but doesn't fully answer these questions in her popular TED talk. She does, however, think Stanford Psychology Professor Carol Dweck's work on growth mindset, which I wrote about a few months ago, offers the most hope.
Do readers have any thoughts on this subject? Feel free to leave a comment or e-mail me your thoughts.