Friday, November 22, 2013
Andrew A. Schwartz has posted Rural Crowdfunding on SSRN with the following abstract:
One reason that economic development in rural America lags behind its urban counterpart is the persistent lack of venture capital for rural entrepreneurs. Geography deserves much of the blame, as angel investors and venture capitalists tend to live and work in metropolitan areas on the coasts, in places like Silicon Valley and Boston. Many rural areas are literally thousands of miles away, with the result that venture capital has rarely found its way to rural regions.
Recent federal legislation, however, has the potential to change this dynamic. The JOBS Act authorizes the sale of securities over the Internet to large numbers of investors, each of whom only invests a small dollar amount. This “crowdfunding” of securities is a promising means for rural entrepreneurs, as well as farmers and others, to access venture and business capital.
Kathleen Weiss Hanley and Stanislava Nikolova have posted The Removal of Credit Ratings from Capital Regulation: Implications for Systemic Risk on SSRN with the following abstract:
We examine whether the removal of references to credit ratings affects one channel for the transmission of systemic risk identified by the Financial Stability Oversight Council: asset liquidation. In 2009 and 2010 insurance regulators replaced credit ratings with model-generated valuations for determining required capital and accounting treatment of residential and commercial mortgage-backed securities. We document that this regulatory change results in significant capital savings though much of the savings are accompanied by large write-downs. We find that insurers who save more capital under the new regime are less likely to sell distressed RMBS and CMBS, and also less likely to gains trade corporate bonds. We also show that the regulatory change reduces the need for insurers to raise additional capital through equity issuance. Finally, valuation-based capital regulations, in contrast to credit-rating-based ones, allow insurance companies to purchase assets below investment grade and retain an investment grade equivalent capital treatment. This creates the potential for yield chasing and may shift insurance companies’ portfolios toward greater risk-taking than may be advisable from a regulatory perspective.
North American Securities Administrators Association President, Andrea Seidt, has issued a statement on the SEC Adviser Exam Funding. Seidt states:
NASAA shares the concerns of the [Securities and Exchange Commission’s Investor Advisory Committee] and SEC Chair Mary Jo White that existing SEC resources are inadequate to detect or credibly deter frauds that might occur in federally-registered investment advisers. To hear the SEC Chair say, five years after the financial meltdown, that approximately 40 percent of SEC-registered investment advisers (who collectively manage $50 trillion) still have not received their first SEC examination should be a wake-up call to everyone. . . .
By authorizing the SEC to use revenue derived from the self-funding of examinations to augment [Office of Compliance Inspections and Examinations's] exam program, the legislation recommended by the IAC would permit the SEC to establish and maintain a robust adviser examination program that periodically adjusts to correspond to changes in its examination responsibilities. It would appear to create a viable, long-term solution to a problem that has plagued the SEC for decades.
North American Securities Administrators Association President, Andrea Seidt, has issued a statement on the SEC’s Support for Fiduciary Duty for Broker-Dealers. Seidt reports, "State securities regulators strongly support the recommendations of the SEC’s Investor Advisory Committee to extend a fiduciary duty to broker-dealers when they provide personalized investment advice to retail investors, and to call for legislation to fund investment adviser examinations. NASAA encourages the SEC and Congress to take swift action on each of these important recommendations."
North American Securities Administrators Association President, Andrea Seidt, has issued a statement on Regulation A+. Seidt states:
Title IV of the JOBS Act requires the SEC to adopt a rule to provide an exemption for certain offerings up to $50 million. Because of its similarity to the current exemption under Regulation A, which is capped at only $5 million, this new exemption is commonly referred to as Regulation A+.
These offerings will be exempt from SEC registration under the new Section 3(b)(2) of the Securities Act of 1933, but they will be subject to registration at the state level unless the securities are listed on a national securities exchange or sold to a qualified purchaser as defined by the SEC.
Given the risky nature of investments in startups, and the fact that the states have traditionally been the primary regulator of small offerings, NASAA believes state oversight of these offerings is essential. However, we recognize the need to change some of our longstanding policies to make Reg A+ successful.
Toward that end, NASAA has consulted with a task force of the American Bar Association to develop a proposal that peels back some of our normal guidelines to accommodate this new type of offering.
As part of the proposal, we have designed a multistate review process in which one or two states will take a lead role in reviewing a registration application and working through any deficiencies with the company issuing the securities in a set timeframe.
In addition, we are developing a multistate electronic filing platform that will allow one-stop filing with all states, and we intend to build out that system to accommodate Reg A+ filings. Think of it as the equivalent of a CRD/IARD system for multistate offerings for the corporation finance world.
NASAA recently released for public comment a proposal to establish this new multistate review program.
Thursday, November 21, 2013
Wednesday, November 20, 2013
Yuta Seki has posted Capital Market Reform and the Challenges Facing the New Government in Korea on SSRN with the following abstract:
Korea's capital market reforms gathered momentum when the IMF program it adopted following the Asian Currency Crisis came to an end in 2001. The reforms (e.g., the establishment of Korea Exchange through the integration of the country's three existing exchanges, measures to promote the exchange-traded derivative market, and the enactment of the Financial Investment Services and Capital Markets Act) have had a certain degree of success, leading, for example, to the expansion of Korea's capital markets and greater participation by overseas investors. Nevertheless, some critics say that Korea's capital markets lack dynamism as a result, for example, of an absence of competition among the exchanges and an excessive degree of concentration in the chaebol. There has also been some concern about the country's rapidly aging population, the strength of the currency, falling property prices, and a perceived decline in the ability of the country's banks and companies to weather hard times. It will therefore be interesting to see how the new government tries to restructure the economy and revitalize its markets.
On November 19th, 2013, Andrew Ceresney, Co-Director of the Division of Enforcement at the SEC, delivered the keynote address at the International Conference on the Foreign Corrupt Practices Act in Washington, D.C. Ceresney summarized his remarks in the following manner:
In short, let me assure you that [the SEC] will remain the vigilant cop on the beat when it comes to the FCPA. I am confident that we will remain aggressive and proactive in enforcing the FCPA. And through strong enforcement, we will continue to level the playing field for U.S. companies doing business abroad and hold corrupt actors accountable when they fail to play by the rules. We also recognize, however, that successful enforcement is assisted by cooperation from others.
Ceresney's remarks suggest that aggressive enforcement of the FCPA will continue, and there will be no return to the "quiet period" that occurred during the first few decades of the FCPA's existence in which enforcement actions were few and far between.
Tuesday, November 19, 2013
Commentary on Chair White’s Speech on “The Importance of Trials to the Law and Public Accountability”
On November 15, 2013, Commissioner Daniel M. Gallagher offered informal remarks at Columbia Law School on leading issues in securities regulation and enforcement. He chose to focus his comments on the imposition of corporate penalties in enforcement matters. He stated, "the amounts of the penalties that the SEC imposes against corporations today are eye-popping and likely would have shocked the legislators who voted for the Remedies Act and the Commission that sought penalty authority from Congress." Because shareholders are the individuals who ultimately shoulder the cost of corporate penalties, he went on to say, "[t]he single most important issue in this analysis is whether the shareholders have received an improper benefit from the corporation’s misconduct." His view is that this is the required resulted based on the text and legislative history of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, Pub. L. No. 101-429, 104 Stat. 931 (1990).
Although likey a correct interpretation of the law, these remarks will almost certainly raise concerns from those who are not fans of corporate liability. This is because corporate penalties often prove to be a distraction from pursuing those who actually are most responsible for the wrongdoing.
Monday, November 18, 2013
Tim Husson, Craig J. McCann, Eddie O'Neal, and Carmen Taveras have posted Private Placement Real Estate Valuation on SSRN with the following abstract:
As a result of the Securities and Exchange Commission's relaxation of its prohibition against the marketing of private placements, investors will soon be exposed to a broad array of syndicated commercial real estate investments. Private placement commercial real estate investments are illiquid and so cannot be easily valued by reference to frequent transactions in the same asset in active markets.
We have reviewed over 200 syndicated commercial real estate private placement memorandums and find that virtually all include projected cash flows. This study explains how investors and their advisors can use these projections to develop estimates of investment value. We determine a lower bound for discount rates applicable to the cash flows derived from commercial real estate and apply the methodology to an actual commercial real estate private placement investment. Our findings suggest significant overvaluation by commercial real estate private placement investment sponsors even when using conservative estimates of discount rates.
Sara K. Phillips and David C. Buxbaum have posted Capital Markets: Mongolia on SSRN with the following abstract:
2013 has been a period of both progress and setbacks for Mongolia’s burgeoning capital market. Highly anticipated amendments to the country’s Securities Market Law were passed and more significant legal developments may still be on the horizon. Currently, Mongolia’s capital market is limited, with only a small number of stocks and company and government bonds being traded regularly. However, as described in this article, the newly amended Securities Market Law heralds a new age for Mongolia’s capital market, paving the way for greater foreign investment within the country’s dominant mining industry and allowing for greater diversification of the economy. Mongolia’s newly amended Securities Market Law is a far cry from its predecessor. The Law incorporates a number of important financial instruments, including futures, options and derivatives. The Law’s amendments also promise to bring greater transparency to the market through the use of international disclosure requirements. Other important amendments will allow for multiple listings – which for Mongolian companies’ capital raising endeavours is of particular importance.
As in many emerging markets with vast natural resources, support for the mining industry is mixed. Mongolia’s government and its citizens support the country’s growth, but remain wary of greater foreign influence and perceived external control over Mongolia’s mineral resources. However, as seen in Mongolia’s past, the country demonstrates a consistent willingness to work alongside foreign investors, and Mongolia’s lawmakers continue to evidence an immense capacity for adaptation and development, with an eye towards the country’s undoubtedly promising future. The role of the London Stock Exchange in helping to shape the Mongolian capital market’s future cannot be understated. Cooperation with the Mongolian Stock Exchange began in 2011, when the London Stock Exchange Group agreed to administer management, training and oversight to the Mongolian Stock Exchange. In addition, the London Stock Exchange was to provide information technology services via its MilleniumIT platform, which would serve to bolster Mongolia’s ‘trading and surveillance infrastructure’. Regulations and procedures must still be implemented under the newly amended Law, and this sizeable task has been delegated to Mongolia’s Financial Regulatory Commission. However, with the London Stock Exchange’s continued support, it is hoped that the country will soon see a market with greater liquidity. Many in the country believe that the Mongolian Stock Exchange could even see listings worth US $45 billion in the coming decade. Thus, in spite of the country’s recent economic troubles, for many investors the future seems wide open in the Mongolian capital market.
This article provides a legal overview of Mongolia’s capital markets, including an analysis of the country’s capital market legal framework, a market overview, structural considerations, tax considerations, and other important legal developments. In the country’s ever-changing legal landscape, this article seeks to provide informative insight into the promises and challenges facing Mongolia today – a country with one of the fastest economic growth rates in the world.
David Groshoff has posted Kickstarter My Heart: Extraordinary Popular Delusions and the Madness of Crowdfunding Constraints and Bitcoin Bubbles on SSRN with the following abstract:
This manuscript builds on my existing research program that (a) broadly seeks to analyze laws, regulations, instruments, and policy levers that inhibit a market’s ability to recognize an asset’s intrinsic value, whether in terms of financial, social, or human capital, and (b) explores and advances interdisciplinary corporate governance theories by employing a heterodox economic analytic to derive its proposal to the paradox of an unregulated virtual currency market (Bitcoins) and an overly regulated crowdfunding market (Kickstarter).
The manuscript functions not only as an homage to Charles MacKay’s legendary 1841 book, Extraordinary Popular Delusions and the Madness of Crowds, which described the human, social, and economic psychology of financial bubbles — particularly the Dutch tulip bulb bubble — but also as an offering of problems and proposals that crowdfunded and Kickstarted entrepreneurial businesses, including those funded by Bitcoin currencies, present for a wide swath of societal stakeholders.
To describe the problem, this manuscript (i) describes behavioral finance, (ii) details the new entrepreneurial business possibilities that virtual currencies and crowdfunded entities can explore, (iii) describes how current rules and regulations represent unnecessary constraints to traditional equity-based funding models and concerning governance models of entrepreneurial enterprises, and (iv) questions why one form of capital deployment (currencies) may provide equity-like returns and unique governance, while the other form of investing (crowdfunding), provides only soft-dollar-like returns and no governance for middle-class investors.
While both virtual currencies and crowdfunding represent risks, including economic bubble risk, this Article believes that a heterodox economic analysis demonstrates unnecessary constraints on entrepreneurial businesses imposed by extant regulation, regulators, and law and policymakers. To assuage these paradoxic problems for emerging business enterprises, this Article proposes a minarchist heterodox solution of modest statutory language that requires market-based solutions that employ needed risk reduction strategies while redeploying necessary capital to private startup business enterprises. This proposal thus benefits the middle class entrepreneurs, suppliers of capital, and job seekers harmed by the current regulatory regime, while permitting for an expansion of the U.S. and global economies.
Carol Liao has posted A Canadian Model of Corporate Governance: Insights from Canada's Leading Legal Practitioners on SSRN with the following abstract:
This report comes at a unique time in Canadian corporate governance history. It has been five years since the landmark decision of BCE Inc. v 1976 Debentureholders, a plan of arrangement case where the Supreme Court of Canada specifically addressed director duties in relation to stakeholder interests. In the decision, the court affirmed its earlier findings in Peoples Department Store Inc. (Trustee of) v. Wise and seemed to shift away from an Anglo-American definition of shareholder primacy. But of course, the current state of Canadian common law is only one part of a larger story. The Canadian securities commissions have become increasingly influential in the governance sphere, and by design are shareholder-focused. Canada is considered one of the most bidder-friendly jurisdictions in the world, as Canadian boards have a limited number of defensive tactics when faced with an unsolicited takeover bid. Shareholders’ rights have increased well beyond what was ever contemplated by Canadian corporate laws, and the issue of greater shareholder vs. board control has now become the topic of live debate. The release of competing proposals from the Canadian Securities Administrators and the Autorité des Marchés Financiers regarding the use of shareholder rights plans and defensive tactics in general have put these issues under increased scrutiny in Canada.
The conflicting theoretical positions from the courts and the securities commissions have enriched the dialogue on the current environment of Canadian corporate governance. This qualitative study brings together some of the top corporate legal minds in Canada to opine on the fundamental principles that are driving the development of Canadian corporate governance today. Interviews were conducted with 32 leading senior legal practitioners across Canada, who spoke candidly on matters involving shareholder primacy, director duties, stakeholder interests, common law and the courts, regulatory bodies, and the future trajectory of Canadian corporate governance, among other things. The observations from these senior practitioners provide a pulse check on the dynamic field of Canadian corporate governance. Taken within the context of today’s legal and regulatory environment, their insights piece together the framework of a Canadian model of corporate governance to further director knowledge and help inform future research.