Business Law Prof Blog

Sneaking business law into civil procedure

Although I blog on business issues, I spent most of my professional life as a litigator and this semester I teach civil procedure. A few weeks ago I asked my students to draft a forum selection clause and then discussed the Boilermakers v. Chevron forum selection bylaw case, which at the time was up on appeal to the Delaware Supreme Court.  The bylaws at issue required Delaware to be the exclusive venue for matters related to derivative actions brought on behalf of the corporation; actions alleging a breach of fiduciary duties by directors or officers of the corporation; actions asserting claims pursuant to the Delaware General Corporation Law; and actions implicating the internal affairs of the corporation.  

While I was not surprised that some institutional investors I had spoken to objected to Chevron’s actions, I was stunned by the vitriolic reactions I received from my students. I explained that Chevron and FedEx, who was also sued, were trying to avoid various types of multijurisdictional litigation, which could be expensive, and I even used it as a teachable moment to review what we had learned about the domiciles of corporations, but the students weren’t buying it.

Perhaps in anticipation of the likelihood of an affirmance from Delaware’s high court, the plaintiffs voluntarily dismissed their appeal, which may have been a smart tactical move. Now let’s see how many Delaware corporations move from the wait and see mode and join the 250 companies that already have these kinds of bylaws.  Interestingly, prior to the dismissal, only 1% of those surveyed by Broc Romanek indicated that they would never institute a forum selection bylaw. Given how broad some of these bylaws are, it may stem the tide of some of the litigation that I blogged about here as plaintiffs’ lawyers are forced to face Delaware jurists.  Yesterday, as we were discussing venue, I broke the news about the dismissal of the appeal to my students. Needless to say, many were disappointed. Perhaps they will feel differently after they have taken business associations next year.

 

 

The Impact of the Crowdfunding Exemption: The SEC's View

I have argued that, because of excessive regulatory costs, the new crowdfunding exemption in section 4(a)(6) of the Securities Act is unlikely to be as successful as hoped. (Rule 506(c) is another story; I expect that to be wildly successful.)

We now know what the SEC anticipates. Hidden deep within the SEC’s recent crowdfunding rules proposal is the Commission’s own estimate of the likely impact of the new exemption. (It’s on pp. 427-428, in the Paperwork Reduction Act discussion, if you want to look at it yourself.)

How Many Crowdfunded Offerings?

The SEC estimates that there will be 2,300 crowdfunded offerings a year once the new section 4(a)(6) exemption goes into effect, raising an average of $100,000 per offering. That’s a total of $230 million raised each year.

How Many Crowfunding Platforms?

The SEC estimates, “based, in part on current indications of interest” (p. 380) that 110 intermediaries will offer crowdfunding platforms for section 4(a)(6) offerings. Sixty of those will be operated by registered securities brokers and the other fifty will be operated by registered funding portals. (Non-brokers may act as crowdfunding intermediaries only if they register as funding portals.)

The Fight to Survive

If the SEC’s figures are correct, and who really knows, that’s an average of approximately $2 million raised per crowdfunding platform. I would expect many of those 110 platforms to fail rather quickly. Given the regulatory and other costs involved, crowdfunding intermediaries won’t survive for very long on 10-15% of $2 million a year. The SEC doesn’t appear to think so, either. They note (p. 380) that “it is likely that there would be significant competition between existing crowdfunding venues and new entrants that could result in . .  . changes in the number and type of intermediaries as the market develops and matures.”

Of course, as the proposal itself indicates, it’s impossible to predict exactly what will happen when the rules become effective. But it’s at least interesting to see the SEC’s own guesses.

Citizen Shareholders & the Retirement Revolution

I have a new article, Retirement Revolution: Unmitigated Risks in the Defined Contribution Society, which describes citizen shareholders--individual investors who enter the stock market through defined contribution plans--and examines the overlapping corporate and ERISA laws that govern their investments. 

If I haven't lost you with the mention of ERISA, here's an excerpt from the article:

A revolution in the retirement landscape over the last several decades shifted the predominant savings vehicle from traditional pensions (a defined benefit plan) to self-directed accounts like the 401(k) (a defined contribution plan) and has drastically changed how people invest in the stock market and why. The prevalence of self-directed, defined contribution plans has created our defined contribution society and a new class of investors — the citizen shareholders — who enter private securities market through self-directed retirement plans, invest for long-term savings goals and are predominantly indirect shareholders. With 90 million Americans invested in mutual funds, and nearly 75 million who do so through defined contribution plans, citizen shareholders are the fastest growing group of investors. Yet, citizen shareholders have the least protections despite conventional wisdom that corporate law and ERISA protections safeguard both these investors and their investments. As explained in an earlier paper, citizen shareholders do not fit neatly within the traditional corporate law framework because their investment within a defined contribution plan restricts choice and their indirect ownership status dilutes their information and voting rights, as well as exacerbates their rational apathy as diffuse and disempowered “owners.” 

-Anne Tucker

Can Law Reviews Learn from Ideas to Improve Scientific Research?

Last week, I posted a response to the New York Times article criticizing law reviews.  A friend pointed me to a cover story from the Economist, How science goes wrong: Scientific research has changed the world. Now it needs to change itself.  It's an interesting read.  This paragraph jumped out at me:

In order to safeguard their exclusivity, the leading journals impose high rejection rates: in excess of 90% of submitted manuscripts. The most striking findings have the greatest chance of making it onto the page. Little wonder that one in three researchers knows of a colleague who has pepped up a paper by, say, excluding inconvenient data from results “based on a gut feeling”. And as more research teams around the world work on a problem, the odds shorten that at least one will fall prey to an honest confusion between the sweet signal of a genuine discovery and a freak of the statistical noise. Such spurious correlations are often recorded in journals eager for startling papers. If they touch on drinking wine, going senile or letting children play video games, they may well command the front pages of newspapers, too.

 The article also calls for more acceptance of what it calls "humdrum" or "uninteresting" work that confirms or replicates other trials, a long-standing practice underappreciated by both journals and those who award grants.  

Not all is lost. One interesting suggestion:  "Peer review should be tightened—or perhaps dispensed with altogether, in favour of post-publication evaluation in the form of appended comments." The article notes that the areas of physics and mathematics have made progress using the latter method.

 We do have some versions of the post-publication evaluation in the law review world, often published as responses to the work of others, or articles that build upon such work.  Over at The Conglomerate the post, Bebchuk v. Lipton on Corporate Activism,  provides a good example of two papers take opposite views, with David Zaring's post itself serving the role of post-publication evaluator (on a small, but I think important, scale):

Some of the studies cited are quite old, and not all of the journals are top-drawer.  But others seem quite on point.  Perhaps the disputants will next be able to identify some empirical propositions with which they agree, and others with which they do not (other than, you know, sample selection).

Many blogs do this (including, sometimes, the Business Law Prof Blog), and I think it is a important role. Perhaps it is one the should be more formalized so that the value of such commentary can be more clearly recognized as part of the scholarly realm. For example, perhaps law reviews and other journals should consider publishing updates, major citiations, or critiques from various sources made about articles the review/journal has previously published. 

There are many ideas out there, and we should keep looking for ways to keep developing useful scholarship. And by useful, I mean complete, thoughtful, and careful work, including what some people might consider "not novel," if not "humdrum" or "uninteresting."  We don’t always need the legal equivalent of studies about drinking wine and letting kids play video games, not that there's anything wrong with either of those things. 

Crowdfunding Rules Clear Up JOBS Act Ambiguities and Loopholes

Title III of the JOBS Act, which contains the new crowdfunding exemption, is not a particularly well-drafted statute. It was put together rather quickly in the Senate as a substitute for the crowdfunding exemption that passed the House and never went through a formal committee markup. The resulting exemption contains a number of ambiguities and loopholes. I am happy to report that the SEC’s proposed rules to implement the crowdfunding exemption clear up the major statutory problems.

1. $1 Million Offering Limit Includes Only Crowdfunded Offerings

Section 4(a)(6)(A) of the Securities Act provides that the exemption is available only if

the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, is not more than $1,000,000.

The “including” clause makes it unclear if only securities sold pursuant to the crowdfunding exemption are included, or if securities sold pursuant to other exemptions during the 12-month period must also be subtracted from the $1 million limit. I argued (here, at p. 200) that only crowdfunded securities should count against the limit, but conceded that this statutory language is “a little unclear.” (I vacillated on this; I argued in an earlier draft that other sales should count against the limit, but changed my mind before my article went to press.)

The SEC has accepted my final interpretation. Proposed Rule 100(a)(1) of the new crowdfunding rules only includes securities sold “in reliance on Section 4(a)(6) of the Securities Act.” Securities sold pursuant to other exemptions would not have to be subtracted from the $1 million limit.

2. Ambiguities in the Individual Investment Limits Cleared Up

The statute limits the amount each investor may invest annually in crowdfunded offerings. The maximum amount an investor may invest is based on that investor’s net worth and annual income. Unfortunately, the section of the statute that sets those limits contains a couple of ambiguities.

Ambiguity No. 1: Two Different Limits Applicable to Some Investors

The statute provides for two sets of limits; which limits apply depends on the investor’s annual income and net worth. The lower set of limits, in section 4(a)(6)(B)(i), applies “if either the annual income or the net worth of the investor is less than $100,000.” The higher set of limits, in section 4(a)(6)(B)(ii), applies “if either the annual income or the net worth of the investor is equal to or more than $100,000.”

I and others have pointed out ( here, at  201) that if one of those two figures (annual income and net worth) is less than $100,000 and the other is equal to or greater than $100,000, then the statute says both limits apply.

The SEC has resolved this ambiguity. Under proposed Rule 100(a)(2), if either net worth or annual income are equal to or greater than $100,000, then the higher limit applies. The lower limit applies only if both annual income and net worth are less than $100,000.

Ambiguity No. 2: What Exactly is the Higher Limit?

The higher limit, if applicable, is “10 percent of the annual income or net worth of such investor, as applicable.” Section 4(a)(6)(B(ii). Unfortunately, the statute doesn’t say whether the limit is the greater or the lesser of those two figures. If, for example, 10% of annual income is $15,000 and 10% of net worth is $12,000, is the limit $15,000 or $12,000?

Proposed Rule 100(a)(2)(ii) clarifies this. The limit is the greater of the two numbers.

3. Financial Disclosure Loophole Blocked

The statutory exemption includes a possible loophole in the issuer’s financial disclosure requirements. The financial information to be provided by the issuer depends on the target amount of the crowdfunded offering. The statute sets up three target amount categories ($100,000 or less; $100,000-$500,000; more than $500,000), and imposes a greater burden as the target amount gets larger.

Since nothing in the exemption prevents an issuer from raising more than its stated target amount, this opens a loophole (which I discuss here, at p. 204). An issuer could specify a target amount of $100,000, to minimize its financial disclosure, then raise up to the full $1 million.

The SEC has closed this loophole. Proposed Rule 201(h) requires the issuer to disclose whether it will accept investments in excess of the target amount, and, if so, the maximum amount it will accept. An instruction to proposed Rule 201(t) indicates that, if the issuer is willing to accept more than its target amount, the required financial disclosure is based on “the maximum offering amount that the issuer will accept.” As a result of these rules, the issuer will not be able to specify an artificially low target amount to avoid the more burdensome financial disclosure.

Taub on Decades of Bailouts, Captive Regulators, and Toxic Bankers

Jennifer Taub has published a new book, “Other People's Houses: How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business.”  Here is an excerpt from the Yale University Press description:

Focusing new light on the similarities between the savings and loan debacle of the 1980s and the financial crisis in 2008, Taub reveals that in both cases the same reckless banks, operating under different names, received government bailouts, while the same lax regulators overlooked fraud and abuse. Furthermore, in 2013 the situation is essentially unchanged. The author asserts that the 2008 crisis was not just similar to the S&L scandal, it was a severe relapse of the same underlying disease. And despite modest regulatory reforms, the disease remains uncured: top banks remain too big to manage, too big to regulate, and too big to fail.

UPDATE: The book will be in bookstores in May, but can be pre-ordered now.

Crowfunding: Even Al Jazeera

You know crowdfunding's getting a lot of media attention when even Al Jazeera covers it.

Bill Black on the Most Ironic Sentence of the Financial Crisis

Bill Black takes down claims of a “victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.”  (HT: naked capitalism.)  The full piece is available here, and I highly recommend you go read the whole thing.  What follows is a brief excerpt:

The author of the most brilliantly comedic statement ever written about the crisis is Landon Thomas, Jr….  Everything worth reading is in the first sentence, and it should trigger belly laughs nationwide. “Bank of America, one of the nation’s largest banks, was found liable on Wednesday of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.” … Yes, we have not seen such an aggressive effort since Captain Renault told Rick in the movie Casablanca that he was “shocked” to discover that there was gambling going on (just before being handed his gambling “winnings” which were really a bribe)…. The jurors found that BoA (through its officers) committed an orgy of fraud in order to enrich those officers…. The journalist’s riff is so funny because he portrays DOJ’s refusal to prosecute frauds led by elite BoA officers as “aggressive.”  Show the NYT article to friends you have who are Brits and who claim that Americans are incapable of irony…. I’m not sure whether the DOJ consciously deciding not to investigate, bring civil suits, or prosecute the most destructive frauds in history represents “aggressive” or “accountable” to the DOJ.  We do know, however, the fantasy that caused DOJ to give these control frauds a free pass. Benjamin Wagner, a U.S. Attorney who is actively prosecuting mortgage fraud cases in Sacramento, Calif., points out that banks lose money when a loan turns out to be fraudulent. “It doesn’t make any sense to me that they would be deliberately defrauding themselves,” Wagner said. “They” refers to the CEO.  “Themselves” refers to the bank.  “They” are not “defrauding themselves.” …  The game being played out in all the corporate settlements, like the JPMorgan deal, is that the controlling officers, even when they grew wealthy by looting the shareholders, use corporate funds to cut deals that protect them from being prosecuted or having to return their fraudulent proceeds.  We all know who pays for this – the shareholders.  Only a comic genius would have the mastery of irony necessary to call the ability of elite bankers to become wealthy through fraud with immunity “accountability.” … The self-congratulations that DOJ press flacks regularly issue to attempt to con journalists and the public into believing that DOJ is aggressively holding elite bankers accountable for their frauds make “Baghdad Bob” seem credible by comparison.

FINRA Proposal for Crowdfunding Funding Portals

I blogged yesterday about the SEC's release of proposed rules to implement the JOBS Act crowdfunding exemption.

Both the JOBS Act and the proposed rules require that crowdfunding offerings be made through either registered securities brokers or registered funding portals. "Funding portal" is a new category of regulated entity created by the JOBS Act specifically for exempted crowdfunded offerings. The Act requires non-broker funding portals to belong to a national securities association subject to rules "written specifically for registered funding portals." (See section 3(h)(2) of the Exchange Act, as amended by the JOBS Act.) Because of that requirement, non-broker funding portals cannot engage in crowdfunding until those rules are in place.

Somewhat overlooked in the hoopla surrounding the SEC rules proposal was the release of proposed rules by the Financial Industry Regulatory Authority (FINRA) to regulate funding portals. The FINRA notice is here and the proposed rules are here.

I hope the SEC and FINRA are careful to coordinate final adoption of the crowdfunding rules and the FINRA rules. Funding portals cannot engage in crowdfunding until they have registered under the FINRA rules. If the crowdfunding rules go into effect before funding portals can register with FINRA, brokers will be able to begin operating crowdfunding platforms before funding portals, giving registered brokers a competitive advantage.

 

Now that juries and the DOJ have spoken, will boards be more active in shaping ethical culture in the C-Suite?

CEOs and executives just can’t get a break in the news lately.  A jury found both former Countrywide executive Rebecca Mairone and Bank of America liable for fraud for Countrywide’s “Hustle” loans in 2007 and 2008 (see here). Martha Stewart has had to renegotiate her merchandising agreement with JC Penney to avoid hearing what a judge will say about that side deal in the lawsuit brought against her by Macy’s, with whom she purportedly had an exclusive merchandising deal (see here).  JP Morgan Chase is in talks to pay $13 billion to settle with the Department of Justice over various compliance-related failures, but the company still faces billions in claims from angry shareholders. The company isn’t out of the woods yet in terms of potential criminal liability (see here). CEO Jamie Dimon isn’t personally accused of any wrongdoing, and in fact has been instrumental in achieving the proposed settlements. But in the past he has faced questions from institutional shareholders about his dual roles as chair of the board and CEO. Those questions may come up again in the 2014 proxy season.

The Bank of America verdict and the recent JP Morgan Chase settlement may herald a new age of prosecutions and settlements both for institutions and executives for compliance failures and criminal activity. With the recent announcement of a $14 million dollar award for an SEC whistleblower coupled with the SEC's pronouncements about getting its "swagger" back, we can expect more legal actions to come as employees feel incentivized to come forward to report wrongdoing. 

So what is the role of the board in directing, managing, and shaping corporate culture? In my former life as a compliance officer this issue occupied much of my time.  My peers and I scoured the newspapers looking for cautionary tales like the ones I recounted above so that we could remind our internal clients and board members of what could happen if they didn’t follow the laws and our policies.

Bryan Cave partner Scott Killingsworth has written a white paper on the importance of the board in monitoring the C-Suite.  He examines the latest research in behavioral ethics citing Lynne Dallas, Lynn Stout, Krista Llewellyn, Maureen Muller-Kahle, Max Bazerman and Francesca Gino, among others.  It’s definitely worth a read by board members in light of recent headlines. The abstract is below:

The C-suite is a unique environment peopled with extraordinary individuals and endowed with the potential to achieve enormous good – or, as recent history has vividly shown, to inflict devastating harm. Given that senior executives operate largely beyond the reach of traditional compliance program controls, a board that aspires to true stewardship must embrace a special responsibility to support and monitor ethics and compliance in the C-suite. 

By themselves, the forces at large in the C-suite would challenge the ability of even the most conscientious and rational executives to make consistently irreproachable decisions. The C-suite environment is characterized by the presence of power, strong incentives and huge temptations (financial and other), high ambition, extreme pressure, a fast pace, complex problems and few effective external controls. The problem of C-suite ethics has a deeper dimension, though, than the mere impact of strong pressures upon rational decision-makers. Recent behavioral research brings the unwelcome news that the subversive effects of these pressures are magnified by systematic, predictable human failings that can prompt us to slip our moral moorings and overlook when others do so. We are just beginning to understand the insidious power that such factors as motivated blindness, attentional blindness, conflicts of interest, focused "business-only" framing, time pressure, irrational avoidance of loss, escalating commitment, overconfidence and in-group dynamics can exert below the plane of conscious thought, even over people who have good reason to consider themselves ethically strong. and behaviorally upright. 

But we also know that organizational culture can dramatically affect both ethical conduct and reporting of misconduct, by establishing workplace norms, harnessing social identity and group loyalty and increasing the salience of ethical values. How can these learnings inform the board’s interaction with, and monitoring of, the C-suite? And how can the board help forge a stronger connection between the C-Suite and the organization’s compliance and ethics program? This paper suggests several key strategies for dealing with different aspects of this complex problem. 

 

SEC Crowdfunding Rules Proposal

The SEC has finally released its long-awaited proposal for rules to implement the crowdfunding exemption in the JOBS Act. It's available here. The 585-page proposal is substantial, even by SEC standards.

The statutory deadline for the SEC to adopt these rules was Dec. 31, 2012, but almost no one with a sophisticated knowledge of securities law, including me, expected the SEC to meet that deadline. I wish I had bet with some of the people in the crowdfunding community who naively expected that deadline to be met; I could have cleaned up.

There's a 90-day comment period. (Giving people 90 days to comment on a 585-page proposal that it took 18 months to draft is chutzpah.) Because of that, adoption before the end of this year is impossible. [I corrected this. The original post said 60 days.]

I am happy to report that SEC staff members have read my two articles on crowdfunding and the JOBS Act crowdfunding exemption (available here and here). Those articles are cited several times in the release. I will be interesting to see if the staff actually acted on any of my recommendations or accepted any of my interpretations in drafting the rule. But the JOBS Act itself puts significant restrictions on the content of the exemption, so it's not clear there's much they can do to cure some of the problems.

A few bloggers began chiming in shortly after the release of the proposal with summaries and instant analysis. The blogosphere is becoming like the race to the courthouse for shareholder litigation, often with similar quality. I will be offering some comments on the proposal, but only after I have had time to absorb and analyze it.

The Legal Job Market and the Case for Emphasizing Business Law Classes

Yesterday, the Executive Director, James Leipold, of NALP (the National Association of Law Placement) presented data regarding law graduate hiring trends from 2000 through 2012, both nationally and for my school (Georgia State University College of Law).  It provided an understanding of the changes to the legal market as a whole, and for our graduates specifically.  I wasn’t aware of the data compiled by NALP and available on their website prior to this presentation, and man was I impressed.  As a faculty member who frequently counsels students on job searches, the data paints a very interesting story about HOW a majority of law graduates find jobs and WHERE they find them.  The data also tells a very compelling story of how the 2008 financial crisis/Great Recession has impacted the legal hiring market.  (In short:  big law jobs are down significantly which was created downward pressure on alternative career paths as students who would have traditionally pursued big law jobs compete for other positions.) 

On the HOW question, the data confirmed a suspicion of mine about how a majority of students find jobs.  Of course these statements will be either more or less true depending on the reputational capital of your school.  Before the Great Recession approximately 20% of students found their post-graduation job through on campus interviewing (OCI) and that number is now approximately 14%.  This means that even before the Great Recession, but certainly today, a vast majority of students find jobs through other means such as networking/personal referral, self-initiation such as inquiring about job opportunities and sending out resumes, and responding to postings on sites like Monster.com.   In thinking about HOW law students find jobs, this information provides a powerful narrative that students who are working hard to find a job are not alone, and not the outlier now, or even in the past.  This information will shape the advice that I give students about where and how to place their energy during their three years in law school.  If in-school activities do not land a student on law review and the top 10% of their class, then focusing on external opportunities to network and gain professional contacts in law practice and law-related fields should be a top priority for students.

And now for the WHERE part, private practice job placement is down from a steady 55% to approximately 50% of post-graduation jobs.  One of the sectors that has absorbed this shift is JD hiring by businesses, which is up to almost 18% of new graduate jobs (from historic percentages of 12-13%).   The NALP report on 2012 graduates 9 months after graduation concludes that:

“Employment in business was 17.9%, down a bit from the historic high of 18.1% reached in 2011, but still higher than the 15.1% for the Class of 2010. The percentage of jobs in business had been in the 10-14% range for most of the two decades prior to 2010, except in the late 1980s and early 1990s, when it dipped below 10%. About 29% of these jobs were reported as requiring bar passage, and about 39% were reported as jobs for which a JD was an advantage.”

Out of a presentation that included a host of facts and figures, I want to highlight one other part of the picture painted by the data.  Feedback from legal employers (mostly private practice law firms) said that in new-JD hires, they were looking for students who understand that practicing law in a firm is a business and how they fit into that business model. They also want students to have a basic understanding of financial literacy skills.   I plan on sharing this information with our students who are turning their attention to scheduling classes for their spring semester. I see this as a clear justification for emphasis on business-related classes.

-Anne Tucker

Step Back A Bit: Law Review Criticisms Not Exactly Unique

Yesterday, the New York Times published what I consider a medicocre criticism of law reviews.  Not that some criticism isn't valid.  It is.  I just think this one was poorly executed.  Consider, for example, these thoughtful responses from Orin Kerr and Will Baude.

As I have thought about it, one thing that struck me was about the Times article was the opening:

 “Would you want The New England Journal of Medicine to be edited by medical students?” asked Richard A. Wise, who teaches psychology at the University of North Dakota. 

Of course not. Then why are law reviews, the primary repositories of legal scholarship, edited by law students?

I don't disagree with the premise, but note how limiting it is.  First, it talks about one journal, one that is highly regarded.  I know some people hate all law reviews, but I humbly suggest that most people consider elite journals like the Yale Law Journal a little differently.  (It's also true that some journals like the Yale Law Journal happen to use some forms of peer review in their process.) 

Second, the implication is that medical journals have it all figured out.  That's apparently not true, either.  An article from the Journal of the Royal Society of Medicine, What errors do peer reviewers detect, and does training improve their ability to detect them?, had the following goal:

Objective

To analyse data from a trial and report the frequencies with which major and minor errors are detected at a general medical journal, the types of errors missed and the impact of training on error detection.

The study concluded: 

Editors should not assume that reviewers will detect most major errors, particularly those concerned with the context of study. Short training packages have only a slight impact on improving error detection.  

Consider also, for example, this article from National Geographic, Fake Cancer Study Spotlights Bogus Science Journals: 

A cancer drug discovered in a humble lichen, and ready for testing in patients, might sound too good to be true. That's because it is. But more than a hundred lower-tier scientific journals accepted a fake, error-ridden cancer study for publication in a spoof organized by Science magazine.

Finally, the problem for all kinds of journals is hardly new.  This study, Peer-review practices of psychological journals: The fate of published articles, submitted again, from 1982, determined that the problem can also run in the other direction. From the Abstract: 

A growing interest in and concern about the adequacy and fairness of modern peer-review practices in publication and funding are apparent across a wide range of scientific disciplines. Although questions about reliability, accountability, reviewer bias, and competence have been raised, there has been very little direct research on these variables.

The present investigation was an attempt to study the peer-review process directly, in the natural setting of actual journal referee evaluations of submitted manuscripts. As test materials we selected 12 already published research articles by investigators from prestigious and highly productive American psychology departments, one article from each of 12 highly regarded and widely read American psychology journals with high rejection rates (80%) and nonblind refereeing practices.

With fictitious names and institutions substituted for the original ones (e.g., Tri-Valley Center for Human Potential), the altered manuscripts were formally resubmitted to the journals that had originally refereed and published them 18 to 32 months earlier. Of the sample of 38 editors and reviewers, only three (8%) detected the resubmissions. This result allowed nine of the 12 articles to continue through the review process to receive an actual evaluation: eight of the nine were rejected. Sixteen of the 18 referees (89%) recommended against publication and the editors concurred. The grounds for rejection were in many cases described as “serious methodological flaws.” A number of possible interpretations of these data are reviewed and evaluated.

In the interest of full disclosure, I admit I have a fondness for law reviews. I am a former editor in chief of one, have served as an advisor to another, serve as the current president of our law review alumni association, and serve on the review's Advisory Board of Editors. The things I learned, from (usually) patient and careful authors, were exceedingly valuable and help guide me to do what I do now.  I also have worked with several journals and reviews from the author side, and I have been usually impressed, and sometimes very frustrated, which is also true of almost every job experience I have ever had.  And I am confident every editor in chief of a law review has worked with an author or two who drove them nuts.  

I understand the frustrations, and the criticisms are often valid, at least to a point.  But let's not undercut the efforts of committed and careful, if not experienced, student editors, who usually work their tails off.  And let's not assume that every other discipline has it all figured out.  I think it's clear they don't.  There may be a better system (and I suspect there is), but let's not keeping dumping on a system (and students who work hard) without proposing some alternatives that we have a reason to believe will actually be better.  

Haan on Outside Spending and Disclosure by Privately-Held Business Entities

Sarah C. Haan has posted “Opaque Transparency: Outside Spending and Disclosure by Privately-Held Business Entities in 2012 and Beyond” on SSRN.  Here is a portion of the abstract:

In this Article, I analyze data on outside spending from the treasuries of for-profit business entities in the 2012 federal election – the very spending unleashed by Citizens United v. FEC. I find that the majority of reported outside spending came from privately-held, not publicly-held companies, including a significant proportion of unincorporated business entities such as LLCs, and that more than forty percent of spending by privately-held businesses was characterized by opaque transparency: Though fully disclosed under existing campaign finance disclosure laws, something about the origin of the money was obscured. This happened when political expenditures were spread among affiliated business-donors, typically donating similar amounts to the same recipient(s) on similar dates, and when for-profit business entities were used as shadow money conduits. I also argue that, due to differences between access-oriented and replacement-oriented electoral strategies, for-profit businesses engaged in outside spending in a federal election are likely to be experiencing insider expropriation. The expropriation of a business entity’s political voice by a controlling person is another potential way in which voters are misled in our current disclosure regime. In light of these spending patterns, and evidence of insider expropriation of the political voice of many privately-held business donors, I argue that privately-held business entities that engage in federal election-related spending should be compelled to reveal the individual(s) who control them.

A Possible Introduction to Fraud-on-the-Market Reliance

Stephen Davidoff recently posted a piece on DealBook entitled “A Push to End Securities Fraud Lawsuits Gains Momentum,” in which he notes that “Halliburton is asking the Supreme Court to confront one of the fundamental tenets of securities fraud litigation: a doctrine known as “’fraud on the market.’”  He goes on to provide a lot of interesting additional details, so you should definitely go read the whole thing, but I focused on the following:

In its argument, Halliburton is asking the Supreme Court to confront one of the fundamental tenets of securities fraud litigation: a doctrine known as “fraud on the market.” The doctrine has its origins in the 1986 Supreme Court case Basic v. Levinson. To state a claim for securities fraud, a shareholder must show “reliance,” meaning that the shareholder acted in some way based on the fraudulent conduct of the company. In the Basic case, the Supreme Court held that “eyeball” reliance — a requirement that a shareholder read the actual documents and relied on those statements before buying or selling shares — wasn’t necessary. Instead, the court adopted a presumption, based on the efficient market hypothesis, that all publicly available information about a company is incorporated into its stock price…. A group of former commissioners at the Securities and Exchange Commission and law professors represented by the New York law firm Wachtell, Lipton, Rosen & Katz have also taken up the cause. In an amicus brief, the group argues that, in practice, the Basic case has effectively ended the reliance requirement intended by the statute, something that is not justified. They rely on a forthcoming law review article by an influential professor, Joseph A. Grundfest of Stanford Law School. Professor Grundfest argues that the statute on which most securities fraud is based — Section 10(b) of the Exchange Act — was intended by Congress to mean actual reliance because the statute is similar to another one in the Exchange Act that does specifically state such reliance is required.

This got me to thinking about how I might introduce the fraud-on-the-market reliance presumption to students the next time I teach it.  This is what I came up with as a possibility:

Assume you know that a particular weather app is 100% accurate.  Assume also that you know all your neighbors check the app regularly.  If in deciding whether you need an umbrella you simply look out your window to see whether any of your neighbors are carrying one, rather than checking the weather app, are you not still actually relying on the weather app?  The fraud-on-the-market presumption of reliance effectively answers that question in the affirmative.  In the securities context it provides that instead of reviewing all publicly available disclosures when deciding to buy or sell securities, it is enough for you to simply “look out your window” at the market price because we assume the market price reflects the consensus equilibrium of all publicly available information.

One might protest that the plaintiff should still have to prove that all the neighbors are in fact checking the weather app, and this is in fact the case when we require plaintiffs seeking the benefits of the FOM presumption to prove the relevant market is efficient.  Alternatively, one might protest that the idea that the actions of your neighbors reflect well-enough the information provided by the weather app is questionable, but since Eugene Fama just won the Nobel prize in economics it might be an uphill battle to overturn the presumption on that basis.  Another objection might be that we don’t need the presumption because there are enough alternative mechanisms to hold corporate actors accountable for fraud, and it is certainly the case that when the Supreme Court adopted the FOM presumption, a large part of the rationale was the perception that there was a need for the presumption in order to facilitate actions that would otherwise never be brought in any form.  What I see as a possible obstacle to this approach is that, while one may debate whether the Roberts Court is in fact pro-business, I do believe it is concerned about appearing overly so – and authoring a decision that states we no longer need the FOM presumption because alternative corporate accountability mechanisms are working so efficiently strikes me as just throwing fuel on that fire when the Court could arguably reach the same result by continuing to tighten up class-action law generally.  Finally, one might object that the FOM presumption actually allows folks who just run out of the house without either checking the app or looking out their window to claim the presumption, but at least a partial answer to this objection is that the Basic decision itself provides that: “Any showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance,” Basic Inc. v. Levinson, 485 U.S. 224, 248 (1988), and this is typically understood to at least include plaintiffs who are, to continue the analogy, rushing out of the house because they don’t have time to grab an umbrella.

Obviously, the issues are ultimately more complicated than the foregoing suggests, but it is just intended to serve as an introduction, which can be expanded to account for more complicated matters as the discussion proceeds. I’d be curious to hear what readers think needs to be added/amended to make this introduction work.

Fox on What We’ve Learned from the Financial Crisis

Really great piece by Justin Fox on “What We’ve Learned from the Financial Crisis” over at the Harvard Business Review.  What follows is a brief excerpt, but you'll want to go read the whole thing.

Five years ago the global financial system seemed on the verge of collapse. So did prevailing notions about how the economic and financial worlds are supposed to function. The basic idea that had governed economic thinking for decades was that markets work…. In the summer of 2007, though, the markets for some mortgage securities stopped functioning…. [T]he economic downturn was definitely worse than any other since the Great Depression, and the world economy is still struggling to recover…. Five years after the crash of 2008 is still early to be trying to determine its intellectual consequences. Still, one can see signs of change…. To me, three shifts in thinking stand out: (1) Macroeconomists are realizing that it was a mistake to pay so little attention to finance. (2) Financial economists are beginning to wrestle with some of the broader consequences of what they’ve learned over the years about market misbehavior. (3) Economists’ extremely influential grip on a key component of the economic world—the corporation—may be loosening.

Fox goes on to dissect each of these shifts, putting them in historical perspective.  As I said, I think it is well worth your time to read his entire piece.  A couple of additional noteworthy quotes from his analysis of item (3) above follow:

• [M]ost economic theories also build upon a common foundation of self-interested individuals or companies seeking to maximize something or other (utility, profit) …. Still, one narrow way of looking at the world can’t be the only valid path toward understanding its workings. There’s also a risk that emphasizing individual self-interest above all else may even discourage some of the behaviors and attitudes that make markets work in the first place—because markets need norms and limits to function smoothly.

• I don’t think the shareholder value critics have come up with a coherent alternative. We’re all still waiting for some other framework with which to understand the corporation—and economists may not be able to deliver it. Who will? Sociologists have probably been the most persistent critics of shareholder value, and of the atomized way in which economists view the world. Some, such as Neil Fligstein, of UC Berkeley, and Gerald Davis, of the University of Michigan, have proposed alternative models of the corporation that emphasize stability and cohesion over transaction and value.

Proxy advisors, plaintiffs' lawyers and pay ratio- oh my!

For those of you who have seen the classic film The Wizard of Oz, you may remember the scene where Dorothy, the tin man, and the scarecrow made their way through the Spooky Forest chanting "lions and tigers and bears, oh my."  They feared what could come next on their journey. Some in the business community have a similar fear of what could come next with the rise of shareholder activism, increasing but unclear regulation, and more demands from particular investors.

On October 16th,  I had the privilege of serving on a panel with the corporate secretary of JP Morgan Chase, an executive of the AFL-CIO, and the fund controller for Vanguard during an informational session on corporate governance and proxy trends. The US Chamber of Commerce Center for Capital Markets Competitiveness sponsored the event.

The morning started with New Jersey Congressman Scott Garrett setting the tone for the day by praising SEC Chair Mary Jo White for her recent statements promoting agency independence and discretion, and decrying disclosure overload.  He expressed his opposition to what he perceived to be a growing push to “hijack” the SEC disclosure regime to push "environmental and social causes that are immaterial to investors."  He spent the remainder of his time outlining his concerns about the rise of proxy advisor firms, the over reliance on these firms by clients, potential conflicts of interest, and the lack of competition (2 companies control 97% of the market).  Proxy advisors in attendance invited the Congressman and all interested parties to meet to discuss transparency and the value they bring to the process. 

Former SEC chair Harvey Pitt echoed Congressman Garrett’s sentiments later in the day. Pitt also talked about the tensions between investors who want less disclosure and those who want more, the less than stellar record that the SEC has had recently with rulemaking and litigation, and the need for higher resubmission thresholds for shareholder proposals. Pitt also called pay ratio “one of the dumbest provisions in Dodd-Frank…because it either states the obvious or confuses the issue beyond recognition.”

Although I missed his report, Jim Copland of the Manhattan Institute presented proxymonitor.org’s report of the 2013 proxy season.  Of note the average Fortune 250 company faced 1.26 shareholder proposals, up from 1.22 proposals per company in 2012. But only 7 percent of shareholder proposals received the backing of a majority of shareholders in 2013, down from 9 percent in 2012. Of the 20 proposals that received a majority vote, over half involved just two issues: whether to elect all corporate directors annually and whether each director should be required to receive a majority of votes cast to be elected. 99% of shareholder proposals were sponsored by either organized labor, or a social, religious or other public policy organization. Finally, this tidbit --“among the 41 Fortune 250 companies contributing $1.5 million or more to the political process in the 2012 election cycle, 44 percent faced a labor-sponsored proposal, as opposed to only 18 percent of all other companies. Those companies that gave at least half of their donations to support Republicans were more than twice as likely to be targeted by shareholder proposals sponsored by labor-affiliated funds as those companies that gave a majority of their politics-related contributions on behalf of Democrats.” Nonetheless, political spending and lobbying proposals received only 18% of the shareholder vote. The full report is here.

During our panel, I focused my remarks on the three recent waves of litigation by a small cadre of enterprising lawyers alleging: (1) directors breached their duties by approving excessive compensation and failing to rescind the compensation after failed say-on-pay votes (despite say-on-play's nonbinding nature and the fact that Dodd-Frank makes it clear the law does not create any new duties); (2) inadequate proxy disclosures; and (3) failure to comply with 162(m) of the IRS code.  I also speculated about potential suits that may come in the 2016 proxy season regarding pay ratio, and discussed some of the environmental and social shareholder proposals. JP Morgan Chase, the AFL-CIO and Vanguard talked about the increasing importance of engaging with shareholders early to work through issues in advance of shareholder proposals. In fact the union indicated that through the engagement process, it had withdrawn 43% of its proposals.

On the pay ratio matter, the AFL-CIO lauded the benefits of additional disclosure (although they have no ideal ratio in mind), and stated that their top concerns included executive compensation, board diversity and board tenure. Vanguard, which owns a bit of most companies, discussed its priorities of majority voting and board classification, and educated the audience on how the firm targets companies for engagement, which the speaker noted was a “process, while voting is an event.”

All in all, an informative morning for those in attendance, who should now be better equipped to deal with the Spooky Forest of the 2014 proxy season. 

Law & Economics

The 2013 Nobel Prize in Economics winners were announced earlier this week and the award was shared by three U.S. Economists for their work on asset pricing.  Eugene Fama of the University of Chicago, Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University share this year’s prize for their separate contributions in economics research.

The work of the three economics is summarized very elegantly in the summary publication produced by The Royal Swedish Academy of Sciences titled “Trendspotting in asset markets”.  The combined economic contribution of the three researchers is described below:

The behavior of asset prices is essential for many important decisions, not only for professional inves­tors but also for most people in their daily life. The choice on how to save – in the form of cash, bank deposits or stocks, or perhaps a single-family house – depends on what one thinks of the risks and returns associated with these different forms of saving. Asset prices are also of fundamental impor­tance for the macroeconomy, as they provide crucial information for key economic decisions regarding consumption and investments in physical capital, such as buildings and machinery. While asset prices often seem to reflect fundamental values quite well, history provides striking examples to the contrary, in events commonly labeled as bubbles and crashes. Mispricing of assets may contribute to financial crises and, as the recent global recession illustrates, such crises can damage the overall economy. Today, the field of empirical asset pricing is one of the largest and most active subfields in economics.

 This year’s award has several implications for those of us interested in the legal side of law and economics.  First, Fama is the grandfather of the efficient capital market hypothesis, the foundation for fraud on the market, a economics elements incorporated into securities fraud litigation.

Second, Fama’s inclusion in the award is being heralded by some as a win, or vote of confidence, for free marketers whose regulatory view (that markets should be largely unregulated) rests on the fundamental assumption that markets are efficient.  On the other hand, Shiller’s inclusion in the award challenges the coup that can be claimed by free marketers because Shiller has long questioned the efficiency of the markets.  John Cassidy at The New Yorker writes “Shiller, in showing that the stock market bounced up and down a lot more than could be justified on the basis of economic fundamentals such as earnings and dividends, kept alive the more skeptical and realistic view of finance that Keynes had embodied in his “beauty contest” theory of investing.”  Market efficiency, or lack thereof, are key arguments against and for market regulations.  Trends in support for either theory or validation of one could signal future approaches to regulation.

Finally, the focus on asset pricing, particularly Fama’s work has some potential implications for the mutual fund industry.  Fama’s efficiency view of the markets largely discounts the value of actively managed funds, once costs and annual fees are deducted because the market, if efficient, cannot consistently be beaten.  This last thread regarding fund management is a theme woven into some of my more recent research on the regulations, risks, and ownership anomalies facing retirement investors.  More on this later, with links to newly published papers of course, but for now read the Nobel summary document included above and briefly contemplate taking the time to audit an economics course next semester—I am going to browse the b-school catalogue now.

-Anne Tucker

You Can’t Pierce the Corporate Veil of an LLC Because It Doesn't Have One

Early this month, the United States District Court for the Middle District of Pennsylvania decided Gentex Corp. v. Abbott, Civ. A. No. 3:12-CV-02549,  (M.D.Pa. 10-10-2013).  The outcome of the case is not really objectionable (to me), but some of the language in the opinion is. As with many courts, this court conflates LLCs and corporations, which is just wrong.  The court repeatedly applies “corporate” law principles to an LLC, without distinguishing the application.  This is a common practice, and one that I think does a disservice to the evolution of the law applying to both corporations and LLCs.

I noted this in a Harvard Business Law Review Online article a while back:

Many courts thus seem to view LLCs as close cousins to corporations, and many even appear to view LLCs as subset or specialized types of corporations. A May 2011 search of Westlaw’s “ALLCASES” database provides 2,773 documents with the phrase “limited liability corporation,” yet most (if not all) such cases were actually referring to LLCs—limited liability companies. As such, it is not surprising that courts have often failed to treat LLCs as alternative entities unto themselves. It may be that some courts didn’t even appreciate that fact. (footnotes omitted).

To be clear, though, Pennsylvania law applies equitable concepts, such as piercing the corporate veil, to LLCs.  Still, courts should not discuss LLCs as though they are the same as corporations or improper outcomes are likely to follow.  When dealing with LLCs, the concept should be referred to as “piercing the LLC veil” or “piercing the veil of limited liability.”  Instead, though, courts tend to discuss LLCs and corporations as equivalents, which is simply not accurate.

By way of example, the Gentex court states:

Helicopterhelmet.com's principal place of business is in South Carolina, while Helicopter Helmet, LLC is a Delaware corporation with its principal place of business also in South Carolina.

 Gentex Corp. v. Abbott, 3:12-CV-02549, 2013 WL 5596307 (M.D. Pa. Oct. 10, 2013) (emphasis added).  It is not!  It is a Delaware LLC!

Further, the court says:

 From the record, it does not appear that Helicopter Helmet LLC was anything less than a bona fide independent corporate entity, or that Plaintiff intends to allege as much. 

Id. (emphasis added).  Again – no.  An LLC is NOT a corporate entity.  It is as, Larry Ribstein liked to say, an uncorporation.  In fact, I would argue that Pennsylvania law, in Title 15, is called Corporations and Unincorporated Associations for a reason. Chapter 89 of that title is called Limited Liability Companies.

In fairness to Judge Brann, who wrote the Gentex opinion, Pennsylvania courts have merged the concepts of LLC and corporate veil piercing in other cases, even when discussing the differences between the two.  In Wamsley v. Ehmann, C.A. No. 1845 EDA 2009 (Pa. Super. Ct. Feb. 28, 2012), summarized nicely here, the court explained:

These factors [for determining whether to pierce the veil] include but are not limited to: (1) undercapitalization; (2) failure to adhere to corporate formalities; (3) substantial intermingling of corporate and personal affairs; and (4) use of the corporate form to  perpetrate fraud. [citing Village at Camelback Property Owners Assn. Inc.] . . .

Certain corporate formalities may be relaxed or inapplicable to limited liability corporations and closely held companies. Advanced Telephone Systems, Inc., supra at 1272. An LLC does not need to adhere to the same type of formalities as a corporation. Id. (finding lack of financial statements, bank accounts, exclusive office space, and tax returns was not evidence of failure to adhere to corporate formalities because entity was LLC with limited scope). In fact, the appropriate formalities for an LLC “are few” and, depending on the purpose of the LLC, it may not need to be capitalized at all. Id. Moreover, not all corporate formalities are created equal. Id. at 1279. To justify piercing the corporate veil, the lack of formalities must lead to some serious misuse of the corporate form. Id. 

Okay, got that?  The rules that apply to corporations apply to LLCs.  Except when they don’t because LLCs are sometimes different.  To justify piercing the “corporate veil,” then, an LLC must have seriously misused the corporate form, even though an LLC is a distinct form from the corporation. This is not especially helpful, I am afraid. 

Veil piercing is difficult enough to plan around, and the seemingly random nature of veil piercing is often noted (with some, such as Prof. Bainbridge, arguing that we should do away with it altogether).  There has not been much of a move to abolish veil piercing, and there hasn't even been much progress to make the standards for veil piercing more clear. Still, given the prevalence of LLCs, it’s high time courts at least help LLC veil piercing law evolve into murky standards specifically designed for LLCs.  That doesn’t seem like too much to ask.  

Double-Door Offerings under the JOBS Act

The JOBS Act offers two new opportunities to offer securities on the Internet without Securities Act registration. Both the Rule 506(c) exemption and the new crowdfunding exemption could be used to sell securities on web sites open to the general public. But could a single web site offer securities pursuant to both exemptions at the same time (assuming the SEC eventually proposes and adopts the regulations required to implement the crowdfunding exemption)?

Background: The two exemptions

Rule 506(c) allows an issuer to publicly advertise a securities offering, as long as the securities are only sold to accredited investors. Rule 506(c) is not limited to Internet offerings, but it could be used by an issuer to advertise an offering on an Internet site open to the general public—as long as actual sales are limited to accredited investors.

The new crowdfunding exemption, added as section 4(a)(6) of the Securities Act, allows issuers to sell up to $1 million of securities each year. The offering may be on a public Internet site, as long as that site is operated by a registered securities broker or a “funding portal,” a new category of regulated entity created by the JOBS Act.

Could a single intermediary do both 506(c) and crowdfunded offerings?

Yes, but only if the intermediary is a federally registered securities broker.

Rule 506(c) does not limit who may act as an intermediary, but the crowdfunding exemption says that only registered brokers or funding portals may host crowdfunded offerings. By definition, funding portals appear to be limited to offerings under the crowdfunding exemption. A funding portal is “any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6).” Exchange Act section 3(a)(80), as amended by the JOBS Act. Thus, funding portals could not act as intermediaries in Rule 506(c) offerings.

The JOBS Act does not impose a similar limitation on brokers, so brokers could act as intermediaries in both Rule 506(c) and crowdfunded offerings.

Could a broker include both types of offerings on the same web site?

The answer to this is probably yes.

Rule 506(c) does not limit the content of the web site, so any limitations are going to come from the crowdfunding exemption. Crowdfunding intermediaries are subject to a number of requirements, but the crowdfunding exemption does not appear to prohibit the inclusion of other offerings on the same web site.

Operating a dual site could be cumbersome. For example, Rule 506(c) offerings could appear on the site's main page, but no investor may see crowdfunded offerings until they satisfy the crowdfunding exemption’s investor education requirements. But unless the SEC rules implementing the crowdfunding exemption prohibit it, dual-exemption sites should be possible.

Could an issuer do a double-door offering, using a single web site to simultaneously sell the same securities in both types of offerings?

I have heard that some ill-advised fledgling intermediaries have plans to do this, but the answer to this question is no. The integration doctrine would not allow it.

Rule 506(c) incorporates the requirements of Rule 502(a) of Regulation D, and Rule 502(a) indicates that “[a]ll sales that are part of the same Regulation D offering must meet all of the terms and conditions of Regulation D.” Section 4(a)(6) of the Securities Act, the crowdfunding exemption, exempts “transactions” that meet the criteria of the exemption.

Under that transactional language, as consistently interpreted by the SEC and the courts over the years, the entire offering must comply with the requirements of the exemption, or none of the sales is exempted. An issuer cannot sell parts of a single offering pursuant to two separate exemptions.

Unless an integration safe harbor is available, and none would apply here, the SEC uses a five-factor test to determine whether ostensibly separate offerings are part of the same transaction. This test considers (1) whether the sales are part of a single plan of financing; (2) whether the sales involve issuance of the same class of securities; (3) whether the sales are made at or about the same time; (4) whether the issuer receives the same type of consideration; and (5) whether the sales are made for the same general purpose.

Under this test, an issuer could not sell a security pursuant to the Rule 506(c) exemption and at the same time sell the same security on the same web site pursuant to the crowdfunding exemption. Those two ostensibly separate offerings would be integrated and would have to fit within a single exemption. (There is vague language in the crowdfunding exemption that might arguably protect against integration, but the argument is a weak one. For a discussion of that argument see pp. 213-214 of my article here.)