Securities Law Prof Blog

Director Ceresney on The Impact of SEC Enforcement on Public Finance

On October 13, 2016 at the Securities Enforcement Forum, Andrew J. Ceresney, the Director of the SEC's Division of Enforcement gave a keynote address on The Impact of SEC Enforcement on Public Finance.  The text of the address is available here.

Melissa Hodgman Named Associate Director in SEC Enforcement Division

Details available here.

Solenkey on the Listing and De-Listing of Securities in India

Shreya Solenkey has posted Listing and De-listing of Securities in India: A Comprehensive View on SSRN with the following abstract:

Ever since Stock Exchange came into being transfer of securities has become an easier and organized task. Stock exchange provides the convenience of trading in securities from any place, however in order to trade the securities are required to be listed on a recognized stock exchange. Only securities of a public company can be listed by agreeing to a Listing Agreement. Listing of securities allows liquidity, and protection of investors by ensuring full disclosure.

Similarly, there is a process of delisting securities, it is either voluntary or compulsory. Compulsory delisting can be due to non-compliance of rules of stock exchanges or listing agreement. Voluntary delisting takes place during a merger or acquisition.

The importance of the process of listing/delisting of securities has gained importance ever since 2012, Foreign Direct Investment policies have enabled mergers and acquisitions. With both foreign companies merging with domestic companies and a merger between domestic companies the process listing and delisting have become unavoidable as it one of the many steps included in merger/acquisition.

This paper will discuss the impact of various provisions and acts such as the Companies Act 1956, SEBI Act, Securities Contract (Regulation) Act, 1956, Securities Contract (Regulation) Rules, 1957, Stock Exchange guidelines, SEBI (Delisting of Securities) Guidelines 2003 etc. The researcher will discuss the process of growth in India for listing/delisting securities. Listing Agreement and its development will be discussed upon by the researcher in context of investor protection. A comprehensive summary of rules for listing and delisting under the National Stock Exchange and Bombay Stock Exchange keeping in mind the growing importance of the process after the FDI Policy 2012.

 

Ahdieh on Legal Scholarship

Robert B. Ahdieh has posted Notes from the Border: Writing across the Administrative Law/Financial Regulation Divide on SSRN with the following abstract:

A central feature – if not the central feature – of legal scholarship today is analysis across divides.

It is surprising, then, how little has been written across the divide that separates administrative law and financial regulation. That is perhaps especially so, given the modest nature of the relevant divide: one that is intra- rather than interdisciplinary, one that operates within rather than across geographic boundaries, and one that involves no temporal dimension but operates entirely within current-day law.

For all the proximity in their interests, targets of study, and even analytical tools, however, scholars of administrative law and of financial regulation (including securities regulation, in particular) have shown strikingly little interest in one another: scholars of each discipline rarely read one another, cite one another, or even talk to one another.

To engage this peculiar lacuna in the legal literature, this brief essay proceeds in four stages. First, I review the history of the divide, as well as recent efforts to bridge it. Second, I outline core characteristics of the divide: the two fields’ distinct motivations, divergent assumptions about the market, and particular limitations. With a clearer picture of the nature of the divide, I suggest some of the insights that might be gained from engagement across it. Finally, I conclude by acknowledging the challenges attendant to writing across the administrative law/financial regulation divide – while also highlighting the need to overcome those challenges.

Fisch on Insider Trading

Jill E. Fisch has posted Family Ties: Salman and the Scope of Insider Trading on SSRN with the following abstract:

On October 5, 2016, the Supreme Court heard oral argument in Salman v. United States. Salman raises questions about the scope of insider trading liability for tippees under the personal benefit test previously articulated in Dirks v. SEC. Some critics have argued the Second Circuit’s decision last year in United States v. Newman demonstrates that the personal benefit test is unduly restrictive and should be reconsidered. Salman offers an opportunity for the Supreme Court to do so.

This essay argues that Salman does not require the Court to reexamine the parameters of insider trading liability. Instead, the Court can affirm Salman on the basis of a simple principle: family is different. Specifically, the essay explains the reasons that tips to close family members provide a personal benefit to the tipper consistent with the Dirks test. As Justice Breyer observed at oral argument in Salman, “to help a close family member is like helping yourself.”

Dirks was motivated by an effort to provide sufficient predictability to enable market participants to search out information without undue fear of liability. The test has proved workable in practice – imposing liability in cases of insider self-dealing while constraining overreaching by government prosecutors. It is unnecessary to revisit this balance to affirm Salman’s conviction.

Cable on Equity Compensation in Startups

Abraham J. B. Cable has posted Fool's Gold? Equity Compensation & the Mature Startup on SSRN with the following abstract:

There are a record number of startups valued at $1 billion or more, but there are signs that these so-called unicorns (or “mature startups”) are faltering. Employees who are compensated with stock options may bear the brunt of these disappointments due to senior rights of managers and financial investors.

Private placement regulations are surprisingly lax when it comes to protecting employees as compared to other types of investors. While securities laws once followed other fields in considering employees to be vulnerable, the SEC has gradually relaxed regulation of equity grants to employees.

This essay considers a fundamental question: are startup employees capable investors? The analysis reveals a counter-intuitive possibility: startup employees may be relatively capable investors in a company's early stages (when the risk of investment is sometimes perceived as highest) but poorly equipped to navigate the risks of a mature startup.

 

Keeper on Crowdfunding in New Zealand

Trish Keeper has published Equity Crowdfunding in New Zealand: A Progressive Experiment on SSRN with the following abstract:

When the first tranche of provisions of the Financial Markets Conduct Act 2013 (‘the FMC Act’) came into force on 1 April 2014, a new licensing regime for crowdfunding service providers (‘CSPs’) was introduced into New Zealand law – one of the most progressive and innovative operating in the world today. The regime works on the basis that an offer of financial products to an investor does not require the FMC Act's standard disclosure documents necessary for an initial public offering, if the offer of financial products is by, or through, a licensed CSP and the offer is under the market service licence held by the CSP.

The paper starts with an overview of the nature of equity crowdfunding and how it implicates securities law. It then briefly outlines how this activity was regulated in New Zealand previously and discusses how the new regulatory framework operates. The final part of the paper describes how the crowdfunding markets have developed in the last two years and identifies future developments and potential threats to the operation of New Zealand’s crowdfunding regime.

SEC Announces Enforcement Results for FY 2016

Details available here.

Kidd on Hedge Funds

Jeremy Kidd has posted Quacks or Bootleggers: Who's Really Regulating Hedge Funds? on SSRN with the following abstract:

Influential scholars of corporate law have questioned previous federal interventions into corporate governance, calling it quackery. Invoking images of medical malpractice, these critiques have argued persuasively that Congress, in responding to crises, make policy that disrupts efficient private rules and established state laws. This article applies the Bootleggers and Baptists theory to show that Dodd-Frank’s hedge-fund rules are more than just negligent or reckless, but designed to benefit special interests that compete with the hedge fund model. Those rules offer no solutions to any real or perceived risks arising from hedge-fund investing, but might offer an advantage to competitors of hedge funds.

Velikonja on Administrative Proceeding Settlements

Urska Velikonja has posted Securities Settlements in the Shadows on SSRN with the following abstract:

The Dodd-Frank Act authorized the Securities and Exchange Commission (“SEC”) to obtain civil fines against any person in administrative proceedings. Since 2011, the SEC has significantly increased the number of settlements filed in administrative proceedings instead of in federal district court. Before Dodd-Frank, 40% of settlements were filed in administrative proceedings; in fiscal year 2015, over 80% were. The shift to filing settled actions in administrative proceedings instead of in court is significant because it reduces transparency and oversight of settlement practices. Settled actions filed in administrative proceedings are confidential until after the Commission has approved it. By contrast, settled actions filed in court are reviewed by the judge. On occasion, judges have requested additional briefing and even oral argument to ensure that the proposed settlement is in the public interest. Although such interventions are rare, they have had a significant impact on settlement practices. Now that settlements have migrated to administrative proceedings, any oversight that courts exercised is gone, and SEC settlements have departed from SEC’s own announced objectives. The Essay proposes reintroducing some external constraint on securities settlements, whether through courts, administrative processes, or greater transparency.

Call For Papers: National Business Law Scholars Conference

The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 8-9, 2017, at the University of Utah S.J. Quinney College of Law.

This is the eighth meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at [email protected] with an abstract or paper by February 17, 2017. Please title the email “NBLSC Submission – {Your Name}.” If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.” Please specify in your email whether you are willing to serve as a moderator. We will respond to submissions with notifications of acceptance shortly after the deadline. We anticipate the conference schedule will be circulated in May.

Keynote Speaker:

Lynn A. Stout, Distinguished Professor of Corporate & Business Law, Cornell Law School

Plenary Author-Meets-Reader Panel:

Selling Hope, Selling Risk: Corporations, Wall Street, and the Dilemmas of Investor Protection by Donald C. Langevoort, Thomas Aquinas Reynolds Professor of Law, Georgetown Law School

Commentators:

Jill E. Fisch, Perry Golkin Professor of Law, University of Pennsylvania Law School

Steven Davidoff Solomon, Professor of Law, University of California, Berkeley School of Law

Hillary A. Sale, Walter D. Coles Professor of Law, Washington University School of Law

Conference Organizers:

Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia School of Law)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)

Please save the date for NBLSC 2018, which will be held Thursday and Friday, June 21-22, at the University of Georgia School of Law

New in Print

The following law review articles relating to securities regulation are now available in paper format:

Erica Gorga, Is U.S. Law Enforcement Stronger Than that of a Developing Country? The Case of Securities Fraud by Brazilian Corporations and Lessons for the Private and Public Enforcement Debate, 54 Colum. J. Transnat'l L. 603 (2016).

Michel A. Habib & D. Bruce Johnsen, The Quality-Assuring Role of Mutual Fund Advisory Fees, 46 Int'l Rev. L. & Econ. 1 (2016).

Taylan Mavruk &H. Nejat Seyhun, Do SEC's 10b5-1 Safe Harbor Rules Need to be Rewritten?, 2016 Colum. Bus. L. Rev. 133.

Karen K. Nelson & A.C. Pritchard, Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors, 13 J. Empirical Legal Stud. 266 (2016).

John I. Sanders, Comment, Spoofing: A Proposal for Normalizing Divergent Securities and Commodities Futures Regimes, 51 Wake Forest L. Rev. 517 (2016).

Adam J. Sulkowski, City Sustainability Reporting: An Emerging & Desirable Legal Necessity, 33 Pace Envtl. L. Rev. 278 (2016).

Yesha Yadav,  Insider Trading and Market Structure, 63 UCLA L. Rev. 968 (2016).

David Zaring, Enforcement Discretion at the SEC, 94 Tex. L. Rev. 1155 (2016).

NASAA Statement on Bipartisan Congressional Effort Encouraging the SEC to Finalize Rulemaking Related to Intrastate Crowdfunding

The Statement is available here.

David Saltiel Named as Head of SEC's Office of Analytics and Research in the Division of Trading and Markets

Details available here.

Gubler on Insider Trading

Zachary James Gubler has posted Reframing United States v. Salman on SSRN with the following abstract:

If a corporate insider breaches a confidence to his employer by passing along nonpublic information to a family member, who then uses it to profit in the stock market, can it be inferred that the insider must have received some sort of personal benefit in exchange for that tip? That’s the issue in United States v. Salman, a once-in-a-decade insider trading case that the Supreme Court will hear in its 2016 Term. If the issue sounds narrow, that’s because it is. In part, however, this narrowness is the result of how the case has been framed thus far. All parties involved, including the Court, seem to assume that one must prove a personal benefit in order to establish liability when insider trading involves a tip. That was true once. But the Court’s own insider-trading jurisprudence has moved beyond the logic of that requirement. The Court would do well to acknowledge this fact, thereby bringing much needed clarity to a notoriously messy and unpredictable area of law.

Wroldsen on Crowdfunding

Jack Wroldsen has posted Crowdfunding Investment Contracts on SSRN with the following abstract:

This article examines the first wave of crowdfunding investment contracts that were offered in the U.S. during the first month after crowdfunding investment became legal in May 2016. Assessing the earliest possible data sample of crowdfunding investment contracts is particularly important because crowdfunding investment platforms create influential path dependencies that drive start-up companies to use the standardized contract templates that the platforms promote. This paper provides a basis, grounded in actual crowdfunding investment contracts, for recommending improvements to the agreements that govern the emerging field of crowdfunding investments while also establishing a baseline from which to measure future evolution of crowdfunding investment contracting practices.

Initial crowdfunding investment offerings include contracts for six distinct types of investments: common stock, preferred stock, interest-bearing loans, revenue-sharing arrangements, convertible debt, and future equity. In addition, many of the initial crowdfunding investment offerings also include a rewards component, in the style of Kickstarter crowdfunding campaigns.

This article’s analysis of each type of crowdfunding investment contract leads to four primary observations. First, crowdfunding investors may garner more practical protections from their collective leverage through social media than from formal contract rights. Second, crowdfunding investment intermediaries (i.e., websites known as funding portals) profoundly influence crowdfunding contracting practices by forging the standardized channels through which crowdfunding investments flow. Third, in the initial set of crowdfunding investment contracts, debt securities were significantly less likely to be offered than equity securities, and hybrid revenue-sharing securities were even less common, even though debt and revenue-sharing securities are well-suited for stable businesses with positive cash flows that seek investments from the crowd. Fourth, two new forms of simplified contracts — the “SAFE” and the “KISS”, which are specially tailored for crowdfunding investment offerings with high-growth potential — hold great promise, though not without drawbacks, for efficiently providing crowdfunding investors with the types of protections that venture capitalists typically demand when investing in seed-stage start-up companies.

Li on Crowdfunding in China

Jing Li has posted Equity Crowdfunding in China: Current Practice and Important Legal Issues on SSRN with the following abstract:

By studying two leading Chinese equity crowdfunding portals, namely, Renrentou and Zhongou8, this paper provides the very first empirical evidence on the practice and regulation of equity crowdfunding in China. In the case of Renrentou, I examine a hand-collected sample consisting of the investment documentation of the 53 crowdfunding projects that are successfully completed as of June 30, 2016 on the portal. It is found that the utmost task of the contractual terms in these agreements is to secure the investors’ right of return. Control on the part of investors is rather minimal, and most of the time only encompasses the basic information and monitoring rights. Although investors are not first pooled to form a new entity before investing, it is still a prevalent practice for projects to commission a third party manager to manage the investment for the crowdfunders and exercise monitoring rights in the project entity on their behalf. In the Zhongtou8 case study, I go beyond the margins of investment contracts and explore the operation of the business with a both broader and deeper view. It is found that, the leading investors of crowdfunding projects are very often served by entities that are in some ways related to the founder of the portal. In addition, the portal is also identified to have financial interests in many projects besides that. While these practices do raise concerns about potential conflicts of interests, the regulatory solutions proposed by the Crowdfunding Measures are nevertheless overly cautious and effectually not enforceable. It is therefore argued that the regulator should rather focus on ensuring effective disclosure from the parties with better information, so that the investors can use it to make effective decisions. Furthermore, by setting down high entry thresholds for qualified investors, the Crowdfunding Measures fail to establish equity crowdfunding as a new financing alternative, but rather create a minimized version of the NEEQ private placement. As such, it would be meaningful for China to consider lowering the investor qualifications and allow crowds to participate, so that equity crowdfunding can grow into a true new alternative for entrepreneurs to avail in addition to existing fundraising channels.

Bengtzen on Regulation FD

Martin Bengtzen has posted Private Investor Meetings in Public Firms: The Case for Increasing Transparency on SSRN with the following abstract:

While developments in the law of insider trading usually attract significant scholarly interest, far less attention has been paid to the design and effects of the Securities and Exchange Commission’s complementary Regulation Fair Disclosure. Yet, this article argues that the SEC’s current quandaries relating to insider trading enforcement are largely self-inflicted and could have been avoided if it had better aligned its Reg. FD with the Supreme Court’s insider trading jurisprudence.

Introduced 16 years ago to prevent senior officers of public firms from leaking material information to preferred investors and financial analysts, Reg. FD was designed to function as a backstop for undesirable favoritism that insider trading law, as developed by the Supreme Court, could not reach — in particular the situation where a corporate manager divulges valuable information to a preferred investor not for any obvious personal benefit (which would trigger insider trading law) but for the ostensible benefit of the firm.

This article analyzes Reg. FD through the lens of private investor meetings — personal conversations between corporate managers and investors they select — to find that Reg. FD should not be expected to deter selective disclosure. The regulation was disjointed from the outset and professional market participants rationally appear to have taken advantage of its permissive design to obtain preferential access to inside information. For example, through one recently introduced service offering — “corporate access” — selected investors spend billions of dollars on private access to corporate managers in return for the opportunity to lawfully trade on valuable information before it is released to the public.

The article argues that the design of Reg. FD causes undesirable effects and that the SEC should redraft the regulation to follow the Supreme Court’s classification of corporate information as firm property. The SEC could then regulate selective disclosures as transactions in this property that require public disclosure, similar to how insiders must report their personal transactions in firm stock. By increasing transparency to inform investors of selective disclosure events, concerns recently expressed by the SEC and the Department of Justice relating to insider trading enforcement could be alleviated and their requests for Supreme Court intervention in insider trading law reconsidered.

Salman Oral Argument Transcript

For readers interested in insider trading regulation, the Supreme Court of the United States heard Salman v. United States today.  The oral argument transcript is available here. 

Ho on Crowdfuning in Hong Kong

Kong Shan John Ho has posted Regulating Equity Crowdfunding in Hong Kong: Appreciating Anglo-American Experiences and Recognizing Local Conditions on SSRN with the following abstract:

In March 2016, the Financial Services Development Council (FSDC) of Hong Kong published a paper to examine as to whether the financial market of Hong Kong should introduce regulatory framework to promote equity crowdfunding. This article examines the recent experiences adopted by the United States and United Kingdom in setting a regulatory framework on equity crowdfunding and seeks to identify what Hong Kong can learn from its Anglo-American counterparts in regulating such activity. It is ultimately argued that these experiences provide a good platform for implementing a broadly similar regime in Hong Kong by permitting crowdfunding within the scope of current regulated activities.