Securities Law Prof Blog

New Securities Law Articles in Print

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

Darian M. Ibrahim, Public or Private Venture Capital?, 94 Wash. L. Rev. 1137 (2019).

John D. Morley, Too Big to Be Activist, 92 S. Cal. L. Rev. 1407 (2019).

Alexander I. Platt, Index Fund Enforcement, 53 U.C. Davis L. Rev. 1453 (2020).

New Securities Law Articles in Print

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

John P. Anderson, Undoing a Deal with the Devil: Some Challenges for Congress's Proposed Reform of Insider Trading Plans, 13 Va. L. & Bus. Rev. 303 (2019).

Albert H. Choi, Andrew C. W. Lund & Robert Schonlau, Golden Parachutes and the Limits of Shareholder Voting, 73 Vand. L. Rev. 223 (2020).

Patrick M. Corrigan, The Seller's Curse and the Underwriter's Pricing Pivot: A Behavioral Theory of IPO Pricing, 13 Va. L. & Bus. Rev. 335 (2019).

Marisa Papenfuss, Note, Inflated Private Offering: Regulating Corporate Insiders and Market-Moving Disclosures on Social Media, 73 Vand. L. Rev. 311 (2020).

Maria Lucia Passador, The Woeful Inadequacy of Section 13(d): Time for a Paradigm Shift?, 13 Va. L. & Bus. Rev. 279 (2019).

Andrew Winden & Andrew Baker, Dual-Class Index Exclusion, 13 Va. L. & Bus. Rev. 101 (2019).

Christopher R. Zimmerman, Note, Accredited Investors: A Need for Increased Protection in Private Offerings, 114 Nw. U. L. Rev. 507 (2019).

Guseva on Digital Assets

Yuliya Guseva has posted A Conceptual Framework for Daos, Dapps, Coins and Tokens: New Trends and Conflicts in Securities Law on SSRN with the following abstract:

The article offers a novel approach to the threshold questions on the applicability of securities law to digital assets. The clarity of this framework should be useful to courts, regulators, and market participants. Digital-asset development involves two stages, and securities law is essential only in Stage One.

During Stage One, an identifiable firm-developer undertakes to build a project, launch a platform, and deliver fully functional assets. Except decentralized autonomous organizations, many tokens (or coins) do not confer equity rights with respect to issuers, nor do they trigger fiduciary duties typically associated with equity. These assets default to the alternate category of debt securities and are similar to “bonds.”

Bonds are creatures of contract. Under the terms of “indentures” (whitepapers and other offering materials), issuers may incur distinct long-term obligations to their initial investors and undertake to provide ongoing efforts to contribute to the project success even when assets are fully functional and the platform is decentralized, open source and permissionless. This essentially extends the bond term to maturity.

Bonds are securities. Their continuous existence after fully functional tokens are delivered and platforms launched extends the application of the Supreme Court Howey test. Thus, the federal securities law may apply post-launch and post-asset-delivery, i.e., during the Second Stage of a digital asset project. It also points toward two distinct and separate types of assets – a non-security-token (or coin) and a bond - simultaneously circulating after the project has been deployed and tokens distributed in Stage Two.

Finally, there also two groups of digital asset purchasers: the initial investors who own tokens post-delivery and post-platform-launch and the subsequent token purchasers. They exist concurrently. These two cohorts of market participants have completely divergent expectations concerning the role of the issuer in the operation of the platform and the valuation of digital assets. Only the initial “bondholders” have claims against the issuer in Stage Two.

 

Krakow & Schäfer on Mutual Funds

Nils Jonathan Krakow and Timo Schäfer have posted Mutual Funds and Risk Disclosure: Information Content of Fund Prospectuses on SSRN with the following abstract:

Mutual funds are mandated by the Securities and Exchange Commission (SEC) to disclose information on their investment objectives and risks. In this paper, we study the informational value of U.S. mutual funds’ qualitative disclosures by analyzing the content of funds’ prospectuses. First, we find that funds disclosed risks increase with their exposed risk. They inform, in particular, extensively about their idiosyncratic risks and less about their systematic risks. Second, using methods from textual analysis, we document that around one-third of the variation in the content of funds’ risk disclosures is fund-specific, while a substantial part of a fund’s risk disclosures is determined at the fund group level. Our findings suggest that the relative informativeness in funds’ prospectuses has been, on average, decreasing over time. Third, we show that regular content-based updates of the disclosed risks provide relevant information in predicting future fund performance. Investors, however, do not react to this new information but rather to the content’s informativeness. Finally, using an event study framework relying on matching techniques, we document that investors also do not respond to the provision of additional simplified disclosure.

Lennox & Yu on Securities Fraud

Clive S. Lennox and Y. Julia Yu have posted Cooking the Books Using Different Ingredients: An Examination of Earnings Frauds That Also Involve Misreported Cash Flows on SSRN with the following abstract:

Prior studies examine how fraud firms manipulate their accruals in order to overstate their earnings. We document that some fraud firms also manipulate their operating cash flows in order to fraudulently overstate earnings. More importantly, we predict that these earnings-cash flow frauds (ECF) are harder to detect and have more severe consequences when compared to earnings frauds in which operating cash flows are not misstated. Consistent with our predictions, we find that earnings-cash flow frauds take longer to detect, have larger estimated damages, elicit more negative market reactions, are more likely to result in CEO and executive turnover, and are more likely to result in securities lawsuits. We conclude that ECF frauds are harder to detect and have more severe consequences.

Binz & Graham on Disclosure

Oliver Binz and John R. Graham have posted The Information Content of Corporate Earnings: Evidence from the Securities Exchange Act of 1934 on SSRN with the following abstract:

We examine whether the Securities Exchange Act of 1934 increased the information provided in accounting disclosures. Prior research examining the effects of the Act generally relies on long- window tests and yields mixed results. We improve upon prior designs by examining return, return volatility, and trading volume reactions to earnings news during short earnings announcement windows, which mitigates concerns that our results are driven by confounding events. Further, we employ a difference-in-differences design to control for potential contemporaneous structural changes. We document that the informativeness of earnings announcements of treatment firms (that withheld disclosure before the Act) increases relative to control firms (that disclosed voluntarily before the Act). The results are pronounced for large firms (higher regulatory scrutiny) and firms that do not pay dividends (possibly facing higher agency costs), and are symmetric for positive and negative earnings news.

Martin Shelby on Social Impact Investing

Cary Martin Shelby has posted Profiting From Our Pain: Privileged Access to Social Impact Investing on SSRN with the following abstract:

Social impacting investing has become the latest trend to permeate the financial markets. With massive anticipated funding gaps for sustainable development goals, and a millennial driven thirst for doing good while doing well, this trend is likely to continue in the coming decades. This burgeoning industry is poised to experience yet an additional boost, since it provides an alternative mechanism for private actors to “profit from our pain” particularly in the wake of the COVID-19 pandemic and the Black Lives Matters movement. As to be expected, the law has not sufficiently adapted to this new wave of innovation as regulatory concerns have arisen such as the extent to which impact should be measured and disclosed. Even with this emerging focus, limited attention has been paid to whether the public/private divide under the federal securities laws has contributed to these harms. This Article seeks to fill this scholarly gap by exploring the extent to which the public/private divide under the federal securities laws induces reductions to the net social benefits generated by social impact investments. While social impact investing has the highest potential for impact along the continuum of socially conscious strategies, they largely operate as exempt entities due to the need for regulatory flexibilities such as the power to invest in illiquid assets. As a result, retail investors, which encompass all members of the general public, are restricted from accessing these privately held vehicles due to investor protection concerns. This serves to exclude affected community members as investors, who are the targeted beneficiaries of these schemes, while limiting transparency which would enable the general public as well as policy makers to make assessments about the extent to which these schemes are maximizing net social welfare. This is particularly problematic given the potential for such investments to generate unaccounted for negative externalities which can occur for example when seemingly clean energy technologies inadvertently destroy surrounding environments or habitats. Solely relying on privately ordered solutions can leave costly loopholes given that they are completely voluntary and lack standardization. Innovative regulatory solutions that reconceptualize antiquated notions of publicness may best address these harms. This Article therefore concludes with a novel proposal which seeks to combine existing indicators of “publicness” and “privateness” while perhaps creating new measures. This could be effectuated through the creation of an entirely new series of exemptions entitled the “Social Impact Exemptions” that would appear under the Securities Act of 1933 and the Investment Company Act of 1940. They would effectively recalibrate existing rules related to access and disclosure, while possibly creating new frameworks for accountability and management structure.

Atanasov and Boutchkova on Performance Metrics and Executive Compensation

Vladimir A. Atanasov and Maria Boutchkova have posted Striking Oil in the Boardroom: Overpaying Executives through Manipulating Performance Metrics on SSRN with the following abstract:

Using hand-collected proxy statement data, we examine the distribution of performance metrics used to calculate executive compensation in 86 US oil and gas firms. We find that the distribution of achieved–target differences is significantly discontinuous at zero over the 13-year period 2006-2018. Executives are three times more likely to just beat than to just miss their performance targets. When we split metrics into GAAP-like and non-GAAP-like measures, we find discontinuities only in the non-GAAP-like group. The discontinuities also disappear when firms are financially distressed or have better governance. Our findings suggest that managers can routinely manipulate performance metrics in order to increase their performance-based compensation. Our framework can help analysts and investors in their firm governance assessments and the US Securities and Exchange Commission in its current efforts to redesign disclosure rules for non-GAAP performance metrics. The discontinuity detection approach we introduce can help SEC pre-filter filings and focus its review process.

Lambert, Liebau & Roosenboom on Security Token Offerings

Thomas Lambert, Daniel Liebau and Peter Roosenboom have posted Security Token Offerings on SSRN with the following abstract:

Security token offerings (STOs) are not initial coin offerings (ICOs) or a subset of it. This paper shows that distinguishing STOs from ICOs is crucial for the study of entrepreneurial finance. We first provide a working definition of a security token and uncover key facts about the primary STO market using a unique STO sample. The STO activity developed after the end of the ICO market bubble. The STO market is, however, still a nascent market. STOs are geographically dispersed but concentrated in jurisdictions with accommodating securities laws. Next, we explore STO success factors. We show that various issuer and offering characteristics, traditionally used in the ICO literature, also matter for STO success. We also find that success is associated with good governance practices, consistent with the corporate finance literature. We conclude by discussing the implications of native digital securities, the next generation of block-chain-based securities, for entrepreneurial finance.

Kelly, Malamud & Pedersen on Portfolio Choice

Bryan T. Kelly, Semyon Malamud and Lasse Heje Pedersen have posted Principal Portfolios on SSRN with the following abstract:

We propose a new asset-pricing framework in which all securities’ signals are used to predict each individual return. While the literature focuses on each security’s own- signal predictability, assuming an equal strength across securities, our framework is flexible and includes cross-predictability—leading to three main results. First, we derive the optimal strategy in closed form. It consists of eigenvectors of a “prediction matrix,” which we call “principal portfolios.” Second, we decompose the problem into alpha and beta, yielding optimal strategies with, respectively, zero and positive factor exposure. Third, we provide a new test of asset pricing models. Empirically, principal portfolios deliver significant out-of-sample alphas to standard factors in several data sets.

 

 

New Securities Law Articles in Print

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

Lucian Bebchuk, & Scott Hirst, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy, 119 Colum. L. Rev. 2029 (2019).

Prateek Bhattacharya, India's Insider Trading Regime: How Connected Are You?, 16 N.Y.U. J.L. & Bus. 1 (2019).

John R. Fallon, Note, Municipal Bonds: In the Shadow of an Underfunded Pension Crisis, Puerto Rico, and a Low Interest Rate Environment, 24 N.C. Banking Inst. 271 (2020).

Jill Fisch, Assaf Hamdani & Steven Davidoff Solomon, The New Titans of Wall Street: A Theoretical Framework for Passive Investors, 168 U. Pa. L. Rev. 17 (2019).

Gina-Gail S. Fletcher, Engineered Credit Default Swaps: Innovative or Manipulative?, 94 N.Y.U. L. Rev. 1073 (2019).

Elliot Ganz & Phillip Black, CLO Risk Retention: A Case Study in Regulatory Indiscretion, 24 N.C. Banking Inst. 75 (2020).

Brage Humphries, Note, Funding the Future: Marketplace Lending, Equity Crowdfunding, and Bank Lending, 24 N.C. Banking Inst. 217 (2020).

Lynnise E. Phillips Pantin, What's Wrong with Jumpstart(ing) Our Business Startups (JOBS) Act?, 16 N.Y.U. J.L. & Bus. 185 (2019).

Chase Ponder, Note, Fiduciary Standards and Best Interests: Should States Take the Lead?, 24 N.C. Banking Inst. 241 (2020).

Urska Velikonja, Public Enforcement after Kokesh: Evidence from SEC Actions, 108 Geo. L.J. 389 (2019).

New Securities Law Articles in Print

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

Alyson Brown, Note, Could Distributed Ledger Shares Lead to an Increase in Stockholder-Approved Mergers and Subsequently an Increase in Exercise of Appraisal Rights?, 10 Wm. & Mary Bus. L. Rev. 781 (2019).

Seth Holoweiko, Student Article, What Is an ICO? Defining a Security on the Blockchain, 87 Geo. Wash. L. Rev. 1472 (2019).

Henry T.C. Hu & John D. Morley, The SEC and Regulation of Exchange-Traded Funds: A Commendable Start and a Welcome Invitation, 92 S. Cal. L. Rev. 1155 (2019).

Jerry W. Markham, Regulating the Sale of Stock Exchange Market Data to High-Frequency Traders, 71 Fla. L. Rev. 1209 (2019).

Kayla L. Stavinoha, Note, How Unreal Is the Unicorn Now? The Need for Regulation in the Wild-Wild-West of Private Companies, 59 Washburn L.J. 171 (2020).