US Securities Laws Research Articles

The crypto frontier: How US policymakers and investment advisers can address digital assets

This paper focuses on prominent issues surrounding digital assets. The lack of a comprehensive federal digital asset law has recently raised several issues for Securities and Exchange Commission (SEC)-registered investment advisers as they try to navigate new markets and new industry practices. As such, this paper addresses the current US regulatory landscape, provides a comparison of non-US approaches to digital assets and provides US policymakers with key principles they can consider for potential digital asset legislation and/or regulation. The paper also provides compliance considerations for investment advisers who currently manage digital assets, to address the evolving obligations under the US securities laws.

Estimating Firms’ Responses to Securities Regulation Using a Bunching Approach

Abstract Many important provisions of US securities law—most notably, crucial elements of the Sarbanes-Oxley (SOX) legislation enacted in 2002—apply only to firms that have a public float of at least $75 million. Public float (i.e., the market value of shares held by non-insiders) is not comprehensively reported in standard databases, so I “scrape” public float data from firms’ 10-K filings for an extensive sample of reporting entities over fiscal years 1993–2015. I use a bunching approach that compares the number of observations immediately below the $75 million threshold to a smooth counterfactual density. Prior to SOX (i.e., over 1993–2002), there is no detectable bunching. Following SOX (i.e., over 2003–15), there is statistically significant evidence of bunching. However, the magnitude of bunching is relatively modest. Moreover, bunching is concentrated in the early post-SOX years (2003–09) and is virtually absent in later years (2010–15). The magnitude of bunching is not a sufficient statistic for the compliance costs of securities regulation because the costs of managing public float are unobservable. Nonetheless, the results of the bunching analysis cast some doubt on widespread claims that the regulatory burdens of these securities law provisions are large.

Just Say No? Shareholder Voting on Securities Class Actions

The US securities laws allow security-holders to bring a class action suit against a public company and its officers who make materially misleading statements to the market. The class action mechanism allows individual claimants to aggregate their claims. This procedure mitigates the collective action problem among claimants, and also creates potential economies of scale. Despite these efficiencies, the class action mechanism has been criticized for being driven by attorneys and also encouraging nuisance suits. Although various statutory and doctrinal “solutions” have been proposed and implemented over the years, the concerns over the agency problem and nuisance suits persist. This paper proposes and examines a novel mechanism that attempts to preserve the benefits of class action system while curtailing its cost: allowing company’s shareholders to vote on securities class actions. The shareholders can vote on the structural dimensions of securities class actions, e.g., whether to allow class actions at all, limit discovery, impose fee-shifting, etc., before any class action suit has been filed (ex ante voting) or vote to determine the course of a specific class action suit, e.g., whether to terminate or settle a class action (ex post voting). The paper analyzes the conditions under which allowing shareholders to manage and control securities class actions can benefit the shareholders across the board and its potential limitations.

Avoiding Liability – The Role of Auditors and Comfort Letters in Capital Markets Transaction

In every capital raising exercise, there will be various obligations and requirements imposed by the stock exchanges, securities laws and investors. These obligations and requirements are then represented by a disclosure document (commonly known as a prospectus or offering circular). The disclosure document then creates various liability issues for issuers and managers which extends even after the offering process has completed. Liability on issuers and managers protects investors against fraudulent offerings (think Wolf of Wall Street!). In order to mitigate such risks arising from disclosure documents, issuers and managers (through their respective legal counsels) avail themselves of the due diligence defense. Come and hear Ben Chester Cheong talk more about how auditors and comfort letters play a crucial role in the due diligence defense in the context of US securities laws in international offerings.

The power of the US SEC whistleblower programme: What compliance and regulatory professionals should know

The US Securities and Exchange Commission’s (SEC) whistleblower programme has become one of the most effective tools for enforcing US securities law. This paper provides the historical context that led to the creation of the programme, outlines its main features, and reports on its overall effectiveness and results. In addition, the legal and practical challenges faced by the SEC’s Office of the Whistleblower, which takes the lead in evaluating whistleblower submissions, are examined and some solutions to these challenges are proposed. Lastly, the paper provides practical advice and do’s and do not’s for companies and their internal compliance and audit employees to implement common-sense policies and procedures to address the very real possibility that, because of a US Supreme Court decision two years ago, their employees may be incentivised to report directly to the SEC rather than through internal compliance mechanisms.

미국 증권법상 SEC Rule 10b-5와 Scheme Liability에 관한 최근 판례연구

미국 증권법상 SEC Rule 10b-5와 Scheme Liability에 관한 최근 판례연구

미국 증권법상 SEC Rule 10b-5와 Scheme Liability에 관한 최근 판례연구

미국 증권법상 SEC Rule 10b-5와 Scheme Liability에 관한 최근 판례연구

Recent Developments on SEC Rule 10b-5 and Scheme Liability under US Securities Law

Recent Developments on SEC Rule 10b-5 and Scheme Liability under US Securities Law

Regulation of Initial Coin Offerings: Reconciling US and EU Securities Laws

Initial Coin Offerings (ICOs) are currently the hottest topic in the financial markets. They typically use blockchain technology to offer so-called ‘tokens’ that can confer various rights. Experts estimate that the amount of money raised via ICOs will reach US$ 20 billion by the end of 2018. Commentators have described the ICO bonanza as a new gold rush. Nevertheless, the legal framework for ICOs remains unclear because traditional securities regulation is designed for classical securities that are traded on a stock exchange. In late 2017, the US Securities and Exchange Commission released two statements that highlighted that tokens may be subject to US securities regulation if they meet the requirements for ‘investment contract’ as laid out in the Howey test. However, regulators in Asia and Europe remain quite vague on the issue. In this article we analyze the legal framework for ICOs in the European Union. It is our view that investment tokens (including hybrid tokens with some investment functions) are ‘transferable securities’ under Directive 2014/65/EU on Markets in Financial Instruments. Despite resting on a highly dissimilar definition, the financial markets law of the European Union, if applied correctly, applies to token classifications – this is comparable with the US Securities and Exchange Commission’s approach. The result would be a similar framework in two of the most vibrant regions for ICOs. It would be a first step towards a harmonized application of securities laws to ICOs, avoiding regulatory patchwork and a possible ‘race to the bottom’.

The Promise and Perils of Crowdfunding: Between Corporate Finance and Consumer Contracts

Abstract‘Crowdfunding’ is a burgeoning phenomenon. Its still‐evolving status is reflected in diversity of contracting practices: for example, ‘equity’ crowdfunders invest in shares, whereas ‘reward’ crowdfunders get advance units of product. These practices occupy a hinterland between existing regimes of securities law and consumer contract law. Consumer protection law in the UK (but not the US) imposes mandatory terms that impede risk‐sharing in reward crowdfunding, whereas US (but not UK) securities law mandates expensive disclosures that hinder equity crowdfunding. This article suggests that while crowdfunding poses real risks for funders, the classical regulatory techniques of securities and consumer law provide an ineffective response. Yet, a review of rapidly‐developing market mechanisms suggests they may provide meaningful protection for funders. An initially permissive regulatory approach, open to learning from market developments yet with a credible threat of intervention should markets fail to protect consumers, is justified.

US Securities and Exchange Commission suggests greater actions may be required under its custody rule

Under US securities laws, investment advisers that maintain custody (as defined by applicable rules) must undergo certain procedures. The Securities and Exchange Commission (SEC) has taken violations of the custody rules quite seriously, often referring them for enforcement. This paper outlines two situations, based on SEC guidance, that may invoke the custody rule unexpectedly and with respect to which advisers should take proactive measures: transfers between client accounts (even those of the identical client) and possession of the power to move client assets. This paper suggests the steps an investment adviser must take in order to comply with this recent SEC guidance.

Initial Coin Offering (ICO) Risk, Value and Cost in Blockchain Trustless Crypto Markets

On July 25th 2017 the SEC published guidance indicating that US securities laws may apply to token sales, effectively recognizing crypto coins associated with entities such as the DAO as a new asset class. In Mutual Distributed Ledgers, or Blockchains, trust is embedded and no explicit chain of trust is necessary. Smart contracts running on a Blockchain allow to create objects with various degrees of liquidity and to automate the operations of a fund, enabling trustless crypto markets. Despite great promise, the sources of uncertainty and risk in such trustless settings are not yet well understood; for instance “The DAO” (Decentralised Autonomous Organisation), which was the world’s first decentralised investment fund, went from being the largest crowdfunding event in history to get about a third of its assets compromised due to an attack from a shareholder. The dual nature of money shared by a Blockchain calls for a novel approach: a DAO is a listed entity by default, and its projects might be financial instruments as well, so we use network correlations to study portfolio risk diversification. Furthermore, automated corporations are essentially about decentralized intelligence, so we need to consider the strategic nature of the social world; for this we map the vector field and use signal processing to investigate volatility in traffic flows. The primary objective of the study is to determine factors that affect cash flows in decentralized applications, to enhance the understanding on whether decentralized organizations are perceived as truly “trustless entities”, or, if investors are rather forced to “trust in the design”. The target audiences of this paper are Government regulatory authorities, Banking sector and Stock markets.

Marketing non-US private equity funds in the United States: a roadmap through the various regulations and tax implications

PurposeTo discuss general legal considerations for non-US private equity sponsors who seek to market their funds to US institutional investors.Design/methodology/approachExplains relevant aspects of US securities laws, commodity exchange laws, pension and employee benefit plan laws, federal income tax laws, and the Foreign Account Tax Compliance Act (FATCA).FindingsThe evolving US regulatory regime necessitates careful planning and thorough knowledge of relevant laws and regulations to effect a successful US marketing effort.Originality/valuePractical guidance from experienced investment funds and tax lawyers.

The Promise and Perils of Crowdfunding: Between Corporate Finance and Consumer Contracts

‘Crowdfunding’ — raising capital through large numbers of small contributions — is a burgeoning phenomenon, spurred by the internet’s capacity to reduce communication costs. Its still-evolving status is reflected in diversity of contracting practices: for example, ‘equity’ crowdfunders invest in shares, whereas ‘reward’ crowdfunders get advance units of product. These practices occupy a hinterland between existing regimes of securities regulation and consumer contract law, with no consistency of treatment. Thus consumer protection law in the UK (but not the US) imposes mandatory terms that impede risk-sharing in reward crowdfunding, whereas US (but not UK) securities law mandates expensive disclosures that hinder equity crowdfunding. This article offers a normative roadmap for the regulation of crowdfunding. We suggest that while crowdfunding poses real risks for funders, neither the classical regulatory techniques of securities or consumer law provide an effective response. At the same time, a review of rapidly-developing mechanisms in crowdfunding markets suggests they offer the potential to provide meaningful protection for funders. In light of this, a permissive regulatory approach — with a credible threat of intervention should the market fail to protect consumers — is justified.

Parties push to enforce statutory time limits on SEC enforcement actions

Purpose – To alert companies and individuals subject to regulation and investigation by the US Securities and Exchange Commission (SEC) of potential arguments to enforce time limits on enforcement actions that have heretofore commonly been ignored. Design/methodology/approach – Analyzes two cases - one recently decided and one pending - in US Courts of Appeals, explains significance of issues at stake. Findings – The Courts of Appeals for District of Columbia Circuit has recently reviewed, and the Court of Appeals for the 11th Circuit will soon decide whether statutory timing provisions effectively remove SEC power to bring enforcement actions past their deadlines, at least in some circumstances. Practical implications – Depending on the outcomes of the cases, companies and individuals may gain a new procedural defense or two against SEC enforcement actions. They may also expect the SEC to respond by more actively seeking tolling agreements, and/or being more cautious in issuing Wells notices. Originality/value – Guidance based on pending decisions interpreting US securities law, may bring regulatory adjustments to agency practice and procedure.

IOSCO and the Spreading of a US-Like Regulatory Philosophy around the World

The objective of this article is to describe the International Organization of Securities Commissions - IOSCO, its internal procedures, normative product and implementation process, and to test the role played by the US Securities and Exchange Commission - SEC since the Organization's birth. The pervasiveness of the US Securities Laws will be tested both on the most important document IOSCO has ever adopted, the Objectives and Principles of Securities Regulation, representing the regulatory philosophy of the Organization; and, as a more detailed case study, on the documents concerning the regulation of Credit Rating Agencies, a very hot topics for international finance. Moreover, it will be analyzed the position of the US in the crossborder enforcement cooperation process established under the auspices of IOSCO in the last twenty years and how this has recently changed. The results seem to suggest that IOSCO's has been deeply affected by the US Securities Laws even if, more recently, the emerging of new important markets is progressively turning the Organization into a multipolar forum where the US is no longer the only "regulatory" superpower.

Corporate Inversions and the Unbundling of Regulatory Competition

A sizable number of US public companies have recently executed “tax inversions” – acquisitions that move a corporation’s residency abroad while maintaining its listing in domestic securities markets. When appropriately structured, inversions replace American with foreign tax treatment of extraterritorial earnings, often at far lower effective rates. Regulators and politicians have reacted with alarm to the “inversionitis” pandemic, with many championing radical tax reforms. This paper questions the prudence of such extreme reactions, both on practical and on conceptual grounds. Practically, I argue that inversions are simply not a viable strategy for many firms, and thus the ongoing wave may abate naturally (or with only modest tax reforms). Conceptually, I assess the inversion trend through the lens of regulatory competition theory, in which jurisdictions compete not only in tax policy, but also along other dimensions, such as the quality of their corporate law and governance rules. I argue that just as US companies have a strong aversion to high tax rates, they have an affinity for robust corporate governance rules – a traditional strength of American corporate law. This affinity has historically given the US enough market power to impose tax premiums with dampened fear of chasing off incorporations, because US law specifically bundles tax residency and state corporate law into a conjoined regulatory package. To the extent this market power remains durable, radical tax overhauls would be unhelpful (and even counterproductive). A more blameworthy culprit for inversionitis, I argue, can be found in an unlikely source: Securities Law. Over the last fifteen years, financial regulators have progressively suffused US securities regulations with mandates relating to internal corporate governance matters – traditionally the domain of state law. Those federal mandates, in turn, have displaced and/or preempted state law as a primary source of governance regulation for US-traded issuers. And, because US securities law applies to all listed issuers (regardless of tax residence), this displacement has gradually “unbundled” domestic tax law from corporate governance, eroding the US’s market power in regulatory competition. A potential elixir for this erosion, then, may also lie in securities regulation. I propose two alternative reform paths: (a) domestic exchanges should charge listed foreign issuers for their consumption of federal corporate governance policies; and/or (b) federal law should cede corporate governance back to the states by rolling back many of the governance mandates promulgated over the last fifteen years.

SUB-ADDITIVE RECURSIVE "MATCHING" NOISE AND BIASES IN RISK-WEIGHTED INDEX CALCULATION METHODS IN INCOMPLETE MARKETS WITH PARTIALLY OBSERVABLE MULTI-ATTRIBUTE PREFERENCES

While indices, index tracking funds and ETFs have grown in popularity during then last ten years, there are many structural problems, tracking errors and biases inherent in index calculation methodologies and the legal/economic structure of ETFs, which raise actionable issues of "suitability" and "fraud" under US securities laws. This article contributes to the existing literature by: (a) introducing and characterizing the errors and biases inherent in "risk-adjusted" index-weighting methods and the associated adverse effects; (b) showing how these biases/effects reduce social welfare, and can facilitate harmful arbitrage activities; (c) introducing new theorems.

An Effort to Create Jobs: The Changing Landscape of the IPO Process

Procedural IPO rules are set forth in the US securities laws and mandate a company to make certain disclosures about their business — disclosures that are aimed at protecting investors. If a company makes errors in its required disclosures or exhibits questionable business practices, then investors learn of the potential problems — which lessens the probability that those investors will choose to participate in the company’s public offering. However, the year-old JOBS Act has instituted revised IPO rules that could prove beneficial to youthful and growing companies. By easing the regulatory burdens of launching an IPO, these new rules may have benefited a company like Groupon and prevented the debacle that ensued after Groupon’s public filing with the SEC.

New Disclosure Requirements Under the Dodd-Frank Act: A Move Towards Greater Transparency

This article considers two little known provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act with potential to have great impact on mulitnational and other businesses listed on US national stock exchanges. Specifically, the article discusses the 'conflicts minerals' provision requiring disclosure by companies of the use of certain minerals sourced from the Democratic Republic of Congo and the provision requiring disclosure of payments made to foreign governments by resource extractors. It describes the requirements of each provision, examines the costs and benefits of each. It also discusses the disclosure philosophy underlying the US securities laws and locates these provisions within that philosophy.