Tag: Finance

The Effects Of The SEC Shutdown On The Capital Markets

Although EDGAR continues to accept filings, the government shutdown has now eclipsed its 28th day and the SEC continues to operate with limited staff which is having a crippling effect on the ability of many companies to raise money in the public markets. This is particularly due to the fact that the SEC is unable to perform many of the critical functions during the lapse in appropriations, including the review of new or pending registration statements and/or the declaration of effectiveness of any registration statements.

Although Section 8(a) of the Securities Act of 1933, as amended, creates an avenue whereby a registration statement will automatically become effective 20 calendar days after the filing of the latest pre-effective amendment that does not include “delaying amendment” language, many companies seeking to raise money in the public markets, including through an initial public offering, are reluctant to use this route for the following reasons. First, any pre-effective amendment which removes the “delaying amendment” language must include all information required by the form including pricing information relating to the securities being sold as Rule 430A is not available in the absence of a delaying amendment. This means that companies must commit to pricing terms at least 20 days in advance of the offering which may be difficult due to the volatility in the markets. In the event pricing terms change, companies must file another pre-effective amendment which restarts the 20-day waiting period. Second, companies run the risk that the SEC may, among other things, issue a stop order. Finally, companies may run into issues with FINRA, Nasdaq or the NYSE as these organizations may not agree to list securities on such exchanges without the SEC confirming that they have reviewed and cleared such filing and affirmatively declared the registration statement effective. These risks, among others, associated with using Section 8(a) as a means by which a registration statement can become effective after the 20-day waiting period, seem to outweigh the benefits of pursuing this alternative despite the fact that many companies with a December 31st year end will soon be required to file audited financial statements for the year ended December 31, 2018 pursuant to Rule 3-12 of Regulation S-X which will further delay the process resulting in an increase in both cost and time related to the offering.

Although companies seeking to raise money in the public markets, including through initial public offerings or shelf registration statements, may be reluctant to rely upon Section 8(a), some companies have already chosen to remove the “delaying amendment” language. For example, some companies which appear to have cleared all comments from the SEC prior to the partial government shutdown have elected to remove the “delaying amendment” and proceed with their offerings after the 20-day waiting period. In addition, other companies conducting rights offerings, such as Trans-Lux Corporation and Roadrunner Transportation Systems, Inc., are also relying on Section 8(a) as a means of raising money. Finally, some special purpose acquisition companies (“SPACs”), including Andina Acquisition Corp. III, Gores Metropoulous, Inc., Pivotal Acquisition Corp. and Wealthbridge Acquisition Limited, are among the issuers that are using Section 8(a) as a way to procced with their offerings during this partial government shutdown since SPACs, in particular, are not sensitive to price volatility in the markets because they have no operations.

Companies and underwriters that may be considering filing a pre-effective amendment to a registration statement to take advantage of Section 8(a) of the Securities Act should discuss the effects of removing the “delaying amendment” language with securities counsel before proceeding down such path.

 

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.
Read more legal news on the Government Shutdown at the National Law Review.

California Supreme Court Holds That High Interest Rates on Payday Loans Can be Unconscionable

On August 13, 2018, the California Supreme Court in Eduardo De La Torre, et al. v. CashCall, Inc., held that interest rates on consumer loans of $2,500 or more could be found unconscionable under section 22302 of the California Financial Code, despite not being subject to certain statutory interest rate caps.  By its decision, the Court resolved a question that was certified to it by the Ninth Circuit Court of Appeals.  See Kremen v. Cohen, 325 F.3d 1035, 1037 (9th Cir. 2003) (certification procedure is used by the Ninth Circuit when there are questions presenting “significant issues, including those with important public policy ramifications, and that have not yet been resolved by the state courts”).

The California Supreme Court found that although California sets statutory caps on interest rates for consumer loans that are less than $2,500, courts still have a responsibility to “guard against consumer loan provisions with unduly oppressive terms.”  Citing Perdue v. Crocker Nat’l Bank (1985) 38 Cal.3d 913, 926.  However, the Court noted that this responsibility should be exercised with caution, since unsecured loans made to high-risk borrowers often justify their high rates.

Plaintiffs alleged in this class action that defendant CashCall, Inc. (“CashCall”) violated the “unlawful” prong of California’s Unfair Competition Law (“UCL”), when it charged interest rates of 90% or higher to borrowers who took out loans from CashCall of at least $2,500.  Bus. & Prof. Code § 17200.  Specifically, Plaintiffs alleged that CashCall’s lending practice was unlawful because it violated section 22302 of the Financial Code, which applies the Civil Code’s statutory unconscionability doctrine to consumer loans.  By way of background, the UCL’s “unlawful” prong “‘borrows’ violations of other laws and treats them as unlawful practices that the unfair competition law makes independently actionable.”  Citing Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal.4th 163, 180 (1999).

The Court agreed, and found that an interest rate is just a term, like any other term in an agreement, that is governed by California’s unconscionability standards.  The unconscionability doctrine is meant to ensure that “in circumstances indicating an absence of meaningful choice, contracts do not specify terms that are ‘overly harsh,’ ‘unduly oppressive,’ or ‘so one-sided as to shock the conscience.”  Citing Sanchez v. Valencia Holding Co., LLC, 61 Cal.4th 899, 910-911 (2015).  Unconscionability requires both “oppression or surprise,” hallmarks of procedural unconscionability, along with the “overly harsh or one-sided results that epitomize substantive unconscionability.”  By enacting Civil Code section 1670.5, California made unconscionability a doctrine that is applicable to all contracts, and courts may refuse enforcement of “any clause of the contract” on the basis that it is unconscionable.  The Court also noted that unconscionability is a flexible standard by which courts not only look at the complained-of term, but also the process by which the contracting parties arrived at the agreement and the “larger context surrounding the contract.”  By incorporating Civil Code section 1670.5 into section 22302 of the Financial Code, the unconscionability doctrine was specifically meant to apply to terms in a consumer loan agreement, regardless of the amount of the loan.  The Court further reasoned that “guarding against unconscionable contracts has long been within the province of the courts.”

Plaintiffs sought the UCL remedies of restitution and injunctive relief, which are “cumulative” of any other remedies.  Bus. & Prof. Code §§ 17203, 17205.  The question posed to the California Supreme Court stemmed from an appeal to the Ninth Circuit of the district court’s ruling granting the defendant’s motion for summary judgment.  The California Supreme Court did not resolve the question of whether the loans were actually unconscionable.

 

Copyright © 2018 Womble Bond Dickinson (US) LLP All Rights Reserved.
For more litigation news, check out the National Law Review’s Litigation Type of Law page.

Congress Enacts New Law to Control Foreign Investments in the U.S.

President Trump signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA) to modernize the CFIUS review process to address 21st century national security concerns today. Congress enacted FIRRMA as Title XVII of the Fiscal Year 2019 National Defense Authorization Act, HR 5515.

Background and Rationale for the New Law

The Committee on Foreign Investment in the United States (CFIUS) is an inter-agency committee led by the Treasury Department to review transactions that could result in control of a U.S. business by a foreign person (referred to as “covered transactions”) in order to determine the effect of such transactions on the national security of the United States. CFIUS operates pursuant to section 721 of the Defense Production Act of 1950 (the “Exon-Florio” amendment), as later amended by Congress and as implemented by Executive Order.

For many years, CFIUS has worked to police national security concerns arising from investment in the U.S. by foreign companies and entities. Two transactions in the last few years have made the issue of foreign investment in the U.S. (and the role of CFIUS) notorious: first, the Dubai Ports World controversy in 2006 involving the sale of port management businesses in six major U.S. seaports to a company based in the United Arab Emirates and, second, the 2012 effort by a Chinese-owned company to purchase land for a windfarm next to a U.S. military weapons testing facility in Oregon. Current law governing CFIUS was last updated more than a decade ago, and its jurisdiction has been increasingly perceived as too limited.

Many government and private industry observers have come to believe that the CFIUS review process is neither designed to, nor sufficient to, address modern threats to national security. Their perception was that China and others have cheated the system, exploited the gaps in its authorities, and have structured their investments in U.S. businesses to evade scrutiny. In short, their view was that many transactions that could pose national security concerns often escaped review altogether.

For example, in introducing the bipartisan FIRRMA in late 2017, Sens. Dianne Feinstein (D-CA) and John Cornyn (R-TX) asserted that:

To circumvent CFIUS review, China will often pressure U.S. companies into arrangements such as joint ventures, coercing them into sharing their technology and know-how. This enables Chinese companies to acquire and then replicate U.S.-bred capabilities on their own soil. China has also been able to exploit minority-position investments in early-stage technology companies to gain access to cutting-edge IP, trade secrets, and key personnel. It has figured out which dual-use emerging technologies are in development and not yet subject to export controls.

Substantive Changes in CFIUS Law

To counteract these new threats, FIRRMA is intended to strike a balance between giving CFIUS additional authority that it needs to address modern national security issues without unduly chilling foreign investment in the American economy and slowing American economic growth in the process. The new law refashions the authority of CFIUS to allow it to reach additional types of investments like minority-position investments and overseas joint ventures. Plus, it creates a new streamlined filing process to encourage notification of potentially problematic transactions. The provisions of FIRRMA make the following changes:

  • FIRRMA expands CFIUS jurisdiction to cover minority investments, any change in a foreign investor’s rights regarding a U.S. business, and any device or scheme designed to evade CFIUS, as well as the purchase, lease, or concession of certain real-estate by or to a foreign person.

  • FIRRMA recognizes the authority of CFIUS to review non-controlling, non-passive investments, especially those involving critical technology and critical infrastructure

  • FIRRMA for the first time recognizes the authority and responsibility of CFIUS to protect against the exposure of sensitive personal data as part of its national security jurisdiction.

  • FIRRMA allows CFIUS to include in the review process any emerging and critical technologies and sets reporting requirements for them.

  • FIRRMA expands CFIUS’s ability to unilaterally choose to initiate a review in the case of a breach of a prior agreement with CFIUS and with respect to covered transactions that have not been submitted to CFIUS for review.

FIRRMA modifies the definition for covered transaction to include “other investments” by a foreign person in a U.S. business that owns, operates, manufactures, supplies, or services to critical infrastructure, produces critical technologies, or maintains or collects sensitive personal data of U.S. citizens. The “other investments” provisions is designed to capture small investments that might not otherwise fall within CFIUS jurisdiction because they lack the previously-required threshold of “control.”

Procedural Changes

Among the procedural changes is that FIRRMA establishes a new expedited process for securing CFIUS clearance by filing a five-page “declaration” (instead of a lengthier written notice). After reviewing such a declaration, CFIUS may direct the parties to submit a full notice.

Any party to a covered transaction may choose to follow the declaration approach, but a declaration is mandatory for any “foreign person in which a foreign government has, directly or indirectly, a substantial interest.” This requirement may be waived by CFIUS if the foreign government does not direct the foreign business and the foreign business has previously cooperated with the Committee. CFIUS may also choose to require a mandatory declaration where a U.S. business that controls critical infrastructure, technology, or sensitive personal data is a party to the transaction.

The new legislation also is intended to improve information-sharing with U.S. allies and partners and provides needed additional resources to the panel while maintaining safeguards to ensure that CFIUS would review transactions only when necessary.

Effective Date

Effective immediately, FIRRMA increases the filing and review schedule to 45 days and the investigatory phase to a second 45 day period. The act permits CFIUS to extend the investigation period by another 15 days in “extraordinary circumstances.” The legislation also adds an additional 15 days to the President’s current 15-day review period in extraordinary cases. Thus, relatively complex CFIUS cases may routinely begin to take 105 days (45+45+15) following initiation, instead of the previous 75 days (assuming that the parties do not withdraw and refile their notice).

Certain other provisions of FIRRMA have a delayed effective date (which is the earlier of 18 months following enactment or 30 days after CFIUS determines that it has sufficient resources). For example, the delayed date applies to the expansion of “covered transactions” to include real estate located in important ports or near sensitive US government facilities such as military installations. The delayed date also applies to CFIUS’s expanded jurisdiction with respect to “other investments” in U.S. business that own critical infrastructures or technologies or that maintain sensitive personal data of U.S. citizens.

 

© 2018 Schiff Hardin LLP
This post was written by William M. Hannay of Schiff Hardin LLP.

Bank Deregulation Bill Becomes Law: Economic Growth, Regulatory Relief, and Consumer Protection Act

On May 24, President Trump signed into law the most significant banking legislation since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010.  The bill – named the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) – passed its final legislative hurdle earlier this week when it was approved by the U.S. House of Representatives.  Identical legislation passed the U.S. Senate last March on a bipartisan basis.

The Act makes targeted, but not sweeping, changes to several key areas of Dodd-Frank, with the principal beneficiaries of most provisions being smaller, non-complex banking organizations.

Below is a summary of several key changes:

  • Higher SIFI Threshold – The controversial $50 billion asset threshold under Dodd-Frank is now $250 billion, affecting about two dozen bank holding companies. Under Section 165 of Dodd-Frank, bank holding companies with at least $50 billion in total consolidated assets were subjected to enhanced prudential standards.  Under the Act, the enhanced prudential standards under Section 165 no longer apply to bank holding companies below $100 billion, effective immediately.  Bank holding companies with total consolidated assets of between $100 billion and $250 billion will be exempted from such standards starting in November 2019, although the Federal Reserve retains the authority to apply the standards to any such company if it deems appropriate for purposes of U.S. financial stability or to promote the safety and soundness of the particular firm.

The increase in the Section 165 threshold does not eliminate the $50 billion threshold used in other areas of regulation and supervision, such as the Office of the Comptroller of the Currency’s (“OCC”) “heightened standards,” the “living will” regulations adopted by the Federal Deposit Insurance Corporation (“FDIC”) for insured depository institutions or the Federal Reserve’s capital plan rule pursuant to which it administers the CCAR process.  However, it is expected that the federal banking agencies may reconsider the appropriateness of using the $50 billion asset threshold elsewhere.

The increase in this threshold is especially important because it may spark renewed interest in M&A opportunities among regional banks that have carefully managed growth to avoid crossing $50 billion or that have otherwise been reluctant to pursue transactions in light of the significant regulatory scrutiny that has accompanied applications by large acquirors.

  • Volcker Rule – The Volcker Rule is amended so that it no longer applies to an insured depository institution that has, and is not controlled by a company that has, (i) less than $10 billion in total consolidated assets and (ii) total trading assets and trading liabilities that are not more than 5% of total consolidated assets. All other banking entities, however, remain subject to the Volcker Rule.  The other change to the Volcker Rule relates to the name-sharing restriction under the asset management exemption, which the Act modifies slightly by easing the prohibition on banking entities sharing the same name with a covered fund for marketing or other purposes.  Going forward, a covered fund may share the same name as a banking entity that is the investment adviser to the covered fund as long as the word “bank” is not used in the name and the investment adviser is not itself (and does not share the same name as) an insured depository institution, a company that controls an insured depository institution or a company that is treated as a bank holding company.  This change allows separately branded investment managers within a bank holding company structure to restore using the manager’s name on its advised funds.

The Act represents only the first set of changes to the Volcker Rule.  The federal banking agencies are expected to release a proposal the week of May 28 to revise aspects of the regulations first adopted in late 2013.

  • “Off-Ramp” Relief for Qualifying Community Banks – A depository institution or depository institution holding company with less than $10 billion in total consolidated assets will constitute a “qualifying community bank” under the Act. The benefit of such a designation is that the institution will be exempt from generally applicable capital and leverage requirements, provided the institution complies with a leverage ratio of between 8% and 10%.  The federal banking agencies must develop this ratio and establish procedures for the treatment of a qualifying community bank that fails to comply.  The regulators have the authority to determine that a depository institution or depository institution holding company is not a qualifying community bank based on the institution’s risk profile.

  • Stress Testing – The Act provides relief from stress testing for certain banking organizations. Notably, bank holding companies with total consolidated assets of between $10 billion and $250 billion will no longer need to conduct company-run stress tests.  Bank holding companies with more than $250 billion in assets and nonbank companies deemed systemically important still need to conduct company-run stress tests, but are permitted to do so on a “periodic” basis rather than the previously required semi-annual cycle.  As for supervisory stress tests, which are conducted by the Federal Reserve, bank holding companies with less than $100 billion are no longer subject to such stress tests.  Bank holding companies with total consolidated assets between $100 billion and $250 billion are subject to supervisory stress tests on a periodic basis, while such firms with $250 billion or more in total consolidated assets and nonbank companies designated as systemically important remain subject to annual supervisory stress tests.

  • Risk Committees and Credit Exposure Reports – The Act raises the asset threshold that triggers the need for publicly-traded bank holding companies to establish a board-level risk committee, from $10 billion to $50 billion. In addition, the Act amends Dodd-Frank’s requirement that bank holding companies with at least $50 billion in assets and nonbank companies designated as systemically important submit credit exposure reports.  Instead, the Act authorizes, but does not mandate, the Federal Reserve to receive reports from these firms, but with respect to bank holding companies, only those with more than $250 billion in assets are within scope.

  • Exam Cycle and Call Report Relief for Smaller Institutions – The Act increases the asset threshold for insured depository institutions to qualify for an 18-month on-site examination cycle from $1 billion to $3 billion. The Act also directs the federal banking agencies to adopt short-form call reports for the first and third calendar quarters for insured depository institutions with less than $5 billion in total consolidated assets and that meet such other criteria as the agencies determine appropriate.

  • Small BHC and SLHC Policy Statement – The asset threshold for the application of the Federal Reserve’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement is raised from $1 billion to $3 billion. As a result, those institutions with less than $3 billion in consolidated assets are not subject to consolidated capital requirements and have the benefit of less restrictive debt-to-equity limitations.

  • Flexibility for Federal Thrifts to Operate as National Banks – Federal savings associations with total consolidated assets of $20 billion or less (as of December 31, 2017) may elect to be subject to the same rights, privileges, duties, restrictions, penalties, liabilities, conditions and limitations that apply to a national bank, without having to convert their charters. As a result, institutions that make the election would be exempt from certain restrictions unique to savings associations, including asset-based limitations applicable to commercial and consumer loans, unsecured constructions loans, and non-residential real property loans.  To make an election, a federal savings association must provide 60 days’ prior written notice to the OCC.

  • “Ability to Repay” Safe Harbor for Smaller Institutions – The Act provides a safe harbor from the “ability to repay” requirement under the Truth in Lending Act (“TILA”) for mortgage loans originated and retained in portfolio by an insured depository institution or insured credit union that has, together with its affiliates, less than $10 billion in total consolidated assets. However, mortgage loans that have interest-only, negative amortization or certain other features do not qualify for this ability-to-repay relief.

  • Capital Treatment for HVCRE Exposures – The Act eases the treatment for certain “high-volatility commercial real estate” (“HVCRE”) loans under U.S. Basel III capital rules. HVCRE exposures had been assigned a 150% risk-weight under the U.S. standardized approach, but the Act now restricts this higher risk-weight to those exposures that constitute acquisition, development and construction (“ADC”) loans meeting a new “HVCRE ADC loan” definition.  Various loans are excluded from HVCRE ADC loan definition, including loans to finance the acquisition, development or construction of one- to four-family residential properties, community development project loans, and loans secured by agricultural land.  In addition, loans to acquire, refinance or improve income-producing properties and commercial real estate projects that meet certain loan-to-value ratios are also excluded from the new HVCRE ADC loan definition.

  • Reciprocal Deposits – The Act excludes deposits received under a reciprocal deposit placement network from the scope of the FDIC’s brokered deposit rules if the agent institution’s total amount of reciprocal deposits does not exceed either $5 billion or 20% of the institution’s total liabilities. The exclusion applies generally to a bank that has a composite condition of outstanding or good and is well capitalized, but it may be relied upon by a bank that has been downgraded or ceases to be well capitalized if the amount of reciprocal deposits it holds does not exceed the average of its total reciprocal deposits over the four quarters preceding its rating or capital downgrade.

  • PACE Financing – The Act requires the Consumer Financial Protection Bureau (“CFPB”) to issue ability-to-repay rules under TILA to cover Property Assessed Clean Energy (“PACE”) financing. The Act defines such financing to include a loan that covers the costs of home improvements and which results in a tax assessment on the consumer’s real property.  In developing these regulations, the CFPB must consult with state and local governments and PACE bond-issuing authorities.

  • Protections for Student Borrowers – The Act provides protections for student loan borrowers in situations involving the death of the borrower or cosigner and those seeking to “rehabilitate” their student loans. In particular, the Act amends TILA to prohibit a private education loan creditor from declaring a default or accelerating the debt of the student obligator solely on the basis of the death or bankruptcy of a cosigner.  In addition, in the case of the death of the borrower, the holder of a private education loan must release any cosigner within a “reasonable timeframe” after receiving notice of the borrower’s death.  The Act also amends the Fair Credit Reporting Act by allowing a borrower to request that a financial institution remove a reported default on a private education loan from a consumer credit report if the institution offers and the borrower successfully completes a loan rehabilitation program.  The program, which must be approved by the institution’s federal banking regulator, must require that the borrower make consecutive on-time monthly payments in a number that, in the institution’s assessment, demonstrates a “renewed ability and willingness to repay the loan.”

  • Immunity from Suit for Disclosure of Financial Exploitation of Senior Citizens – The Act shields financial institutions and certain of their personnel from civil or administrative liability in connection with reports of suspected exploitation of senior citizens. The reports must be made in good faith and with reasonable care to a law enforcement agency or certain other designated agencies, including the federal banking agencies.  Personnel covered by the immunity (which include compliance personnel and their supervisors, as well as registered representatives, insurance producers and investment advisors) must have received training in elder care abuse by the financial institution or a third party selected by the institution.

  • Mortgage Relief – The Act contains a number of provisions easing certain residential mortgage requirements, especially with respect to such loans made by smaller institutions. The Act amends the Home Mortgage Disclosure Act to exempt from specified public disclosure requirements depository institutions and credit unions that originate, on an annual basis, fewer than a specified number of closed-end mortgages or open-end lines of credit.  The Act revises the Federal Credit Union Act to allow a credit union to extend a member business loan with respect to a one- to four-family dwelling, regardless of whether the dwelling is the member’s primary residence.  The Act also amends the S.A.F.E. Mortgage Licensing Act of 2008 to allow loan originators that meet specified requirements to continue, for a limited time, to originate loans after moving: (i) from one state to another, or (ii) from a depository institution to a non-depository institution.  Further, the Act exempts from certain escrow requirements a residential mortgage loan held by a depository institution or credit union that: (i) has assets of $10 billion or less, (ii) originated 1,000 or fewer mortgages in the preceding year, and (iii) meets other specified requirements.

  • Liquidity Coverage Ratio – The Act directs the federal banking agencies to amend their liquidity coverage ratio requirements to permit certain municipal obligations to be treated as higher quality “level 2B” liquid assets if they are investment grade, liquid and readily marketable.

  • Custodial Bank Capital Relief – The Act requires the agencies to exclude, for purposes of calculating a custodial bank’s supplementary leverage ratio, funds of a custodial bank that are deposited with a central bank. The amount of such funds may not exceed the total value of deposits of the custodial bank linked to fiduciary or custodial and safekeeping accounts.

  • Fair Credit Reporting Act – The Fair Credit Reporting Act is amended to increase the length of time a consumer reporting agency must include a fraud alert in a consumer’s file. The Act also: (i) requires a consumer reporting agency to provide a consumer with free “credit freezes” and to notify a consumer of their availability, (ii) establishes provisions related to the placement and removal of these credit freezes and (iii) creates requirements related to the protection of the credit records of minors.

  • Cyber Threat Report – Within one year of enactment, the Secretary of the Treasury must submit a report to Congress on the risks of cyber threats to U.S. financial institutions and capital markets. The report must include: (i) an assessment of the material risks of cyber threats, (ii) the impact and potential effects of material cyber attacks, (iii) an analysis of how the federal banking agencies and the Securities and Exchange Commission are addressing these material risks and (iv) a recommendation of whether additional legal authorities or resources are needed to adequately assess and address the identified risks.

Apart from the changes in the thresholds for banks with assets above $100 billion, most of the Act’s provisions are effective immediately.

 

© Copyright 2018 Cadwalader, Wickersham & Taft LLP
Read more news on banks at the National Law Review’s Finance Practice Group Page.

The Unique Quandaries Faced in Recovering International Cryptocurrency Frauds

Cryptocurrency itself is a string of computer-generated code.  This line of code is accessed by an owner’s unique passcode secret private key.  Each owner’s cryptocurrency is kept in their “Virtual Wallet”. Virtual wallets are similarly anonymous as are the virtual currency balances. The transfer of cryptocurrency is based upon the block chain protocol, a public decentralized ledger that identifies transactions by a digital code with no link to a person or place.

Practically, there is no public record of virtual currency transfers.  Other than the debtor’s own testimony, a creditor would not know where to begin searching for evidence of virtual currency purchases or transactions. There is no way for a creditor to identify either the owner or location of a transferee’s cryptocurrency address. In some cases, the debtor could honestly state that he does not know the identity of the individual who received his cryptocurrency transfers.

For asset protection purposes, a cryptocurrency account currently functions similarly to offshore banking prior to the IRS’s crackdown of anonymous personal foreign accounts.  Today, it is almost impossible for U.S. citizens to establish an anonymous bank account, or any type of bank account, outside of the U.S. With the advent of Bitcoin, a U.S. citizen can open and maintain a financial account that has creditor protection features similar to an offshore bank account in that the Bitcoin account is anonymous and can be maintained outside the geographical jurisdiction of domestic courts. Since block chains are decentralized, they are not subject to any central authority (such as a bank or other financial institution) that might be legally compelled to provide a court with access or control over assets in its possession. Without the complete private key, no court or legal authority can manipulate ownership of a block chain asset.

At the moment, creditors face obstacles of identifying potential defendants and the international nature of the transaction.  Properly selected offshore fiduciaries holding accounts are unlikely to become subject to the jurisdiction of a court where a defendant may be sued.  Absent jurisdictional authority, a court is powerless to compel the fiduciary to turn over assets. Similarly, a US court could try to compel the party to turn over the account or information about the transaction. The court’s contempt powers could be used to coerce compliance. Arrest and incarceration can be utilized. See In Re Lawrence, 279 F.3d 1294,1300 (11th Cir. 2002); FTC v. Affordable Media Inc., 129 F.3d 1228, 1229 (9thCir. 1999). But, on cruel and unusual punishment grounds, incarceration cannot be imposed forever. If the asset is more important than personal freedom, a court’s power of compliance is limited.

There are two equitable remedies that exist under English common law which could be flexibly applied to these evolving transactions. One existing remedy is the equitable pre-trial discovery device known as a Norwich Pharmacal order requiring third parties to disclose information to potentially identify the wrongdoer, to trace funds and to assist prospective plaintiffs in determining whether a cause of action exists.  (There are five states in the U.S. that also allow for pretrial discovery to identify the wrongdoing.)  Norwich orders, being a flexible tool of equity, could assist in claims involving cryptocurrency transactions.  It may be possible that identification information might come from “know your customer” information given a bitcoin exchange.  Proceedings could be constituted as “the bitcoin holder with the public key number…”  However, the hurdle still exists to identify the wrongdoer.

The second equitable remedy is injunctive relief.  Courts have granted world-wide injunctions, particularly when the impugned conduct is occurring online and globally, such as the internet.  InGoogle Inc. v. Equustete, 2017 SC 34, the Supreme Court of Canada recently held that injunctive relief can be ordered against somebody who is not a party to the underling lawsuit, even if that third party is not guilty of wrongdoing.  Google was ordered to stop displaying search results globally for any Data Link websites.  “The problem in this case, is occurring online and globally.  The internet has no borders; its natural habitat is global.  The only way to ensure interlocutory injunction (order) attain its objection was to have it apply where Google operates – globally.”  Thus, if the third party to the block chain transaction can be identified, there may be a remedy to discover information and wrongdoing.

Therefore, courts will need to apply not only new remedies, but expand existing ones.  While the identities of the buyer and seller are encrypted, a transaction record is maintained on the public ledger. In the future, anti-money laundering laws and cryptocurrency exchanges may require the collection of personal data of customers. Until then, the challenge of recovery will require creativity and experience.

 

© Horwood Marcus & Berk Chartered 2018.
This post was written by Eric (Rick) S. Rein from Horwood Marcus & Berk Chartered.

Climate Change and Trends in Global Finance

On December 12, French President Emmanuel Macron, joined by President of the World Bank Group, Jim Yong Kim and the Secretary-General of the United Nations, António Guterres, hosted the One Planet Summit highlighting public and private finance in support of climate action. The summit’s focus centered on addressing the fight against climate change and ensuring that climate issues are central to the finance sector.

The summit’s most notable event was perhaps the announcement that insurance giant Axa would be dumping investments in and ending insurance for controversial U.S. oil pipelines, quadrupling its divestment from coal businesses, and increasing its green investments fivefold by 2020. Axa’s plans echo those of BNP Paribas, who, in mid-October, announced that it would terminate business with companies whose principal activities involve exploration, distribution, marketing, or trading of oil and gas from shale or oil sands. The bank also ceased financing projects that are primarily involved in the transportation or export of oil and gas. These moves themselves follow controversy over the Dakota Access pipeline in the U.S. from mid-March that resulted in ING’s $2.5 billion divestment in the loan that financed the pipeline.

These measures prefigure what might be a more conspicuous trend of large institutional investors moving more rapidly away from fossil fuel investments and into green investments. In mid-December, the World Bank said it would end all financial support for oil and gas exploration by 2019. Around the same time, New York Governor Andrew Cuomo revealed a plan for the state’s common retirement fund, with over $200 billion in assets, to cease all new investments in entities with significant fossil-fuel related activities and to completely decarbonize its portfolio. Recently, HSBC pledged $100 billion to be spent on sustainable finance and investment over the next eight years in an effort to address climate change. Additionally, JP Morgan Chase committed $200 billion to similar clean-minded investments, Macquarie acquired the UK’s Green Investment Bank, and Deutsche Bank and Credit Agricole both made exits from coal lending. As the landscape of global finance shifts, it will be important to monitor how funds, banks, and insurers address the issues related to climate change.

 

©1994-2017 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

SEC Approves NYSE Proposed Rule Change Requiring a Delay in Release of End-Of-Day Material News

On December 4, 2017, the U.S. Securities and Exchange Commission (“SEC”) approved the New York Stock Exchange’s (the “NYSE”) proposed rule change to amend Section 202.06 of the NYSE Listed Company Manual to prohibit listed companies from releasing material news after the NYSE’s official closing time until the earlier of the publication of such company’s official closing price on the NYSE or five minutes after the official closing time. The new rule means that NYSE listed companies may not release end-of-day material news until 4:05 P.M. EST on most trading days or until the publication of such company’s official closing price, whichever comes first. The one exception to the new rule is that the delay does not apply when a company is publicly disclosing material information following a non-intentional disclosure in order to comply with Regulation FD. Regulation FD mandates that publicly traded companies disclose material nonpublic information to all investors at the same time.

© 2017 Jones Walker LLP
This post was written by Alexandra Clark Layfield of Jones Walker LLP.
Learn more at the National Law Review‘s Finance Page.

MAS Releases “A Guide to Digital Token Offerings”

On 14 November 2017, the Monetary Authority of Singapore (the “MAS”) released  “A Guide to Digital Token Offerings” providing general guidance on the application of the securities laws administered by the MAS in relation to offers or issues of digital tokens in Singapore.

The main consideration is whether the digital token is designed in a way that would make it a product regulated under Singapore’s securities laws i.e. if it behaves like a share, debenture or some other form of security. If a token does not function like a security, then technically, neither will the security laws apply.

In the first case study in the guide, Company A plans to set up a platform to enable sharing and rental of computing power amongst the users of the platform. In order to raise funds to develop this platform, Company A intends to offer and sell digital tokens wherein the token will have utility upon completion. The MAS states that the digital token in this case study would not constitute a security under the Securities and Futures Act (Cap. 289). It appears that this is because other than the right to access the issuer’s platform to rent computing power, the digital token in question did not appear to have any other “rights” or “features” that made it look like a security.

Therefore, if a digital token is structured in a similar way as set out in this case study, then it would presumably not trigger the relevant Singapore securities laws, notwithstanding the fact that the sale of the token may have been used to fund the building of the platform.

The practical issue to consider then is this:- How will a company convince its investors to purchase such digital tokens in the first place, given that they do not appear to offer any type of rights or features that would give potential purchasers of those digital tokens a return on their investment?

Singapore is devoting huge resources to building the FinTech industry and offering many incentives to new entrants in the jurisdiction. Initial Coin Offerings (“ICOs”) structured like the example herein would seem to be acceptable.

This post was written by Nicholas M. Hanna & Samantha See of  K& L Gates., Copyright 2017

Equity Plan Share Reserves: How to Increase Its Life Expectancy: Executive Compensation Practical Pointers

Efforts to conserve an equity plan’s share reserve should begin the day the issuer’s stockholders approve the plan (or share increase), and should continue going forward. Issuers that do not make such efforts tend to face problems relating to dwindling share reserves, including moving to cash-based programs, hiring proxy solicitation firms to garner stockholder support for share increases, and overcoming possible negative reactions from ISS.

The following are some ideas an issuer could use to extend the life of its plan share reserve:1

  • Grant awards that are settled in cash – Depending on the terms of the plan, a cash-settled award may not draw from the share reserve.2 An alternative would be settling a portion of the award in shares (e.g., up to target), with any achievement above that settled in cash.
  • Grant full value awards like restricted stock or RSUs – Such grants provide greater value to the holder than options or SARs, the latter providing incentive only to the extent the share price exceeds the exercise/strike price, but draw from the share reserve the same as full value awards.3
  • Permit net-exercise of stock options – Depending on the terms of the plan, the shares subject to the option that are netted in a net-exercise may not draw from the share reserve. Also, a net-exercise could be helpful to a Section 16 insider to avoid a blackout (i.e., no open market transaction occurs with a net-exercise).4
  • Amend the plan to permit maximum withholding – A recent change in accounting rules provides that maximum withholding will not result in liability accounting treatment. Depending on the terms of the plan, withholding of shares to cover taxes may not draw from the share reserve.
  • Grant stock-settled SARs rather than options – A stock-settled SAR will provide the same economic result as a net-exercised option, but since a SAR is settled in shares with respect to only the excess over the strike price, fewer shares are burned than with a net-exercised option.
  • Use inducement awards for new executive-level hires and certain M&A events – The award must be a material inducement to getting the executive/employee to accept the position. If properly structured, these awards can be made outside of the plan and do not require stockholder approval under NYSE or NASDAQ rules.5
  • Implement an ESOP or ESPP – ESOPs, which are subject to ERISA, do not require stockholder approval under NYSE or NASDAQ rules. Depending upon the structure of an ESPP, stockholder approval may be required.6

1. Some of these methods involve liberal share counting, which is disfavored by ISS.

2. Liability classification would apply for accounting purposes and settlement in cash will not count towards satisfying any share ownership requirements.

3. This method will not work if the plan contains fungible share counting provisions.

4. However, a net-exercise of an incentive stock option could jeopardize the ISO’s favorable tax treatment.

5. Without stockholder approval, such awards could not qualify for deduction under Section 162(m), if applicable.

6. Broad participation requirements may apply.

This post was written by Matthew B. Grunert  & Carolyn A. Exnicios of Andrews Kurth Kenyon LLP.,© 2017
For more legal analysis go to The National Law Forum 

Six Reasons Why Wholesale Repeal of Dodd-Frank is Unlikely

Donald Trump Dodd Frank repealIn the days following the November elections, U.S. President-elect Donald J. Trump promised that his Financial Services Policy Implementation team would be working to “dismantle” the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). However, a more recent account in the Wall Street Journal reported Mr. Trump’s transition team as tempering his promise in favor of rescinding or scaling back the individual provisions Republicans find most objectionable.

In light of the current political and macro-economic environment, here are six reasons why a wholesale repeal of Dodd-Frank is unlikely to occur:

  • Congressional Resistance – A wholesale repeal of Dodd-Frank would have to be effectuated through congressional action and would likely face a democratic filibuster. This would require opponents of Dodd-Frank to muster a 60-vote block in the Senate in order to advance the proposal. Legislative horse-trading to achieve specific objectives that are key to the Republican majority may ultimately prove to be more strategically advantageous.

  • Public Perception – Actions of the new administration which could be perceived as advocating for easing the burden on the financial services industry may alienate the middle-class constituency who were significantly impacted by the great recession and who ultimately propelled Mr. Trump to the Presidency.

  • Balance of Cost – Following massive investments in infrastructure and processes, the industry may perceive the costs of undoing the compliance programs put in place subsequent to Dodd-Frank as outweighing the benefits to be derived from decreased regulation.

  • Accepted Expectations – Counterparties have come to accept the safeguards and reporting requirements put in place by Dodd-Frank as constituting baseline expectations in business transactions. A repeal of Dodd-Frank would leave industry participants to reconstruct by contract what may have been previously mandated under law.

  • International Developments – In the wake of the Brexit vote, international financial organizations may be evaluating the relocation of their operational centers to locations in the U.S. The possibility of significant financial regulatory overhauls and the accompanying specter of an unknown business environment may dissuade consideration of the U.S. by such organizations.

  • Absence of a Perceptible Problem – Dodd-Frank was passed on July 21, 2010 with the wake of the great recession providing momentum and popular support for its enactment. Conversely, there is no corresponding economic situation presently existing that critics can point to for its repeal. The DJIA is up approximately 90% since July 2010. The real estate market has remained strong and, even with the recent increase by the Fed, interest rates remain low, allowing consumers access to both homeownership and financing on attractive terms.

In addition to the issues identified above, the incoming Presidential administration and congressional delegation may face additional hurdles in advancing comprehensive legislative initiatives to pare back Dodd-Frank. As the post-election environment cools and the country marches towards inauguration day, the financial services industry can only hope that clarity on the direction of the U.S. regulatory environment begins to emerge.

ARTICLE BY Anthony M. Drenzek of Proskauer Rose LLP
© 2016 Proskauer Rose LLP.