Articles Posted in Regulation

Signaling the potential future of cryptocurrency regulation in the United States, Gary Gensler, the Chairman for the Securities and Exchange Commission (SEC), shared his perspective that the majority of crypto tokens are indeed securities under U.S. law while presenting at the SEC Speaks event in early September. [1]

Along with the sharing his viewpoint that the majority of crypto tokens and cryptocurrency intermediaries are subject to federal securities laws and regulations, Gensler also shared a quote from the first SEC Chairman, Joseph Kennedy: “No honest business need fear the SEC.” [1] Gensler’s repeated reference to this quote supported his overarching message that regulatory oversight of crypto tokens and intermediaries should be viewed as a positive for the market rather than a negative.

In first speaking on crypto tokens themselves, Gensler noted that the purchase and sale of these tokens are subject to federal securities laws so long as the tokens meet the statutory definition of a security. Gensler cited Congressional purpose and history as well as the Supreme Court’s “Howey Test” in support of his view. [1]

Cryptocurrency proponents tout the technology’s potentially “transformative” nature and its position as an arguably more stable store of value when compared with fiat money. [1] Yet SEC Chairman Gary Gensler cautioned crypto investors against an overly rosy view of the technology during a speech at the Penn Law Capital Markets Association Annual Conference this week. Instead, Gensler advocated for investor caution, along with a much broader regulatory and enforcement role for the SEC in cryptocurrency markets. [2]

Before sharing his view of the SEC’s role in crypto markets, Chairman Gensler first compared the technology to that of the dotcom bubble in 2000 and subprime lenders leading up to the 2008 financial crisis. His message: the flurry of attention on crypto and related innovations does little to vouch for its long-term viability or success. Instead, as was borne out in 2000 and again in 2008, cryptocurrency could indeed be a technology destined for failure.

The SEC’s role then, in Gensler’s view, is to protect investors from the potential financial blowback of such a failure. While Gensler lauded the spirit of entrepreneurship common in the United States, he also argued that the SEC should approach crypto regulation in a “technology neutral” way. In so doing, the SEC could carry out their mission to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets, while still allowing crypto markets to flourish.

On Wednesday, March 30th, the Securities and Exchange Commission (SEC) announced newly proposed rules and rule amendments governing Special Purpose Acquisition Companies (SPACs), shell companies, and the projections that these companies make. The aggregate proposed rule is aimed at heightening investor protections for those who choose to invest in SPACs and shell companies, where such investor protections are currently quite slim.

Understanding the new rules necessitates a working understanding of SPACs themselves. SPACs are a form of “blank-check” company, in which capital is raised by investors through an Initial Public Offering (IPO). [2] SPAC IPOs differ greatly from traditional IPOs, however, in that at the time of a SPAC IPO, the SPAC has no physical operations of its own. [2]  Instead, post-IPO, a SPAC is granted a two year term during which it must acquire or merge with an existing company, thereby taking that company public without ever going through the traditional, and often costly, IPO process. [2]

New SPAC IPOs have been on a meteoric rise since 2020. In 2019, just 59 SPAC IPOs occurred, while 2020 saw 247 and 2021 saw a record 613 SPAC IPOs. [2] These 613 SPAC IPOs in 2021 represented over $160 billion of capital raised. [2]

The Securities and Exchange Commission’s much-anticipated rules on climate-related disclosures are finally here. [1] On Monday, March 21, 2022, the federal securities regulator announced the release of a proposed rule, broadly referred by the SEC as “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” [2] The proposed rule comes to the delight of activist investors and others concerned about climate change impacts, while industry actors may fear the increased costs of the proposed mandatory disclosures.

The SEC has proposed rules which would require those registered with the SEC to disclose specific information regarding their climate-related financial risks and climate-related financial metrics. [2] This information would be disclosed to the SEC through an entity’s typical registration statements or annual reports, which already contain many other required disclosures. [2]

Importantly, the draft rules require companies registered with the SEC to disclose both their direct and indirect greenhouse gas emissions. These emissions include three discrete categories – Scope 1, Scope 2, and Scope 3. [3] Scope 1 greenhouse gas emissions are those emitted directly by the company through its operations, while Scope 2 emissions are the “indirect” emissions stemming from a company’s energy usage, such as through electricity generation. [4]

Electric automaker, Tesla, and its CEO, Elon Musk, made headlines once again this week in connection with a 2018 Twitter post. The tweet in question, posted by Elon Musk, read simply: “Am considering taking Tesla private at $420. Funding secured.”[1]

At the time the tweet was posted in 2018, the SEC swiftly charged both Tesla and Musk with securities fraud, over which the parties eventually settled. [1] Now more than three years later, the public has learned of a new subpoena from the SEC relating to the tweet, though the subpoena’s impact and strategic aim are still to be seen.

As evidenced by this series of events, Tesla and the SEC share a turbulent, history. Following the 2018 “funding secured” tweet, the SEC alleged that Musk violated Section 10(b) of the Securities Exchange Act of 1934 along with rule 10b-5.[2] These allegations were based upon the SEC’s contention that the tweet constituted a materially false and misleading statement because despite Musk’s confident tone, he had neither discussed nor confirmed the terms of such a deal with any potential funding source. [2]

While the dust settles on the recent trial of Elizabeth Holmes, former CEO of Silicon Valley startup Theranos, attention is building around the Securities and Exchange Commission’s current and future role in regulating private firms.

Under existing federal law, private firms with less than 2,000 shareholders are not required to register with the SEC nor provide routine disclosures, unlike their public counterparts. [1]

While exemption from such regulatory requirements may provide private startup companies with the freedom to develop their business unimpeded by government, thus encouraging valuable innovation, the rapid growth of the private capital market has experts questioning whether some degree of SEC oversight may be warranted.

As 2021 draws to a close, it is a fitting time to revisit some of the main enforcement actions taken by the Securities and Exchange Commission (SEC) through fiscal year (FY) 2021, which ended on September 30th, 2021.

In total, the number of new enforcement actions filed by the SEC in FY 2021 increased by 7% over the previous year, with 434 new enforcement actions. While the total number of enforcement actions – including new actions along with other “follow-on” or open proceedings  – decreased slightly year over year in FY 2021, the SEC remained committed to its role as “cop on the beat for America’s securities laws,” as described by Chair Gary Gensler. [1] The SEC maintained a sharp focus on protecting the integrity of the country’s capital markets through enforcement actions against bad actors even in the face of the persisting COVID-19 pandemic persisted.

In announcing its progress on enforcement actions during FY 2021, the SEC concentrated on several key priority areas. Some of these priority areas, per a recent SEC Press Release, included “holding individuals accountable,” “ensuring gatekeepers live up to their obligations,” “rooting out misconduct in crypto,” “policing financial fraud and issuer disclosure,” “cracking down on insider trading and market manipulation,” and “swiftly acting to protect investors.” [1]

In the SEC’s pursuit of their mission to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” access to information about potential unlawful activity is of unique importance and interest. [1] Without access to such information, the SEC faces a much steeper battle in holding bad actors accountable and protecting both investors and the market.

In support of this broad mission, the SEC established a whistleblower program and a corresponding Office of the Whistleblower to administer the program in 2012. The whistleblower program was established under Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 21F to the Securities Exchange Act of 1924 (“the Exchange Act”). [2]

Through this statutory addition, the SEC gained authorization to make monetary awards to “eligible whistleblowers.” These “eligible whistleblowers” are individuals who voluntarily come forward to the SEC with original information about a potential federal securities law violation, which ultimately leads to a successful SEC enforcement action imposing a monetary sanction of over $1 million. [3] Importantly, the Dodd Frank Act protects the confidentiality of all SEC whistleblowers, and no identifying information that could potentially reveal a whistleblower’s identity is released to the public. [4]

In today’s ever-interconnected society, protecting the stability and security of cyber infrastructure and the personal information stored therein has never been of greater importance. Recognizing this need, the United States Securities and Exchange Commission (“SEC”) has taken marked steps to protect the security of investor records and information that broker-dealer firms possess.

In fact, the SEC has recently begun sanctioning the very victims of cyberattacks – investment firms that have fallen prey to such attacks – citing their deficient cybersecurity procedures as partly to blame for the unauthorized third-party access to investor’s private information. [1]

On August 30, 2021, the SEC released three orders sanctioning eight firms for their failures in protecting their customers’ personally identifiable information due to inadequate cybersecurity policies and procedures. These orders each proceeded as violations of Rule 30(a) of Regulation S-P, colloquially known as the “Safeguards Rule.” [2]

On September 27th, 2021, the Securities and Exchange Commission (“SEC”) announced affinity fraud charges against a Miami payday lender, Sky Group USA LLC (“Sky Group”), and its CEO, Efrain Betancourt. [1] The SEC’s complaint lists eight violations of federal securities law centering on allegations of material misrepresentations and omissions regarding Sky Group’s use of investor funds, its profitability, and the safety and security of the promissory notes it sold. [2]

According to the SEC’s complaint, Sky Group ran its fraudulent scheme from at least January 2016 through March 2020. During this time, Sky Group raised approximately $66 million through the sale of promissory notes while representing itself as a payday lender soliciting investors to fund its business. [2]

In particular, Sky Group targeted Venezuelan-American investors in South Florida, who in turn often spread information about the investment opportunity by word-of-mouth. Betancourt specifically pitched Sky Group investments as “a great opportunity for members of the Venezuelan immigrant community to generate investment income,” touting its supposed $70 million loan portfolio as evidence of the investment’s safety.

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