July 26, 2017

Initial Coin Offerings: The SEC Speaks. . .

Yesterday, I blogged about “initial coin offerings” – or ICOs – over on “The Mentor Blog.”  The ink on that blog was barely dry when the SEC weighed in with its own thoughts – in the form of a Section 21(a) Report addressing the status of “digital assets” under the Securities Act.

Guess what? Despite claims that “coins” aren’t securities, the SEC sure thinks they can be.  Here’s an excerpt from the SEC’s press release on the Report:

The SEC’s Report of Investigation found that tokens offered and sold by a “virtual” organization known as “The DAO” were securities and therefore subject to the federal securities laws. The Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt.”

The Report was accompanied by a joint statement from Corp Fin & Enforcement and an Investor Bulletin on ICOs. We’re posting memos in our “Definition of ‘Securities” Practice Area.

Materiality: SEC’s Investor Advocate Tells FASB What It Thinks

I thought this recent letter from the SEC’s Office of the Investor Advocate on FASB’s proposal to change its definition of “materiality” was worth noting.

FASB proposes to conform its approach to financial statement materiality to the judicial definition of materiality that applies in other contexts. Right now, there’s a disconnect between the two standards. Instead of requiring that there be a “substantial likelihood” that information would be material, FASB’s Concept Statement No. 8 currently says information is material if “omitting it or misstating it could influence decisions” that users of financial statements make.

Business groups have applauded the proposed change, but many investor groups have panned it – and the Investor Advocate’s letter provides a fairly comprehensive overview of their objections. It also offers up a revised proposal that would have FASB return to its previous materiality definition – which was generally consistent with the legal concept of materiality – but heavily salt that definition with the “qualitative” considerations embodied in SAB 99.

Materiality: An Accounting Decision?

I can’t resist pointing to one section of the Investor Advocate’s letter to FASB that had me – and I think will have many other lawyers – rolling their eyes. Here’s one of the concerns investors have about the proposed change in FASB’s materiality standard:

The proposals would move decision-making on materiality from accountants to lawyers. The SEC’s Investor Advisory Committee, in a theme echoed by other investors, warned in its comment letter of the risk “that, by replacing the current, differentiated professional accounting standard with a case-law driven legal standard, close questions of judgment will ultimately devolve to lawyers rather than accountants.”

You’ve got to be kidding! If I had a dollar for every time an accountant said “well, it’s a materiality issue – and that’s a legal call,” I’d be sipping Margaritas on my private island beach. However, I do want to thank Investor Advocate for this comment – which I intend to laminate so I will be sure to have it to share with the next accountant who tries to artfully dodge the financial statement materiality bullet in this fashion.

John Jenkins