June 18, 2018

Corp Fin Director Weighs In Big-Time: Digital Assets as “Securities”

Last week, Corp Fin Director Bill Hinman delivered this speech on digital assets as “securities” – which caused a stir. Here’s an excerpt from this Debevoise & Plimpton memo about it (also see this WSJ article):

Certain digital assets are not, today, securities. Director Hinman expressly noted during the speech that the virtual currencies Bitcoin and Ether, as offered and sold today, are not securities. This is the first time that an SEC official has publicly indicated that a virtual currency, other than Bitcoin, does not constitute a security and, importantly with respect to Ether, notwithstanding a history of fundraising that accompanied its creation. Underlying his view is the fact that applying the disclosure regime of the U.S. federal securities laws to current transactions in these virtual currencies would add little value because the underlying software platforms are sufficiency decentralized and sufficiently functional. In other words, there is no informational asymmetry between founder/sponsor/promoter, on the one hand, and investors, on the other, that puts investors at risk.

Other digital assets may not, today, be securities. Director Hinman covered three additional points during the speech that may help to bring additional virtual currencies and other digital assets out of the regulatory “shadows.” First, he allowed that there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. Second, he made clear his view that “whether something is a security is not static and does not strictly inhere to the instrument.” Consistent with relevant case law and the SEC’s long-stated views, the economic substance of the transaction in question always determines the legal analysis, and this cuts both ways:

– A digital asset that was originally distributed in a securities offering may later be sold in a manner that does not constitute an offering of a security; and
– Digital assets with utility that function solely as a means of exchange over a decentralized network could be packaged and sold as an investment strategy that can be a security.

Finally, Director Hinman laid out a framework containing two sets of non-exclusive factors that the SEC considers in assessing whether a digital asset is offered as an investment contract and is thus a security. The critical underpinnings of the Hinman Factors are: (i) the role that a third party, whether a person, entity or coordinated group of actors, plays in driving an expectation of an investment return and (ii) whether the economic substance of the transaction indicates that the digital asset truly functions more like a consumer item and less like a security.

As an aside, here’s something wild: The best “wallets” for cryptocurrency are glorified USB drives. So since the exchanges aren’t secure, the traders download their “keys” to the drive every night and lock it in a safe. Blockchain! So easy! And then there’s this guy’s story – forgot his pin, tried a bunch of stuff to recall it (including hypnosis) and then paid someone almost $4k to hack the drive…

More on “First Universal Proxy Card!”

Last week, Liz blogged about the first US-incorporated company to use a universal proxy card – and as an aside, she mused about whether this was a strategy by Sandridge Energy. A member responded with these thoughts:

I suppose a key element of the strategy could involve the grant of discretionary authority to the proxies appointed on the universal card. Specifically, even shareholders wishing to support (partially or fully) the Icahn group will appoint management proxies to vote in their discretion on such other business as may properly come before the meeting or any adjournment or postponement thereof.

I am not certain, but suspect, that if a card were returned with fewer than seven “for” votes in the election of directors, the proxies also would be able to vote in accordance with the board’s recommendation. Thus, if the shareholder cast five votes in favor of Icahn nominees (and cast no votes for any of the Company nominees), the proxies likely can cast two votes in favor of two Company nominees. If correct, there could be controversy because the proxies might be able to distribute those votes in a way to knock out one or more Icahn nominees. Interesting stuff.

HBO’s “Succession”: Duty to Disclose CEO’s Illness

Spoiler alert! The title of this blog already gave away the end of the first episode of HBO’s new show – “Succession.” Sorry about that. Anyway, I thought I would turn off “Succession” about five minutes into the first episode given that we already hear too much about powerful, white, rich families. But I have found it interesting.

For starters, it’s close to home in that I work for a family-owned company that has successfully lived through a recent transition in senior management (Jesse Brill has turned over running the company to his son, Nathan). Then, I am in the midst of my own long-term succession planning as I train Liz about the facets of this job (John isn’t the heir apparent – he & I are the same age).

More importantly, the show grapples with issues that arise for many of you reading this blog. The show’s family-owned business is a publicly-held media empire (but supposedly not based on the Murdochs). As the title of the show suggests, the main premise of the show is about how to handle CEO succession planning. And Episode 2 mainly deals with the duty to disclose a CEO’s illness.

In Episode 2, several characters discuss the CEO’s illness & whether investors should be told. Some of the statements are inaccurate of course. It’s a tricky topic. The most inaccurate statement is that the SEC has a rule compelling disclosure of a CEO’s illness (ie. an affirmative duty to disclose). There is a more accurate statement about the NYSE having a standard that requires disclosure of the CEO’s illness (it’s clearly material in this case). And then there are multiple references to Steve Jobs – as Apple’s decision to be mum about Steve’s health is held up as precedent as part of the argument to do the same in the show.

Here are my three main blogs on the securities law aspects of this topic:

A Delicate Disclosure Issue: Steve Jobs’ Health

More on Steve Jobs & Disclosure of Health Issues

A Recap of Thoughts on Apple & Illness Disclosures

Broc Romanek