September 19, 2018

Glass Lewis to Incorporate SASB Standards in Reports

As I’ve blogged, studies that show many investors are now taking ESG seriously. For example, in this “Proxy Season Blog”, I noted that State Street’s Rakhi Kumar was encouraging boards to become more familiar with SASB and the growing importance of ESG scores in driving investment.

So it’s not a big surprise that proxy advisors have begun incorporating ESG ratings into their reports & recommendations. Broc blogged about how ISS is starting to do this through its “E&S QualityScore” (aided by its slew of recent acquisitions in the ESG space). Now, Glass Lewis has announced that it’s taking a step in that direction. It will soon start displaying SASB standards in its research reports and on its voting platform – which is a nice boost for SASB in light of all the competition in the “ESG disclosure framework” space. Here’s more detail (also see this blog from Davis Polk):

Guidance on material ESG topics from the Sustainability Accounting Standards Board (SASB) will be integrated into Glass Lewis Proxy Paper research reports and its vote management application, Viewpoint. As a SASB Alliance Organizational Member since mid-2017 Glass Lewis is familiar with the value provided by SASB’s industry-specific standards, and has now been granted the right to display this content directly within its standard proxy research as well as its vote management platform.

As such, users of Glass Lewis’ services will be able to easily identify whether items are aligned with the SASB standards, helping inform the clients’ proxy voting and engagement activities. SASB’s information will be incorporated into Glass Lewis’ products in advance of the 2019 season after the SASB standards are codified, and available for thousands of companies across Glass Lewis’ global coverage universe.

ICOs: Court Says Coins Might Be “Securities”

About a year ago, the SEC brought its first ICO enforcement action – against the promoters of RECoin, which was supposedly a cryptocurrency backed by real estate, but (spoiler alert) wasn’t actually backed by real estate, and didn’t actually provide investors with any form of token or currency.

Now, the same defendant is fighting litigation in the first-ever federal district court case on ICOs – where the issue is whether federal securities laws can be used to prosecute ICO fraud. And wouldn’t you know, he’s not faring so well. Last week, the judge denied his motion to dismiss, in which he’d argued that the ICO didn’t involve “securities.” This Proskauer blog describes the judge’s reasoning (also see these memos):

The definitions of “security” in the relevant securities laws includes “investment contracts,” and whether the investment schemes at issue in this case are investment contracts is a question reserved for the ultimate fact-finder, which will be required to conduct an independent Howey analysis based on the evidence presented at trial.

At the motion to dismiss stage, the court must decide whether the “elements of a profit-seeking business venture” are sufficiently alleged in the indictment such that, if proven at trial, a reasonable jury could conclude that investors provided the capital and shared in the earnings and profits, and that the promoters managed, controlled and operated the enterprise. Judge Dearie concluded that such elements were sufficiently alleged in the indictment, and that if such allegations were proven, they would permit a reasonable jury to conclude that Zaslavskiy promoted investment contracts.

We don’t know for sure what’ll happen at trial, but the defendant’s argument seems a little shaky. Particularly because RECoin wasn’t a “utility token” that could be used in transactions – it was supposedly an investment in tokens that represented interests in assets. And it probably doesn’t help that a Florida magistrate judge recently applied the Howey test to another sketchy ICO – and ruled against the promoters (as described in this DLA Piper memo). But the bigger question is what impact the holding and dicta in these cases will have on ICOs that don’t involve fake tokens and imaginary asset interests.

Are ICOs Insurable?

If you’re in the cryptocurrency service space – e.g. security, custody, transfers, investments – or even if you just accept cryptocurrency for payment, it might be time to have a chat with your insurance broker. This “D&O Diary” blog says that you might even be able to get coverage for ICOs and D&O exposure, in addition to business risks. It’s timely advice, since last week the SEC reminded everyone that the legal risks of ICOs aren’t limited to ICO promoters – e.g. unregistered broker-dealers are also fair game for an enforcement action.

Of course, you’ll have to jump through some hoops to get coverage, in the form of extensive underwriter diligence as well as negotiations on policy limits. This “D&O Diary” blog cautions that coverage will be different from what you’d get in a traditional IPO – and elaborates on the attributes of an “insurable ICO”:

– The company is institutionally/VC backed and has already undergone fundraising

– The company is already an established corporate with an experienced management team & a good track record

– The insurer has been able to fully evaluate all of the relevant exposures, including systemic exposures

– The company can justify that the project underpinning the ICO cannot be achieved or the issue solved without blockchain technology

– The company is able to provide a white paper, regulatory authorizations, evidence of compliance controls, legal opinions, audit reports, banking agreements and outsourced service agreements

Liz Dunshee