March 8, 2019

The Fossil Record: Checking Out Pre-’33 Act Prospectuses

Over on the “Business Law Prof Blog,” Prof. Haskell Murray flagged this Fordham study on pre-Securities Act prospectuses. It’s interesting for a number of reasons – not the least of which is that it includes as an appendix a copy of a Coca-Cola prospectus from 1919. Check it out!

Exempting The Crypto? The “Token Taxonomy Act”

Last month, I blogged about Commissioner Peirce’s comments calling for a lighter touch when it comes to regulating “decentralized” tokens.  She’s got company in Congress.  Late last year,  Reps. Warren Davidson (R-Ohio) & Darren Soto (D-Fla.) introduced the “Token Taxonomy Act” –  which would exempt “digital tokens” from key provisions of the federal securities laws.

This CoinDesk article notes that the legislation would carve out an exemption for the kind of digital assets  to which Peirce advocated applying the Howey test with a lighter touch:

According to the text, the bill – among other items – seeks to exclude “digital tokens” from being defined as securities, amending both the Securities Act of 1933 and the Securities Exchange Act of 1934.

That definition has several components, all of which center around a degree of decentralization in which no one person or entity has control over an asset’s development or operation. This ostensibly would clear the way for cryptocurrencies that don’t have a central controller to be spared a securities designation.

The bill defines “digital tokens” as “digital units created… in response to the verification or collection of proposed transactions” (mining, basically) or “as an initial allocation of digital units that will otherwise be created” (as in a pre-mine). These tokens must be governed by “rules for the digital unit’s creation and supply that cannot be altered by a single person or group of persons under common control.”

Sorry if I come off like a digital Luddite – but is a broad statutory exemption from the securities laws really the best approach to an emerging asset category that few people understand, that’s been hyped relentlessly, and that’s rife with fraud?

IPOs: The Media Discovers “Cheap Stock” (Again)

Hey everybody – the media’s discovered “cheap stock” again. I know it’s been an issue in IPOs since Martin Van Buren was president, but for some reason it’s always huge news to the media when they stumble upon it. A couple of years ago, it was the NYT that breathlessly exposed the disparity between the valuation of equity awards made in advance of an IPO & the offering price. This time, it’s the WSJ that breaks the shocking news that private & public valuations are different:

A Wall Street Journal analysis of recent initial public offerings identified 68 companies that gave employees options to buy about $1.5 billion worth of shares in the 12-month run-up to their market debut. But the value of those shares was much higher based on a valuation model developed by academics—an estimated $2.2 billion, the equivalent of employees getting a 32% discount on the shares.

“The Journal’s findings show that the valuations being reported by companies are significantly below what the shares are really worth—the price that investors would pay for them,” said Will Gornall, an assistant finance professor at the University of British Columbia, in Vancouver.

What’s not clear from the WSJ’s article is whether it’s really comparing apples to apples in coming up with what the price “should” be for employee equity awards. The study seems to have just looked at the discount to the IPO price – the so-called “private company” discount. But pre-IPO equity awards usually have a lot of strings attached to them, such as vesting provisions and often onerous restrictions on transfer, and that affects their value too.

John Jenkins