February 28, 2020

D-Lister Dinged for Drumming Digital Deal!

Yesterday, the SEC announced that it had instituted a settled enforcement action against actor, musician, environmentalist, martial arts master & Russian special envoy Steven Seagal for allegedly violating the anti-touting provisions of the Securities Act in connection with a digital asset offering.  Here’s an excerpt from the SEC’s press release:

The SEC’s order finds that Seagal failed to disclose he was promised $250,000 in cash and $750,000 worth of B2G tokens in exchange for his promotions, which included posts on his public social media accounts encouraging the public not to “miss out” on Bitcoiin2Gen’s ICO and a press release titled “Zen Master Steven Seagal Has Become the Brand Ambassador of Bitcoiin2Gen.” A Bitcoiin2Gen press release also included a quotation from Seagal stating that he endorsed the ICO “wholeheartedly.”

These promotions came six months after the SEC’s 2017 DAO Report warning that coins sold in ICOs may be securities. The SEC has also advised that, in accordance with the anti-touting provisions of the federal securities laws, any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.

According to the SEC’s order, in addition to consenting to a C&D on a neither admit nor deny basis, Vladimir Putin’s BFF agreed to disgorge all of the $157,000 in promotional payments that he received (plus interest) and to pay a $157,000 penalty. He also agreed not to promote any securities for three years.

If it’s any consolation to Louisiana’s most Googled d-lister, he’s not the first celebrity to run afoul of Section 17(b) of the Securities Act for touting a digital deal. Back in 2018, boxer Floyd Mayweather & music impresario DJ Khaled were tagged by the SEC for the same conduct.

D&O Insurance:  Dealing with a Tough Market

Lynn recently blogged about the tightening market for D&O insurance.  This Goodwin memo reviews some of the things that companies can do to put themselves in the best position to deal with current market conditions.  In addition to careful advance planning with the company’s insurance brokers & coverage counsel, this excerpt highlights some alternatives for managing increased premiums:

Given daunting premium increases, insureds are also increasingly considering alternative ways to structure their insurance programs. For example, insureds may consider increasing the amount of their deductibles in order to reduce insurer risk, and thereby reduce the amount of premium charged (or reduce the size of a premium increase). In certain situations, insureds have also considered “captive insurance” programs to replace or supplement traditional insurance programs. (Captive insurance programs are in essence self-insurance programs owned and controlled by insureds rather than insurance companies).

Insureds may also consider reallocating more of their insurance program to so-called “Side A Difference-in Conditions (DIC)” coverage, which is less expensive coverage that is for the dedicated benefit of directors and officers only, excess of all other insurance and indemnification available to those individuals. Care should be taken with respect to any of these changes, however, in order to avoid unduly reducing important insurance protections in the event of claims.

Note the reference to “daunting” premium increases – the memo says that some companies are seeing premiums double without any change in risk profile. Deductibles for securities claims are also doubling in some cases, with IPO companies facing as much as a $10 million deductible. Yikes!

D&O Insurance: The Importance of Indemnification Agreements

With deductibles rising significantly, the importance of supplemental arrangements like “Side A” policies are well understood.  But this recent blog from Woodruff Sawyer’s Priya Cherian Huskins says that the importance of individual indemnification agreements shouldn’t be overlooked – particularly given the risk that companies may opt for coverage that proves to be inadequate as premiums escalate.  Here’s an excerpt:

An indemnification agreement in this context is a contract between individual director or officer and the company the director or officer serves. These agreements promise to (1) advance legal fees, and (2) pay loss (indemnification) on behalf of an individual should he or she be named in a lawsuit in his or her capacity as a director or officer of the company.

When properly structured, these agreements provide broad protection so that individuals have the right to hire a lawyer at the company’s expense from the moment they need protection, be it because they’re being investigated (including informally) by a regulator, accused of wrongdoing in a suit, or called as a witness in a case.

Directors & officers may think that they’re appropriately protected by corporate bylaws, but those often provide the company with discretion when it comes to advancement of expenses – and people can’t always rely on that discretion being exercised in their favor after they’ve departed. Indemnification agreements provide the individual with contractual rights obligating the company to defend an indemnitee, and will ensure that there’s a source of funding for those expenses so long as the company remains solvent.

John Jenkins