October 22, 2020

ICOs: Knock It Off With the SAFTs Already, Will Ya?

Earlier this year, Liz blogged about an SEC enforcement action targeting the “Simple Agreement for Future Tokens,” a once popular method of structuring crypto-financings that was intended to avoid securities law compliance issues. Well, it obviously didn’t, and if one SEC enforcement proceeding wasn’t enough to drive that message home, this Brian Cave memo discusses a second one:

On September 30, 2020, Judge Alvin Hellerstein, of the Southern District of New York granted summary judgment to the Securities and Exchange Commission in its enforcement action against Kik Interactive Inc., in which the SEC contended that Kik’s 2017 $100 million Initial Coin Offering was an unregistered securities offering. The Kik decision marks the second time this year that a federal judge in the SDNY has determined that an ICO involving the “Simple Agreement for Future Tokens” (“SAFT”) framework constituted an unlawful unregistered securities offering, establishing a daunting precedent for both potential and past SAFT issuers.

Yesterday, Kik officially threw in the towel and settled with the SEC. One of the interesting things about this case is that the defendant was postively itching to fight the SEC. In fact, as I blogged last year, Kik even went out and raised a war chest from the crypto crowd to fund the litigation. I was skeptical that courting an enforcement proceeding was a particularly good strategy, and now that Kik has gotten its clock cleaned, perhaps the folks behind it don’t think so either.

Although the SAFT was a popular structure, people raised concerns about it from the start.  Now that it’s been swatted down twice in the space of a few months, it’s probably time to concede that the SAFT structure doesn’t cut the mustard.

Insider Trading: Enforcement Numbers Way Down Last Year

According to an NPR report, the number of insider trading enforcement actions brought by the SEC declined dramatically in 2019:

The government agency responsible for policing Wall Street brought the fewest number of insider trading cases in decades, according to the most recent available data. That decline came just before the COVID-19 pandemic hit. The Securities and Exchange Commission now warns that the pandemic has created wild swings in the market and more opportunities for insider trading.

NPR reviewed data from the 1980s through last year and found that under the Trump administration, the SEC brought just 32 insider trading enforcement actions in 2019, the lowest number since 1996.The SEC charged 46 defendants as part of those cases. That was the lowest number of defendants in insider trading cases since Ronald Reagan was president, and about half of the annual average over the last three decades. The decline has alarmed experts and advocates, who worry that flagrant illegal trading may go unchecked.

I suppose this report wouldn’t have been aired without including allegations that “flagrant illegal trading” was going unchecked  but the report also includes commentary to the effect that the decline reflects the current regime’s enforcement focus, which has emphasized issues impacting “Main Street Investors.”  That seems to me to be a more likely explanation for the drop in insider trading cases during a year where overall enforcement activity was near an all-time high.

Sustainability: A Random Walk All Over ESG Funds

Burton Malkiel’s book, “A Random Walk Down Wall Street”, has probably done more to promote index funds as an investment option than any other work.  In a recent WSJ opinion piece, he comes down hard on the concept of ESG funds.  Here’s an excerpt:

Some ESG providers have also claimed that social investing can enhance returns. During particular periods, some funds with specific ESG mandates have outperformed. In the first half of 2020 funds with no oil but high tech stocks did well as the price of oil plummeted and tech stocks soared. But no credible studies show that ESG investing offers consistently higher long-term returns. Such funds are less diversified than broad-based index funds and thus are riskier. They also have higher expense ratios, which tends to lower investment returns.

Further, ESG investing is inherently at odds with the goal of earning higher returns. Investor taste does influence asset prices. But as a thought experiment, suppose that oil stocks are so abhorred that they now sell at low prices relative to their earnings and prospects. That means they will offer higher future returns, and portfolios excluding them might underperform.

So what should investors interested in ESG investing do? Not surprisingly, Malkiel says that low-cost, broad-based index funds should be the core of any investment portfolio. Investors that want to invest in funds with particular mandates should do this as an add-on to their core portfolios.

John Jenkins