Both presidential candidates said warm & fuzzy things about crypto this year, but Donald Trump went all-in on courting the crypto vote, even pledging to launch a “national crypto reserve.” Anyway, with the end of the SEC’s unrelenting onslaught in sight, crypto industry backers believe that Trump’s return to power will make 2025 their “Year of Jubilee.”
Earlier this year, the crypto industry achieved a milestone when the House passed the Financial Innovation and Technology Act. However, prior to the election, that legislation faced dim prospects in the Senate. This excerpt from a recent Wired article suggests that the industry’s investment in the 2024 election may have fundamentally altered the legislative landscape:
During the 2024 cycle, crypto firms donated hundreds of millions of dollars to three crypto-friendly super political action committees (PACs)—Fairshake, Protect Progress, and Defend American Jobs—the aim of which was to support crypto-friendly congressional candidates and dislodge the industry’s most vociferous critics.
The fruits of that investment became clear on Wednesday. In Ohio, incumbent Democratic senator Sherrod Brown, who is depicted as an arch-villain in crypto circles, was unseated by Republican Bernie Moreno. Through Defend American Jobs, the crypto industry spent more than $40 million in support of Moreno. Meanwhile, according to Stand With Crypto, a nonprofit pushing for bespoke crypto regulation in the US, more than 250 pro-crypto representatives have been elected to Congress.
The end of the SEC’s crackdown on crypto would be a big deal, but the crypto industry has long sought federal legislation to establish a regulatory scheme for the industry. With Republicans likely to control both the House and the Senate, the industry’s backers may be poised to finally achieve that objective.
While the crypto industry’s ultimate path to becoming a “real boy” likely lies in legislation authorizing the creation of a comprehensive regulatory framework, this Davis Polk memo provides the next SEC Chair with a “to do” list of actions that the memo says will get the regulatory ball rolling. Here’s an excerpt with some specifics:
Withdraw SAB 121, the 2022 accounting policy that requires a public company with responsibility for safeguarding crypto assets to recognize liabilities for those assets on its balance sheet. While there may be some logic to this staff-promulgated directive, the SEC is not the nation’s accounting standard-setter. That task falls to the FASB, who approaches its remit thoughtfully and with due process and broad public input as opposed to simply announcing a full-blown major GAAP policy change via press release.
Withdraw the Framework for “Investment Contract” Analysis of Digital Assets. Although well-intentioned, this 2019 staff effort has created years of confusion over the securities status of individual crypto assets. Is the crypto asset itself a security, or is it instead only a thing sold as part of a broader securities transaction? The answer to this basic question has a profound impact on all parties active in the crypto markets. But with more than sixty suggested “considerations” that supposedly make a crypto asset more or less likely to be a security, the guidance has proven impossible to interpret and apply in a manner that yields consistent results. What could help replace this guidance? See #6 below.
Place a moratorium on enforcement threats against intermediaries based on activities involving tokens they did not issue. This goes hand-in-hand with withdrawing the staff’s Framework. If a trading platform, market maker or other intermediary did not itself issue a particular crypto asset, then the intermediary did not deploy the token in a primary capital-raising transaction and its activities do not implicate the fundamental policy concerns of the Securities Act of 1933. Until we have designed and implemented a thoughtful regulatory solution, the SEC should stop harassing businesses that are meeting this vast market’s daily liquidity needs.
Stop holding up crypto company IPOs. The chair should direct the Corporation Finance staff to treat companies in the crypto asset industry trying to go public just like companies in every other industry—and provide comments on a regular timetable that will facilitate the company’s ability to go public in 3 to 4 months, rather than 3 to 4 years (or never).
Other recommendations include exercising prosecutorial discretion for registration violations not involving fraud and publishing the Staff’s Howey analysis for bitcoin and ether.
Our colleague Meaghan Nelson has been blogging up a storm over on “The Mentor Blog”, which is available to TheCorporateCounsel.net members. Since she started in late September, Meaghan’s been sharing insights and advice to help you move forward in your career based on her own diverse experiences in the legal profession. For example, here’s Meaghan’s four-part series on how to network:
If you’re a member of TheCorporateCounsel.net you can subscribe to receive the latest from Meaghan by simply inputting your email address on the left side of that blog. Not a member? We can fix that – you can subscribe online, by emailing sales@ccrcorp.com – or by calling us at 800.737.1271.
With the election in the rear-view mirror, many people are speculating about the potential implications of Trump 2.0 for the SEC and securities regulation in general. Some of these are pretty obvious – Donald Trump promised that Gary Gensler would be a goner “on day one,” and he seems likely to depart even before Trump takes office. The SEC’s climate disclosure rules also are almost certainly on the chopping block, and its long-delayed proposals on human capital management and corporate board diversity disclosures will probably never see the light of day.
Those political footballs may garner most of the headlines during the next few months, but what about the Trump Administration’s approach to more “meat & potatoes” securities law issues? Even though Donald Trump claims to know nothing about Project 2025, plenty of others in his orbit do, and it seems likely that many of the policy objectives laid out in that document will be on the agenda when it comes to securities regulation. For example, in the area of capital formation, the Project 2025 document calls for the SEC to take, among others, the following actions:
– Simplify and streamline Regulation A (the small issues exemption) and Regulation CF (crowdfunding) and preempt blue sky registration and qualification requirements for all primary and secondary Regulation A offerings.
– Either democratize access to private offerings by broadening the definition of accredited investor for purposes of Regulation D or eliminate the accredited investor restriction altogether.
– Allow traditional self-certification of accredited investor status for all Regulation D Rule 506 offerings.
– Exempt small micro-offerings from registration requirements.
– Exempt small and intermittent finders from broker–dealer registration requirements and provide a simplified registration process for private placement brokers.
Project 2025 also makes several recommendations aimed at the way the SEC is administered, including ensuring that any three commissioners have the ability to place an item on the agency’s agenda, eliminating all SEC administrative proceedings other than stop orders, or allowing respondents to elect whether their cases will be adjudicated by an ALJ or an Article III federal court, and ending the practice of delegating authority to the Staff to initiate an enforcement proceeding.
These would all be significant changes, but Project 2025’s legislative agenda when it comes to the securities laws is even more ambitious. In addition to proposing a comprehensive overhaul of the federal securities laws, it calls for Congress to eliminate the PCAOB and FINRA and consolidate their functions within the SEC, eliminate Dodd-Frank’s conflict minerals, mine safety, resource extraction and pay ratio disclosure requirements, and ban the SEC from requiring a variety of ESG-related disclosures.
With Gary Gensler on the way out, speculation quickly turned to who would become the next SEC chair? This excerpt from a recent Bloomberg Law article identifies the leading candidates:
Richard Farley, a partner at Kramer Levin Naftalis & Frankel, and Kirkland & Ellis partner Norm Champare among contenders to replace Gary Gensler as chair of the US Securities and Exchange Commission, according to people with knowledge of the matter.
Robinhood Markets Inc. legal chief Dan Gallagher, current SEC Commissioner Mark Uyeda and Heath Tarbert, a former chairman of the Commodity Futures Trading Commission, are also among those being considered for the job, said other people with knowledge of the matter, who asked not to be identified because the information isn’t public.
Also in contention are former SEC Commissioner Paul Atkins and Robert Stebbins, a partner at Willkie Farr & Gallagher, some of the people said.
Commissioner Hester Peirce’s name has also surfaced, but she reportedly isn’t interested in the position and plans to leave the SEC when her current term expires.
Personally, I find it encouraging that the list of potential SEC chairs is composed mainly of people with significant private practice experience. One of the things that’s bothered me about the SEC’s willingness to put forward sweeping disclosure rule proposals in recent years is how few of the people deciding whether to adopt those rules have spent more than a token amount of time in their careers preparing or reviewing SEC filings.
Speaking of SEC Chairs, it looks like former SEC Chair Jay Clayton is on the short list to become Secretary of the Treasury.
Join us tomorrow for the webcast – “SEC Enforcement: Priorites & Trends” – to hear Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe provide insights into the lessons learned from recent enforcement activities and insights into what the new year might hold – including how the election may impact the SEC’s enforcement program.
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On Tuesday, the Supreme Court heard oral arguments in Facebook, Inc. v. Amalgamated Bank. The outcome of this case – as well as another biggie teed up for oral argument next week – could affect the way we draft risk factors and cautionary disclaimers.
Here, as Meredith previewed a few months ago, the company is facing allegations that the “cyber & data privacy” risk factor in its 2016 Form 10-K was misleading because it didn’t disclose that Cambridge Analytica had already improperly collected and harvested user data. “Hypothetical risk factors” are a type of disclosure that the SEC has been kvetching about since… at least 2019, when it settled an enforcement action with Facebook/Meta on this same issue, and as recently as last month when it settled an enforcement action with a SolarWinds victim under a similar theory of “half-truth” liability.
The more recent action was accompanied by a joint dissent from Commissioners Peirce and Uyeda that pointed out that updating risk factors for risks that have materialized is not always straightforward. Based on the tone of the oral argument in the Facebook case, it sounds like at least a few of the Justices share similar views. This WaPo article recaps:
In a lively argument, with hypotheticals involving the potential dangers posed by meteor strikes and space trash, at least three conservative justices seemed sympathetic to Facebook’s arguments that it had not misled investors and that its disclosures were forward looking. The court’s three liberal justices, in contrast, expressed support for the view of investors behind the lawsuit, who are backed in the case by the Biden administration.
Chief Justice John G. Roberts Jr. seemed concerned about the implications for public companies of adopting the position of the investors, calling it “a real expansion of the disclosure obligation.” Justices Neil M. Gorsuch and Brett M. Kavanaugh said the Securities and Exchange Commission could be more explicit if it wanted to require companies to report relevant past events.
I was a little surprised by one exchange from the oral argument. I am no Constitutional law expert, but after the Court’s very recent decision in Loper Bright that agencies should stay in their lane, I didn’t expect a Justice to suggest that the SEC should handle this issue through rulemaking. From WaPo:
“Why can’t the SEC just write a reg?” Kavanaugh asked. “Why does the judiciary have to walk the plank on this and answer the question when the SEC could do it?”
Maybe this was a trick question, in which case I’d like to submit a guess that this rule already exists, at least to some extent, by way of Item 101 and Item 303. Clearly, there are a lot of open questions here. The biggest one being, who would have predicted we’d still be talking about Cambridge Analytica during Election Week 2024? Lucky us.
On Monday, FASB announced that it had published an Accounting Standards Update that will require publicly traded companies to provide more detail about expenses that are reflected on their income statement. Specifically, ASU 2024-03, Disaggregation of Income Expenses (DISE), will require companies to:
1. Disclose the amounts of (a) purchases of inventory; (b) employee compensation; (c) depreciation; (d) intangible asset amortization; and (e) depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities (or other amounts of depletion expense) included in each relevant expense caption.
2. Include certain amounts that are already required to be disclosed under current generally accepted accounting principles (GAAP) in the same disclosure as the other disaggregation requirements.
3. Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.
4. Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.
Investors have been calling for this update for several years. I’ve blogged about the “employee compensation” aspect a few times on CompensationStandards.com. This PwC memo explains what the new ASU will require and provides helpful FAQs. Here’s an excerpt that clarifies where the new disclosures will appear:
The new standard does not change the presentation of expense information or expense captions reported on the face of the income statement. Rather, the new standard requires disclosures in the footnotes that provide disaggregated information about an entity’s expense captions that are presented on the face of the income statement within continuing operations.
The new ASU is effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027.
In the latest “Understanding Activism with John & J.T.” podcast, John and Orrick’s J.T. Ho were joined by Elizabeth Gonzalez-Sussman, head of Skadden’s shareholder engagement and activism practice. Prior to joining Skadden, Elizabeth was a partner at Olshan Frome, where she advised hedge funds and large investors on the strategy and execution involved in all types of shareholder activism-related activities.
Topics covered during this 33-minute podcast include:
– The reasons why companies have fared better in proxy fights in recent years
– The current environment for activist settlements and tips for companies considering a settlement
– Activism in multi-class companies
– The decline in “bed bug” letters and when it still makes sense to send them
– Elizabeth’s lessons for corporate clients from her experience in advising activists
– Implications of recent Delaware case law and statutory changes for settlement terms
– Dealing with multiple activists
– Evolution of activist strategies and lawyers’ roles over the next few years
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. John & J.T. continue to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
Programming note: In observance of Veterans Day, we will not be publishing blogs on Monday. Thank you to all who have served or have family members who have served.
Earlier this week, the SEC’s Office of Inspector General released its annual report on the agency’s top management and performance challenges. This year’s report is 20 pages – compared to last year’s 34-page review. This reflects the OIG’s cycle of preparing a detailed examination in one year and following up with a shorter summary the following year.
In the OIG’s view, the current (anti-)regulatory environment is one of the biggest risks the SEC currently faces. The report lists several rules that were recently vacated or stayed, and observes:
The current regulatory environment may lead to increased forum shopping by petitioners and extended periods of uncertainty about the permissible scope of agency action.
With heightened judicial scrutiny, agencies, including the SEC, must continue to develop a thorough administrative record, including meaningful opportunity for public participation and reasoned responses to public submissions. The SEC already invests considerable resources toward these ends, but should be prepared for additional litigation, as industry and public interest groups may take opportunities to challenge regulations.
The OIG also notes:
The SEC should anticipate increased litigation by parties challenging current and future rulemakings and ensure that new regulations will withstand judicial scrutiny.
Over the past year or two, the SEC has been signaling that it understands these risks, by taking extra time to consider comments and building out the cost-benefit analysis in its adopting releases. But the OIG is doing more: it’s auditing the rulemaking process and internal controls, focusing on:
– The opportunity for interested persons to participate in rulemaking;
– Assessing and documenting the impact of proposed rules on competition, efficiency and capital formation; and
– Ensuring that staff with appropriate skills and experience are involved in formulating and reviewing proposed rules.
It expects to complete a report on this in 2025. That said, in light of this week’s election results, there’s a chance that in the near future, the SEC won’t care so much about adopting and defending new rules (at least, the ones that arguably make being a public company more difficult). John will be blogging in the coming week about what other developments might be in store at the SEC next year…