Mr. Hinman’s Metaphysics: Some Thoughts on Reexamining the Utility Token

Featured Expert Contributor, Legal & Regulatory Challenges for Digital Assets

Alter_Daniel_web2_8784879218361By Daniel S. Alter, a Shareholder in the New York, NY office of Murphy & McGonigle P.C.

A common criticism of Sigmund Freud is that he built a theory of the human psyche based largely upon experiences of the mentally ill.  The U.S. Securities and Exchange Commission’s (SEC) approach to regulating crypto assets labors under a similar bias.  The agency has developed a regulatory construct largely in response to a period of widespread abusive conduct in the digital markets.  Although the SEC’s intervention was historically justified, it may be time to reexamine and refine that regulatory construct in ways that still protect investors but better promote innovation.

Two years back, when billions of dollars in initial coin offerings (ICOs) hit the market—many of which were rife with fraud—the SEC invoked SEC v. W.J. Howey Co., 328 U.S. 837 (1946), to bring matters under control.  Applying the Howey test, the agency concluded that digital tokens, when used to raise capital, can fall within the definition of a “security” under the Securities Act and are thus subject to federal regulation as such.  A digitized security or “security token,” the SEC reasoned, is still a security—regardless of its transactional medium. Continue reading Mr. Hinman’s Metaphysics: Some Thoughts on Reexamining the Utility Token”

With Emulex Corp., Supreme Court Could Raise Bar for “Merger Tax” Securities Suits

bainbridgeFeatured Expert Contributor, Corporate Governance/Securities Law

Stephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

In the wake of the Delaware Chancery Court’s pathbreaking decision in the Trulia case,1 which sharply increased the scrutiny given settlements of cases challenging mergers and other takeovers, there has been a dramatic shift of M&A litigation to federal courts.2 How receptive federal courts will be to this flood of new claims will be determined in part by Emulex Corporation, et al., v. Varjabedian, which is currently pending before the U.S. Supreme Court. Emulex turns on whether scienter is an element of the private-party cause of action under § 14(e) of the Securities Exchange Act of 1934. Section 14(e) prohibits fraud in connection with tender offers and thus will be a key provision in assessing the survivability of these new M&A lawsuits.3 Continue reading “With Emulex Corp., Supreme Court Could Raise Bar for “Merger Tax” Securities Suits”

Quality Control at a Sustainable Cost: Blockchain Solutions for Bank Secrecy and Anti-Money-Laundering Compliance

Featured Expert Contributor, Legal & Regulatory Challenges for Digital Assets

Alter_Daniel_web2_8784879218361By Daniel S. Alter, a Shareholder in the New York, NY office of Murphy & McGonigle P.C.

I’ve banged on this drum before in American Banker but—given recent and exciting developments in blockchain technology—it’s time to beat on it again.  The costs of Bank Secrecy Act and Anti-Money Laundering (BSA-AML) compliance are an enormous regulatory burden on financial institutions, particularly for small and middle market firms.  And considering the global security implications posed by terrorist financing and other criminal money-laundering operations, there are no corners to cut in meeting these requirements.

Yet, as one major vendor of compliance systems has observed, criminals are “increasingly laundering money through smaller regional banks, believing that these institutions do not have the millions to invest in the processes and technology needed” to combat the problem.  I say again, there is a private-market solution to this public-safety challenge. Continue reading “Quality Control at a Sustainable Cost: Blockchain Solutions for Bank Secrecy and Anti-Money-Laundering Compliance”

New York Regulator Approves Internal Use of “Permissioned” Blockchain by Commercial Bank—Other Institutions Should Follow

Guest Commentary

thompson_max_web_10262018_7561796858267778162By Maxwell T.S. Thompson, an Associate with Murphy & McGonigle, P.C. in the firm’s New York, NY office. Prior to joining the firm, Mr. Thompson was Assistant General Counsel and Assistant Corporate Secretary with Bank Leumi USA and served in the General Counsel’s office of the New York State Department of Financial Services.

On December 4, 2018 the New York State Department of Financial Services (“NYDFS”) announced that it had approved an application by Signature Bank to offer a new blockchain-supported digital payment platform named “Signet.” Housed entirely within Signature, the Signet platform “will leverage blockchain technology in its architecture, allowing commercial and asset management clients to make payments in U.S. dollars 24-hours-a-day, 7-days-a-week, 365 days a year.”1 Continue reading “New York Regulator Approves Internal Use of “Permissioned” Blockchain by Commercial Bank—Other Institutions Should Follow”

California Corporate-Board Quota Law Unlikely to Survive a Constitutional Challenge

bainbridgeFeatured Expert Contributor, Corporate Governance/Securities Law

Stephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

The California state legislature recently passed SB 826, which will impose gender diversity quotas on all public corporations whose principal executive offices are located in California. If the corporation has six or more directors, it must have at least three female directors. If it has five board members, it will have to have at least two female members. If the board has four or fewer members, it will be required to have at least one female director. Governor Jerry Brown signed the bill into law.

SB 826 has been criticized on various grounds. Some commentators contend that the business case for gender quotas has not been made, so it is unclear whether the bill will benefit companies and their shareholders. Other commentators contend that state-mandated gender quotas are unconstitutional. Former SEC Commissioner Joseph Grundfest recently posted an article assessing the arguments on both sides of those debates, which I highly recommend for readers interested in pursuing those issues.1

Regardless of one’s views of the constitutional and business merits of diversity mandates, however, SB 826 is bad policy and of dubious constitutional validity for reasons wholly unrelated to gender issues. Continue reading “California Corporate-Board Quota Law Unlikely to Survive a Constitutional Challenge”

What’s Extraterritorial on the Blockchain?: “In re Tezos Securities Litigation” and the Application of U.S. Securities Law to “Foreign” ICOs

Alter_Daniel_web2_8784879218361Featured Expert Contributor, Legal & Regulatory Challenges for Digital Assets

By Daniel S. Alter, a Shareholder in the New York, NY office of Murphy & McGonigle P.C.

*Ed. Note: This is Mr. Alter’s inaugural post as the WLF Legal Pulse’s newest Featured Expert Contributor. Prior to joining Murphy & McGonigle P.C., Mr. Alter was General Counsel for the New York State Department of Financial Services.

In July 2017, the Tezos Foundation—a Swiss non-profit organization—conducted an online initial coin offering (or ICO) that raised more than $230 million in value.  The terms of sale purportedly governing the ICO contained a forum selection clause designating Switzerland as the exclusive forum for all ICO-related litigation and choosing Swiss law to govern disputes.  Soon after the ICO concluded, however, purchasers of Tezos tokens brought suits in U.S. federal district court against multiple defendants (including American and European individuals and entities) involved in managing the token sale.

The plaintiffs alleged that the defendants had sold unregistered securities in violation of §§ 12 and 15 of the Exchange Act of 1934 (“Exchange Act”).  15 U.S.C. §§ 77l, 77O.  Once the cases were consolidated, several defendants moved to dismiss the complaint arguing, among other things, that—because the Exchange Act does not apply to the extraterritorial sale of unregistered securities—a foreign ICO cannot give rise to federal liability.[1] Continue reading “What’s Extraterritorial on the Blockchain?: “In re Tezos Securities Litigation” and the Application of U.S. Securities Law to “Foreign” ICOs”

How the SEC Can Be a Better Lifeguard: Commissioner Peirce’s Insightful Comments on Regulators’ Role in a Sea of FinTech Innovation

Alter_Daniel_web2_8784879218361Guest Commentary

By Daniel S. Alter, a Shareholder in the New York office of Murphy & McGonigle P.C. and a former general counsel for the New York State Department of Financial Services.

Earlier this month, Securities and Exchange Commission (SEC) Commissioner Hester M. Peirce addressed a FinTech conference hosted by the Medici Project, which is a serious effort to build a blockchain-based securities exchange.  In her remarks, Peirce discussed two constructive approaches that financial regulators have taken worldwide in response to the tidal shift in technology that supports financial products and services.  The commissioner’s message to conference attendees should encourage all those in both the legal and entrepreneurial communities who, to date, have felt only the punitive response of SEC enforcement actions involving initial coin offerings, or ICOs.  And yet, Peirce’s comments stopped just short of advocating for the sort of regulatory approach that would likely be most effective in grappling with fast-paced FinTech developments. Continue reading “How the SEC Can Be a Better Lifeguard: Commissioner Peirce’s Insightful Comments on Regulators’ Role in a Sea of FinTech Innovation”