Tag Archives: securities law

Cryptocurrencies and Digital Tokens as Securities

Since the release of Bitcoin in 2009, cryptocurrencies and digital tokens powered by blockchain technology have garnered the attention of investors, financial intermediaries and government agencies. Sales of digital tokens representing cryptocurrencies or some other digital asset or utility in so-called initial coin offerings (ICOs) have provided over $10 billion in capital to technology startups, and the aggregate market value of digital coins has surpassed $325 billion. ICOs have been typically open to the public through website platforms that link to white papers describing a startup’s technological proposition. More often than not, ICOs fund little more than concepts and ideas rather than development stage businesses. Staying largely under the radar of financial regulators, many ICOs have been a source of fraud, market manipulation and the financing of illegitimate ventures.

The investigative report of the Securities and Exchange Commission (SEC) on The DAO in July 2017 served as a point of departure for the ICO marketplace. Over a 30-day period in mid-2016, The DAO, a digital decentralized autonomous organization initiated on the Ethereum blockchain, issued digital tokens worth $150 million to fund various “projects” that would be voted on by token holders. Investors in the tokens would share in the earnings from these projects and could sell DAO tokens on the open market over cryptocurrency exchanges. The SEC found that The DAO tokens were in fact securities under longstanding securities law principles and that any offer or sale of the tokens was subject to registration with the SEC unless there was a valid exemption. The SEC applied the Howey test, which dates back to 1946, in its analysis. Under the Howey test, a digital token is a security if it represents an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. The SEC concluded The DAO token squarely met the criteria under the Howey test, and found that the tokens were securities sold without registration or a valid exemption. The SEC also indicated that the platforms that traded The DAO tokens were required to register under a national securities exchange or operate under an exemption. Continue reading Cryptocurrencies and Digital Tokens as Securities

SEC Releases New Guidance on Cybersecurity Disclosures for Public Companies

The recent spate of high-profile cybersecurity breaches has not spared public companies, as demonstrated by large data breaches in recent years involving Equifax Inc. (NYSE: EFX) and a multitude of other companies.  In response to the proliferation of cybersecurity threats to public companies, on February 21, 2018, the SEC released interpretive guidance to assist companies in preparing disclosures about cybersecurity risks and incidents.  The release, which expands upon the staff’s 2011 guidance and addresses several new topics, was adopted unanimously by the full SEC and, therefore, carries significant weight.

As the SEC release makes clear, in order to meet their ongoing disclosure requirements, public companies should adequately and timely disclose any and all material cybersecurity risks and incidents in their registration statements and in their periodic and current reports.  Public companies must weigh the potential materiality and likelihood of identified risks and, in the case of cybersecurity incidents, the importance of any compromised information and the impact on their operations.  Further, the SEC encourages the use of Forms 8-K and 6-K to promptly disclose cybersecurity risks and incidents, as it will help to reduce the risks of selective disclosure and insider trading.  The SEC guidance indicates that, although some time may be needed to discern the scope and implications of a cybersecurity incident, an ongoing internal or external investigation would not, on its own, provide a basis for avoiding disclosures of a material cybersecurity incident.  The release includes specific guidance on a number of disclosure elements required by Regulation S-K and Regulation S-X, including risk factors, management discussion and analysis, description of the business, legal proceedings, financial statements and board risk oversight. Continue reading SEC Releases New Guidance on Cybersecurity Disclosures for Public Companies

First SEC Staff Comments on Recent Non-GAAP CDIs

As many of us have noticed, the first comment letters from the staff in the SEC’s Division of Corporation Finance, following Corp Fin’s recent issuance of new CDI guidance on the presentation of non-GAAP financial measures, have become available publicly.  The comment letters shed additional useful light on Corp Fin’s views concerning non-GAAP presentations.

One of the comment letters sent to Alexandria Real Estate Equities, Inc. on June 20, 2016, provides a particularly helpful glimpse into Corp Fin’s views about the use of non-GAAP information in the executive summary of MD&A.  The staff’s letter includes the following comment in reference to MD&A in the registrant’s 2015 Form 10-K:

We note that in your executive summary you focus on key non-GAAP financial measures and not GAAP financial measures which may be inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016 (specifically Question 102.10). We also note issues related to prominence within your earnings release filed on February 1, 2016. Please review this guidance when preparing your next earnings release.

Indeed, the executive summary portion of the MD&A – when initially conceptualized in the SEC’s 2003 release providing interpretive guidance in the preparation of MD&A – was supposed to include an overview to facilitate investor understanding.  The overview was intended to reflect the most important matters on which management focuses in evaluating operating performance and financial condition.  In particular, the overview was not supposed to be duplicative, but rather more of a “dashboard” providing investors insight in management’s operation and management of the business.

Looking back at the release to write this blog entry, I note references, with regard to Commission guidance on preparation of the MD&A overview, explaining that the presentation should inform investors about how the company earns revenues and income and generates cash, among other matters, but should not include boilerplate disclaimers and other generic language.  The Commission even acknowledged that the overview “cannot disclose everything and should not be considered by itself in determining whether a company has made full disclosure.”

Many companies have presented in their MD&A overview those non-GAAP measures used by management to operate the business and otherwise manage the company.  Where appropriate, references typically are made to the information appearing elsewhere in the document, presented to enable compliance with applicable rules and guidance for non-GAAP presentations.  Interestingly, the staff, in its comment, questions the “prominence” of the non-GAAP presentation in the context of the earnings release (noting that the staff provides less specificity in the portion of its comment relating to the MD&A overview).  This focus on prominence – to the extent the staff’s concerns relate to the MD&A overview – is worth further consideration in preparing MD&A disclosure.   In this connection, query whether the staff – in questioning prominence – could be expressing a view that when management analyzes for investors the measures on which it focuses in managing the business, if management relies on non-GAAP measures, it necessarily must focus on (and explain) – with no less prominence – the corresponding GAAP measures.

SEC Report to Congress On Decimalization: Prelude or Punt?

On July 20, 2012, as required by Section 106 of the JOBS Act, the SEC released its study on the effects of decimalization (i.e., the trading and quoting of securities in increments of $.01) on initial public offerings and the liquidity of small-cap and middle-cap company securities.

In conducting its study, the SEC took a three-pronged approach consisting of (a) a review of empirical studies regarding tick size and decimalization, (b) participation in discussions held as part of a meeting of the SEC Advisory Committee on Small and Emerging Companies concerning the impact of market structure on small- and mid-cap companies and on IPOs, and (c) a survey of tick-size conventions in non-US markets.

Continue reading SEC Report to Congress On Decimalization: Prelude or Punt?