Virtual Coins are ‘Securities’ After All

On July 25, the SEC issued a Rule 21(a) investigative report concluding that the sun rises in the east and sets in the west. No, wait, that’s not right. The report actually concluded that tokens offered by an unincorporated “virtual organization” known as The DAO (presumably short for “decentralized autonomous organization”) in what is known as an “initial coin offering” (ICO) were securities and, therefore, are subject to the federal securities laws. Despite loads of cool-sounding techno-jargon in The DAO’s marketing materials and multiple breathless articles by mainstream media touting ICOs as the next big thing, the SEC had no trouble slotting The DAO tokens into the U.S. Supreme Court’s 71-year-old Howey definition of a “security,” which should come as no surprise to anyone. What’s going on? ICO’s have sprung out of nowhere in the past couple of years to rival traditional venture capital in the amount of funds raised for early stage technology projects. In fact, Shawn Langlois, social media editor of MarketWatch, said in a recent column that “the total crypto market cap now stands at a whopping $87 billion.” Basically, promotors sell virtual coins in ICOs in exchange for U.S. currency or some other form of virtual currency (for example, bitcoin or ether). The ICO proceeds are then ostensibly used to fund development of the company’s digital platform, software or other technology project. The virtual coins typically can be resold in a secondary market on virtual currency exchanges. Not surprisingly, the SEC says in its related Investor Bulletin that “some promoters … may lead buyers of the virtual coins … to expect a return for their...

Brexit’s Impact on the U.S. Capital Markets

You may have heard by now that the U.K. plans to leave the European Union at some point in the next few years. Since the British voted back on June 23, 2016, there has been no shortage of learned analysis/rank speculation about Brexit’s future impact on the U.K. and EU economies and financial markets. Opinions range from dire to blasé, with reality likely to fall (as it is wont) somewhere in the middle. One surprising consequence, however, may be Brexit’s impact on U.S. capital markets. In a recent Heard on the Street column in The Wall Street Journal, Paul J. Davies theorizes from London that post-Brexit EU companies may have no choice but to tap the U.S. capital markets to make up for less convenient access to U.K. investors. It’s an intriguing, and believable, hypothesis. Mr. Davies notes that much of the capital used to fund business expansion comes from savings, mostly in the form of pension funds, insurance companies and investment funds. He cites statistics provided by the Financial Stability Board, Investment Company Institute, European Central Bank and OECD showing that eurozone savings total less than 150% of its total GDP, as compared to more than 250% of GDP in the U.K. and 240% of GDP in the U.S. He notes further that there currently is no single set of capital markets laws and standards within the EU, making it hard to raise capital simultaneously in several eurozone countries. Therefore, frequent or large eurozone issuers often turn to the U.K.’s massive capital markets. Post-Brexit, that may not be feasible. As a result, Mr. Davies says, EU companies may...

Jay Clayton Confirmed as SEC Chairman

A new era at the SEC officially began last week when Jay Clayton was sworn in as the 32nd Chairman of the SEC. The Senate’s confirmation of Mr. Clayton on May 2nd by a 61 to 37 vote continued the Trump Administration’s practice of tapping well-known Wall Street professionals to serve in key government positions. In this case, Mr. Clayton was a partner in the New York office of Sullivan & Cromwell, where according to the SEC’s news release he advised companies on “securities offerings, mergers and acquisitions, corporate governance and regulatory and enforcement proceedings.” These companies notably included Goldman Sachs, which has been a recurring theme with President Trump’s appointees. While his former ties will, no doubt, prevent Mr. Clayton from participating in SEC matters directly related to Goldman Sachs, his Wall Street background could well influence his perspective regarding the SEC’s future regulatory agenda. That agenda is expected to shift toward re-analyzing the regulations implemented as a result of Dodd-Frank while Congress seeks to roll back many of that act’s statutory imperatives. For example, a bill currently making its way through the House, known as the Financial Choice Act, would among other things and according to its executive summary: Provide an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that maintain high levels of capital, including easing restrictions on their ability to pay dividends and the maintenance of leverage ratios, Repeal the designation of firms as “systematically important financial institutions” and modify the bankruptcy code to accommodate the failure of large, complex financial institutions, thereby eliminating Dodd-Frank’s “orderly liquidation...

T+2 is a Reality

Last September, the SEC proposed rules that would shorten the standard settlement period for securities transactions from three business days (T+3) to two business days (T+2). As predicted, the rules have now been finalized in short order and without controversy. Background This is the latest, though probably not the last, step in the evolution of trade settlements. Trades actually settled on a T+5 cycle until 1993, when the adoption of Rule 15c6-1 mandated T+3 in an effort to reduce credit risk (the risk that the credit quality of one party to the transaction will deteriorate) and market risk (risk that the value of traded securities will change between trade execution and settlement). Since then, the settlement cycle has been stuck on three business days despite dramatic advances in technology, multiple industry-driven recommendations to shorten the cycle and the adoption of a shorter settlement cycle in almost every other significant non-U.S. trading market. For example, T+2 (or less) already exists in most European markets, the U.K, Israel, Saudi Arabia and China, while others markets, like Australia, New Zealand, Japan and Canada, are expected to adopt T+2 in the near future. The SEC actually considered T+1 and T+0 settlement cycles in its deliberations, but rejected them as requiring more extensive changes to technology and post-trade processes that would delay the benefits of moving to a T+2 cycle. Nevertheless, it would be reasonable to expect movement toward shorter trade settlements in the U.S. in the future. The amended rule Exchange Act Rule 15c6-1(a) has been amended to prohibit a broker-dealer from entering into a contract for the purchase or sale of a...

T+2 is on the Way (Finally)

At long last, the SEC has proposed amendments to its rules that would shorten the standard settlement period for securities transactions from three business days (T+3) to two business days (T+2). The proposal… The change would be accomplished by amending Exchange Act Rule 15c6-1 to prohibit a broker-dealer from entering into a contract for the purchase or sale of a security (subject to certain exceptions) that provides for payment of funds and delivery of securities later than two business days after the trade date (known as “T”), unless otherwise expressly agreed to by the parties at the time of the transaction. You may recall that trades used to settle on a T+5 cycle until 1993, when the SEC adopted Rule 15c6-1, which mandated T+3 in order to reduce credit risk (the risk that the credit quality of one party to the transaction will deteriorate) and market risk (risk that the value of traded securities will change between trade execution and settlement). But since 1993, the settlement cycle has been stuck on three business days, despite dramatic advances in technology, multiple industry-driven recommendations to shorten the cycle and the adoption of a shorter settlement cycle in almost every other significant non-U.S. trading market. For example, according to the SEC’s release, T+2 (or less) already exists in most European markets, including Germany, France, Ireland, the Netherlands, Sweden and Switzerland, to name a few, as well as in the U.K., Israel, Saudi Arabia, China and many more. Others markets, like Australia, New Zealand, Japan and Canada, are expected to adopt T+2 in the near future. Impact on securities offerings… For public companies,...

Tandy Reps are No More

The SEC announced on October 5th that, effective immediately, “Tandy” representations are no longer required in company responses to SEC comment letters. Practically speaking, this requires only a simple template modification to a company’s letter responding to SEC comments. For those of us who have been around for a while, it also means the end of an era. What were Tandy reps? Since the 1970s, the SEC staff has required that companies provide the following acknowledgements in their responses to SEC comment letters related to Securities Act filings: Should the Commission or the staff, acting pursuant to delegated authority, declare the filing effective, it does not foreclose the Commission from taking any action with respect to the filing; The action of the Commission or the staff, acting pursuant to delegated authority, in declaring the filing effective, does not relieve the Company from its full responsibility for the adequacy and accuracy of the disclosure in the filing; and The Company may not assert this action as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. These were deemed “Tandy” representations or acknowledgements because Tandy Corporation was the first company required to provide them. When the staff began releasing company/staff correspondence to the public in 2004, it required that substantially similar Tandy reps be included in responses to Exchange Act comment letters, as well. What now? The SEC stated in its announcement that, even though the Tandy reps are no longer required, staff comment letters will include the following language: “We remind you that the company and its management...