Digital Tokens May Be Securities
By Robert M. Crea, K&L Gates
The Securities and Exchange Commission recently struck a cautionary note in analyzing the emerging question of whether or not digital assets in the form of cryptocurrencies such as bitcoin, which exist only as entries in a distributed ledger or blockchain, may constitute “securities” within the meaning of Section 2(a)(1) of the Securities Act of 1933, as amended. In late July 2017, the SEC answered this question in the affirmative, issuing an investigative report under Section 21(a) of the Securities Exchange Act of 1934, as amended, warning that digital tokens offered and sold by a virtual Decentralized Autonomous Organization (DAO) may be securities subject to the registration, disclosure, and liability provisions of the U.S. federal securities laws. Shortly thereafter, the SEC’s Office of Investor Education and Advocacy published a bulletin alerting investors to potential scams involving stock of companies claiming to be related to, or asserting that they are engaging in, Initial Coin Offerings (or ICOs). These developments present significant legal ramifications for certain issuers in the growing market for ICOs and their intermediaries, and threaten to frustrate a principal rationale for the use of ICOs, namely the flexible resale of tokens on secondary markets.
The SEC’s Goal of Facilitating Capital Formation in the Trump Era – August 2017 Developments
By Cathy Dixon, Weil Gotshal & Manges LLP
SEC Chair Jay Clayton has expressed concern regarding the substantial decline in the number of U.S. IPOs and publicly listed companies in recent years, and asked the agency’s staff to explore ways to improve the attractiveness of the public markets while preserving investor protections. To this end, the SEC’s Division of Corporation Finance published new and updated interpretive guidance on August 17, 2017, that permits, among other things: (1) all companies filing an IPO registration statement under either the Securities Act or the Exchange Act to submit that registration statement in draft form for confidential SEC staff review and comment subject to certain conditions; (2) the use of this confidential review process in connection with a follow-on offering, as long as that process is initiated prior to the end of the twelfth month after the effective date of the IPO registration statement; and (3) both emerging growth companies (EGCs) and non-EGCs to omit from their draft confidential registration statements certain interim financial information that the issuer “reasonably believes it will not be required to present separately” at the time of the registered offering (EGCs only) or the first public filing of the registration statement (non-EGCs). Even as the SEC’s Division of Corporation Finance took major steps in August to facilitate IPOs, the agency’s Division of Economic Risk and Analysis submitted a statutorily mandated report to Congress describing trends in primary securities issuances and secondary market liquidity, and assessing how these trends relate to Dodd-Frank Act reforms. The report contains a wealth of useful data on capital-raising activity in the private and public markets for debt, equity, and asset-backed securities—data that may inform future SEC regulatory initiatives in the area of capital formation.
Private Equity and Venture Capital
Benchmark Sues Uber’s Founder and Seeks to Invalidate Votes Based on Fraud
By Lisa R. Stark, K&L Gates
Venture capital firm Benchmark Capital sued Uber’s founder and ousted CEO, Travis Kalanick, in mid-August, alleging that Kalanick breached his fiduciary duties and committed fraud in 2016 when soliciting investor approval of amendments to Uber’s charter and a voting agreement. The amendments gave Kalanick control of three newly created seats on Uber’s board. Benchmark alleges that Kalanick fraudulently concealed material information concerning his mismanagement of Uber, including the alleged theft of trade secrets and pervasive sexual harassment and discrimination at Uber. The complaint filed in Delaware’s Court of Chancery seeks to invalidate the amendments and serves as a cautionary reminder that directors of Delaware corporations possess a fiduciary duty to disclose all material facts when soliciting stockholder votes, regardless of whether that corporation has gone public pursuant to an IPO. On August 31, 2017, the Court of Chancery granted defendant’s motion to stay the action pending an arbitrator’s decision on whether a voting agreement among Uber’s stockholders required arbitration of the matter.
Supreme Court of Canada Offers Rare Guidance on Oppression Remedy
By Aaron Atkinson, Fasken Martineau
In a rare decision, Wilson v Alharayeri, the Supreme Court of Canada recently reaffirmed that stockholders of a VC-backed company may sue the company’s directors for otherwise legal conduct if the directors’ actions are oppressive to minority stockholders. The oppression remedy is designed to remedy a situation in which a stakeholder’s “reasonable expectations” are breached by unfair conduct. In Wilson, the board of directors of a late-stage start-up substantially diluted the holdings of the company’s former CEO by failing to convert his performance-conditioned convertible preferred shares into common shares and then conducting a dilutive offering. The directors of the company who personally benefitted from the offering were found liable for damages to the former CEO.
Start-up Company Name Matters with Customers and Investors Alike
By Matthew Kittay, Fox Rothschild LLP
According to a recent study published in Venture Capital, a start-up’s company name may be critical to the company’s success. Names that are easily pronounced, such as Uber and Lyft, are preferred by both early- and late-stage investors. Start-ups with pronounceable names tend to be offered more money, whether by crowd funders, angel investors, VCs, or IPO investors. The study also found that “uniqueness” is a virtue, but only for early-stage investors. According to the study, since very little is known about a company in the early stages, unique names give the impression there is something special about the company.
Delaware Eases Burden Relating to Dating Requirements for Stockholder Consents
By Joshua D. Geffon, Stradling
Section 228 of the Delaware General Corporation Law, which deals with stockholder action by written (or electronic) consent in lieu of a meeting, has been amended to dispense with the requirement that each consent bear the date of signature of the stockholder executing the consent. The change for emerging growth and venture capital attorneys is particularly welcome. There have been concerns stemming from the 2003 case of H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129 (Del. Ch.), which called into question the validity of corporate actions taken in reliance on consents that were not both signed and dated by stockholders. As revised, Section 228(c) will continue to provide a 60-day period for the delivery of consents representing a sufficient number of votes to take the action, with the 60-day period now commencing on the first date a consent is delivered to the corporation.
European Commission Proposals Seek to Alleviate Regulatory Burdens on OTC Derivatives Market
By Lisa R. Stark, K&L Gates
Recently, the European Commission proposed to amend certain provisions of the Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties, and trade repositories (EMIR). Although EMIR's prime objective is to reduce systemic risk in the OTC derivatives market, EMIR also has imposed substantial burdens on certain market participants. Taking this into account, the proposed revisions to EMIR seek to ease the inefficiencies and regulatory burdens imposed by EMIR on small and medium-sized entities that have low-volume trading by, among other things, (1) exempting firms with limited hedging activity from EMIR’s clearing requirements, (2) limiting the type of OTC derivative contracts subject to clearing in the EU, and (3) requiring firms that provide clearing services to do so in a fair, reasonable, and nondiscriminatory manner. If the proposed amendments to EMIR become effective, U.S.-based counterparties may experience decreased costs and increased inefficiencies when participating in certain cross-border derivative activities.