As the COVID-19 pandemic continues to affect industries worldwide, companies are working to stay abreast of—and to proactively react to—the effects and the unique risks of this pandemic. The inherent uncertainty concerning timeframe and magnitude of market disruptions has caused many companies, and even industries, to reevaluate status quo operations and adjust both short-term plans and long-term risk assessments. In light of this, the Division of Corporation Finance of the Securities and Exchange Commission (SEC) has recently released guidance for public companies regarding its current views on such companies’ risk factor disclosures in light of COVID-19’s distinctive disruptions.
Pretty much from the introduction of Satoshi’s cleverly constructed currency, industry players and observers alike have waited to see how exactly the increasing population of digital assets would be categorized and regulated. Slotting “disruptive” technologies into existing regulatory regimes is hardly a swift process, but there has been some recent movement on behalf of U.S. regulators and Congress. In “All Eyes Are on Regulation of Digital Assets as Federal Agencies and Lawmakers Seek to Bring Clarity,” colleagues Cassie Lentchner, Daniel N. Budofsky and Aaron R. Hutman break down some of that activity. In the first of three alerts on the matter, they look in particular at the SEC’s recent no-action letter involving tokens released by the gaming company, A Pocketful of Quarters.
On the heels of a January 2019 announcement that it was charging nine persons with participation in a scheme that allowed them to hack into the SEC’s confidential database of public filings, commonly known as EDGAR. On February 28, the SEC named Gabriel Benincasa as its first-ever Chief Risk Officer (CRO). Although the two events have no direct causal link, they serve as useful reminders that the SEC is determined to re-emphasize its mission to ensure the smooth operation of the U.S. securities markets and to root out and punish instances of fraud and market manipulation, be it by traditional methods or where digital tools are implicated and databases are compromised. The position of CRO is a new one at the SEC. Created by SEC Chairman Jay Clayton to strengthen the agency’s risk management and cybersecurity efforts, Benincasa’s office will help to coordinate efforts to identify, monitor and address risks facing the agency.
In a time when information is increasingly shared through social media, companies—particularly publicly traded ones—must recognize and consider the potential legal ramifications that could arise from statements made by executives, board members, and/or other employees about the company on social media. Though the actions of a certain well-known technology entrepreneur have provided perhaps the most prominent example of these ramifications, there are plenty of other cautionary tales reminding us that a powerful marketing tool that allows company CEOs to connect directly with consumers carries a host of possible legal consequences. Among the most potentially damaging—time-consuming and costly securities-related litigation, both with complaints involving the SEC and private shareholder litigation.
Last Tuesday afternoon, Elon Musk tweeted from his personal handle, “Am considering taking Tesla private at $420. Funding secured.” These words drove Tesla’s share prices up by 10% on Tuesday before Nasdaq halted trading, increasing Musk’s estimated net worth by $1.4 billion dollars.
Since then, there has been a lot of speculation about Musk’s tweet, including about whether it violated SEC rules. News outlets reported last week that the SEC has contacted Tesla to inquire as to the accuracy of the tweet, a move that could indicate the start of a more formal investigation.
A recent order by the SEC relating to an initial coin offering (ICO) by Munchee Inc. dealt a blow to the common practice of making a distinction between “utility tokens” and “security tokens.” In doing so, the SEC seems to also reject what our colleagues Daniel N. Budofsky and Robert B. Robbins refer to as the “magic frog” approach, the belief that a token can begin life as a security token (i.e., a magic frog) but at the point that the application and ecosystem go “live,” the token will be transformed into a utility token (i.e., the magic frog becomes a prince) and any securities law restrictions will no longer apply. In their recent client alert, “The SEC’s Shutdown of the Munchee ICO,” they examine this issue in greater detail and explore ways in which it is still possible to carry out an ICO that’s in compliance with the Securities Act.
Social media is quickly becoming the way that companies present and market themselves to the world. Companies are also realizing the value social media provides in an easy conduit to communicate with customers. But the same qualities that make social media valuable can also lead to negative consequences. While information can be shared easily and instantaneously through social media, retracting such information is another story. Furthermore, the audience is not easily limited. So when it comes to the context of mergers and acquisitions, should social media have a role?
In their recent Client Alert, colleagues David S. Baxter, Robert B. Robbins, Jonathan J. Russo, and Matthew J. Kane examine the SEC’s adoption of “Regulation Crowdfunding,” the long-awaited final rules regulating what has become the investment vehicle of choice for many creators, entrepreneurs and consumers alike in the Internet Age. Regulation Crowdfunding will allow smaller, private U.S. companies to raise up to one million dollars in a 12-month cycle by selling securities over the Internet or web-based apps and other tech to small individual investors.
As social media companies and businesses rely more heavily on their social media platforms to make important company announcements, state law claims asserting negligent misrepresentation or failure to adequately disclose information relating to announcements made on these outlets are bound to arise.
The evolution of social media in business from “occasional accessory” to “integral component” has in turn forced the law itself to evolve in an attempt to address social media’s increasing relevance. Recent developments in two different areas of law show a newly evidenced recognition of social media’s importance in business.