All types of businesses are leveraging new and emerging business models around virtual currencies and virtual goods. Check out our video where we discuss the various legal issues that need to be addressed to safely and profitable capitalize on these significant business opportunities:
2013 was an incredibly active year for social media legal issues. Below are selected highlights on some of the more interesting legal issues that impacted social media, along with links to reference material relating to the topics.
1. Virtual Currency/Bitcoin
FinCEN Virtual Currency Guidance and Enforcements – FinCEN published legal guidance on virtual currency making clear that existing regulations regarding money transmitter and anti-money laundering laws apply to certain virtual currency activities. Shortly after issuance of the guidelines,
a wave of enforcements shut down non-complying entities. [BLOG]
Congressional Hearings on Virtual Currency – Congressional hearings were surprisingly more friendly and receptive of Bitcoin and other virtual currencies.
2. Privacy – Guidance and Enforcements
CA Privacy Law
– California passed new privacy laws.
3. Intellectual Property/Patents
Patents – The number of social media patent filings continued to increase. The America Invents Act (AIA) fully kicked in, providing a greater ability to challenge patents believed to be invalid without going through district court litigation. The Fast Track
process to get patents issued more rapidly (often in less than a year)
Ownership of Social Media Accounts and Followers – Despite a number of cases (including ones involving LinkedIn and Twitter) relating to ownership of social media accounts, the law remained murky and fact specific.
This uncertainty can be avoided by proper attention to social media policies before issues arise.
4. Employment Law and Social Media
National Labor Relations Board (NLRB) – The NLRB continued to issue surprising guidance and decisions on social media usage. In many cases, some or all provisions of employers’ policies governing the use of social media by employees were found to be unlawful. [BLOG] The NLRB affirmed that workers have the right to discuss work conditions freely without fear of retribution,
whether the discussion takes place in the office or on Facebook. But later in the year it actually found some uses of social media for employment (firing) decisions to be okay.
Employer Access to Social Media User Names and Passwords – By year end, 36 states had passed or initiated legislation prohibiting employers from requesting personal social media account information or passwords in connection with employment decisions.
National Conference of State Legislatures Report – Some states have similar legislation to protect students in public colleges and universities.
5. Online Gaming
First mover states
forged forward with online gambling.
· Nevada – Legalized online poker and granted its first licenses for interactive gaming.
· New Jersey – In February, passed legislation (signed into law by Governor Chris Christie) allowing on-line wagering. Subject to certain limitations, licensed operators are permitted to offer online versions of a wide variety of games currently permitted in Atlantic City casinos (e.g., roulette, craps, black jack, and slots).
· Delaware – On October 31, launched what Delaware officials call a “full suite” of internet gambling.
Zynga – In September,
Zynga withdrew its bid for a gambling license in Nevada
Federal Gambling Legislation
– The prospects for a federal law for online gambling remain elusive.
Mobile Health Applications
– The Food and Drug Administration (FDA) issued guidance that focused on applications that present a greater risk to patients if they do not work as intended or that cause smartphones or other mobile platforms to impact the functionality or performance of traditional medical devices.
– The FTC issued guidance in April focusing on truthful advertising and privacy.
gaming promotions in a cause-related marketing campaign (where purchase of a good or service benefits a charitable cause).
Internet Sweepstakes Café Conviction in Florida – Lawyer Kelly Mathis was convicted on 103 of 104 counts related to illegal gambling based on his role in Internet Sweepstakes Cafés in Florida. He faces up to 30 years in prison. CA, OH, SC and other states moved quickly to shut down similar operations.
Equity-based crowd funding legalized in the United States
Equity crowd funding is much like crowd funding, which has been popularized in the United States through sites such as Kickstarter and Indiegogo. The difference is that instead of individuals supporting campaigns through donations, numerous investors are purchasing small stakes in startups or small businesses.
– Critics of equity crowd funding worry that the industry will be rife with Ponzi schemes or that having too many investors will hurt startups’ prospects for future funding.
FTC Enforcements on Fake Endorsements – In February, the FTC permanently stopped a fake news website operator that allegedly deceived consumers about acai berry weight loss products. The settlements will yield more than $1.6 million and conclude a sweep against online affiliate marketers and networks. The sites falsely claimed endorsements from ABC, Fox News, CBS, CNN, USA Today and Consumer Reports.
Many companies’ understanding of and compliance with the FTC Endorsement Guidelines remains lacking, yet enforcements continue.
Wearable Computing Lawsuit
Google Glass Liability? – In what may be a foreboding development, a California woman received a traffic ticket for wearing Google Glass while driving. Many states have broad distracted-driving laws or bans on certain monitors that may apply to Google Glass and similar wearable computing devices.
The intersection of social games and gambling is moving forward at a torrid pace. Yet, there are many blurred lines with respect to the legal boundaries for permissible game mechanics used in social games and online gambling offerings. The use of virtual goods and virtual currency further complicates the analysis. Additionally, some companies are pushing the envelope with various forms of prediction markets and online sweepstakes/contest-based business models. Florida recently adopted new rules to close some perceived loopholes. Will this prompt other states to act as well?
Check out our video:
Continue Reading →
On July 23, 2013 the Securities and Exchange Commission (“SEC”) announced it was bringing charges in a Texas federal court against Trendon Shavers for allegedly using a Bitcoin Ponzi scheme to defraud investors between September 2011 and September 2012. For those who may not know, Bitcoins are anonymous, decentralized, non-government-backed electronic currency. Bitcoins were originally created by an unknown hacker in 2009 as a worldwide payment method with low processing costs and have become a much ballyhooed currency among the Technorati.
The SEC is accusing Mr. Shavers, using the online handle “pirateat40,” of advertising the Bitcoin Savings and Trust and accepting 700,467 Bitcoins, worth approximately $4,592,806, as investments while promising a 7% weekly return. Mr. Shavers allegedly promised to pay such returns to investors by trading the Bitcoins online. In the SEC’s Complaint Mr. Shaver is alleged to have instead used funds from new Bitcoin investments to pay out the promised returns to older investors. Additionally, the SEC alleged that he converted roughly $147,000 worth of the Bitcoins in order to pay personal expenses including “rent, car-related expenses, utilities, retail purchases, casinos, and meals.
Concurrent with the filing of the SEC’s Complaint, Andrew Calamari, director of its New York office, was quoted as saying. “[f]raudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws.” The SEC also recently issued an investor alert warning of scams involving virtual currencies, stating “[w]e are concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulent, or simply fabricated, investments or transactions.”
Shavers quickly moved to dismiss the SEC’s Complaint and argued that the SEC has no authority to bring this action, as the Bitcoins linked to his website were not securities because “Bitcoin is not money, and is not part of anything regulated by the United States”. In response the SEC said the investments were both contracts and notes, and so were securities that can be regulated, according to regulatory documents. Judge Amos Mazzant of U.S. District Court in the Eastern Division of Texas, disagreed with Mr. Shavers’ arguments and found for the SEC in a ruling on August 6, writing, “[i]t is clear that bitcoin can be used as money” and “[t]he court finds that the [Bitcoin Savings & Trust] investments meet the definition of investment contract, and as such are securities.”. Therefore, this historic SEC case will continue.
Ironically, individuals who had simply bought and held Bitcoins from September 2011, without relying on Mr. Shavers services, would have made significant returns. The average Bitcoin value from September 2011 to September 2012 was approximately $6.56 but thereafter skyrocketed to a high of $266 before settling down to the current value of approximately $95.30. In fact, the700,000 Bitcoins at issue in this case are arguably worth around $65 million at their current value.
Sean F. Kane, Pillsbury special counsel, will participate in PLI’s Think Like a Lawyer, Talk Like a Geek 2013: Get Fluent in Technology seminar by co-presenting during the “Virtual Games and Virtual Currency” session on Monday, November 18, 2013 at 11:30am.
This unique program will present extraordinary sessions combining experienced technology lawyers with industry hi-tech experts. You will hear simple and direct explanations of current technologies.
What you will learn:
- How every company and individual is a target for international hackers
- How cloud computing is displacing traditional software applications
- How social networks are monetizing the detailed data they collect
- The techniques used by mobile networks to track consumers
- How online and virtual games have incorporated “virtual currency” into their platforms
- Best practices for software project planning, implementation and negotiation
- Establishing a corporate policy in creating and using Big Data
This event will also be webcast on November 18, 2013 at 9:00am.
Sean Kane, Pillsbury special counsel
The U.S. Department of the Treasury has targeted Liberty Reserve S.A. as a financial institution of primary money laundering concern under Section 311 of the USA PATRIOT Act (Section 311). According to Financial Crimes Enforcement Network (FinCEN) press release, Liberty Reserve – a web-based money transfer system or “virtual currency” – is specifically designed and frequently used to facilitate money laundering in cyber space.
Additionally, FINCEN published a regulatory finding explaining the basis of the actions anda notice of proposed rulemaking that, if adopted as a final rule, would prohibit covered U.S. financial institutions from opening or maintaining correspondent or payable-through accounts for foreign banks that are being used to process transactions involving Liberty Reserve.
The regulatory enforcements around virtual currency appear to be increasing. If you have not recently reviewed your regulatory compliance with your counsel, now is a good time to do so.
FinCEN recently issued interpretive guidance to clarify that it views certain activities involving convertible virtual currencies as money transmission services under the Bank Secrecy Act and FinCEN regulations. If your business involves creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies, you may be subject to FinCEN’s registration, reporting, and recordkeeping requirements.
To read the full Client Alert, please see Financial Crimes Enforcement Network Issues Guidance on Virtual Currency.
Federal authorities executed a seizure warrant against a bank account associated with one of the leading bitcoin exchanges. The warrant was not based on bitcoins themselves being illegal. Rather, the entity was not registered as a money transmitter. The failure to so register was alleged to be a violation of 18 U.S.C. 1960. The entity, Mutum Sigillum LCC, is a subsidiary of Japan-based Mt. Gox, the world’s biggest Bitcoin exchange.
As we previously reported, FINCEN issued guidance in March of this year, articulating its views on the applicability of the existing regulations to virtual currency and decentralized virtual currency (such as bit coin). If you are acting as a money transmitter and are not licensed, or if you are not sure if you are a money transmitter, you should consult with counsel promptly. It is likely that more enforcements may be forthcoming. Don’t be next!
A new Manhattan bar has become one of the few brick and mortar operations to accept Bitcoins as a method of payment.
What are Bitcoins? They are essentially a form of digital cash or virtual currency. They are unique in that there is no central issuing or regulatory authority (such as a corporation or government), rather they are issued through the use of downloadable software which in effect searches for Bitcoins over the Internet. A successful search, which takes varying and increasing amounts of computer processing power, results in the issuance of a block of Bitcoins. The more people searching, the more difficult it is, but also the more valuable the Bitcoins are worth. One of the key features of Bitcoins is anonymity. Just like with a cash payment, there are no records as to the individual engaging in the transaction, as the transactions can occur through anonymous Bitcoin addresses. Bitcoins, however, are regulated, at least on the administrator side in the US, by the Department of the Treasury’s Financial Crimes Enforcement Network (FINCEN). For more on their virtual currency regulations see FINCEN Issues Virtual Currency Regulations.
The bar accepts Bitcoin payments through a virtual wallet app, which is similar to most app-based payment systems. The app converts bar tabs from US dollars into Bitcoins, which are then transferred to the bar’s bank. Notably, some of the press for the bar may be due to the owner’s close friendship with the chairman of Bitcoin.
The Bank of China Hong Kong announced recently that it plans to launch its first credit card that is compatible with Near Field Communication (“NFC) technology this year. NFC is a set of standards for smartphones and similar devices to communicate with each other by either by touching or bringing them into close proximity. One of the products that will be offered will serve as an electronic wallet for clients containing all their credit cards issued by the bank and will enable them to turn their iPhones into payment devices.