The Law and Other Anomalies

As part of the Administration’s expanding activity in anti-trust, which includes new proposed Guidance and changes in pre-merger filings under Hart-Scott-Rodino for larger transactions, the FTC for the first time is going to court to make anti-trust violation claims against companies set up by  Private Equity funds as vehicles for effecting roll-ups of competitors.

A step back–generally anti-trust claims arise by reason of a transaction involving two large-enough entities to trigger required disclosure to the Feds.  Since roll-ups typically involve a party to be acquired the size of which entity is small, below the threshold of required filings, the transaction is invisible to the regulators.  So the government now is claiming that, regardless of size of any given acquisition, the overall roll-up plan violates that anti-trust statute that protects against unfair methods of competition.  This approach is said to be directed today primarily against life science and health care market roll-ups.

In a recent unique lawsuit, the FTC attacked an effort to roll up anesthesiologists in parts of one State, Texas.  Why did the FTC attack this particular set of roll-up transactions to establish principles it can use in future cases?  The lawyer take-away is because the company’s own records revealed that the sole purpose was to keep prices high, not to create better patient service or create savings or economic benefits that could be passed on to patients or doctors.  One of my partners commented: “your statements and documents matter.”

In this case, company documents made clear that the goal was to increase prices. And the company doing the roll-up also made agreements with non-rolled-up providers in key areas that those providers would not under-price services below what the roll-up would charge.  The lawyer take-aways thus are: PE’s in their literature they use to raise capital or to attract would-be acquisition targets, must show benefits to be derived other than increased financial profit driven by de facto monopoly.

My view is that while in this particular case the PE’s company left a variety of sexy smoking guns lying around which no doubt tempted the FTC to claim unfair competition, the strict legal analysis is really very tight against the typical roll-up transactions.  The de facto result of roll-up operations is efficiency that will in fact drive profit, and every one of such deals will have financial projections that show profit from such efficiency; investors will see these projections and will be induced to fund the roll-up by reason of profit; if roll-up documentation show profits, even if there is also stated that this deal is intended to reduce costs for patients or fees for underpaid staff, the reality of profit through efficiency will be evident.

Thus I assume that the fundamental lesson here is that for the first time the government is moving against the model.  Deals not large enough singly to trigger anti-trust mandatory reporting now can be aggregated and thus attacked as unfair competition. Attention to the tone and content of all related disclosures and documents may be a practical escape hatch in some instances;  but, what is important here that the Fed is taking action that attacks one of today’s fundamental business practices.

The Federal Government requires virtually all businesses formed in the United States before this year-end, regardless of form of entity and regardless of line of enterprise, to register during 2024 and disclose all owners; if you form a new business after the first of the year, you will have 30 days to file.  Failure to do so can be criminal and in any event non-compliance carries a $500/day civil penalty.

The reason is to fight crime and money-laundering.  The fact that you are not a crook obviously does not protect you– the Feds know lots of things but do not know (obviously, since Congress needed to pass this law) if you are an honest operation.

I know this seems weird– unlikely — a bother.  You would be merely correct.  If I were a crook, I am already on the wrong side of the law so perhaps I am not going to register.  Or do I register, figuring that I am hidden within the estimated 32,000,000 initial filings?

Hopefully the below link will connect you to my firm’s initial alert regarding these filings; and you can sign up for our alerts and then you will be updated as needed.  Email me if you are having trouble or have any current questions.

https://www.duanemorris.com/alerts/you_cant_hide_corporate_transparency_act_dragnet_0923.html

The law relating to nonfungible tokens continues to limp along without clear guidance.  In the past, the SEC has taken the general position that if you sell an NFT based on the express or implied promise of making a profit by reselling it, you are selling a security, even if the form of the NFT is a drawing or work of art.  And the SEC has levied fines on celebrity endorsers of such offerings who receive undisclosed direct or indirect fees for advertising the merits of buying that NFT.

Without presuming to being able successfully to explain the complex law here, the whole legal issue is polluted (or informed, depends on how you see it) by a 1946  U. S. Supreme Court case (“Howey”) that held that selling interests in a physical orange grove was the sale of a security because the “investor” relied on the efforts of the seller to run the grove for a profit and share that profit with the investor.  If you rely for profit on the effort of a third party, whatever you call the investment vehicle it is still akin to buying a share of stock and relying on the corporation to run a business and share the profit with shareholders.

Particularly where the proceeds of the NFT are to be used by the issuing company to build an asset that creates a potential profit, the SEC has taken the position that this is the same as investing in a company in hopes that shares of stock can be resold at a profit.

In an August enforcement action, the SEC forced a $6 million settlement with a company issuing NFTs to fund building a media platform, and this month levied a million dollar fine against a company developing a show.

SEC Chair Gensler has been unwilling to release clear guidance to the marketplace as to what precisely the SEC consider a security, and such an SEC position is not unusual– the forms of deals (whether NFTs or other offerings) are varied and  fluid, and the SEC often has waited years to see what is happening in the marketplace before giving guidelines.  However, since many NFTs represent efforts to raise money for artistic projects, the question is whether the SEC’s lack of guidance will stifle artistic creativity.  The definitional issues here are beyond both the scope of this post and the scope of clear understanding.

Finally and predictably, the two-person Republican minority on the SEC has dissented with respect to such above-referenced enforcement efforts, claiming that “[r]ather than arbitrarily bringing enforcement actions…, we ought to lay out some clear guidelines for artists and other creators who want to experiment with NFTs as a way to support their creative efforts and build their fan communities.”