Strict Crypto Regulation on Horizon

The Senate Friday proposed a bill for the comprehensive regulation of crypto currency and for digital assets akin to securities.  Regulation of crypto, which is classed as a commodity, will rest with the Commodity Futures Trading Commission, while digital assets that function as investment vehicles will continue to fall under the SEC.

Regulation must be instituted within 180 days of passage of the bill, which is understood to have Presidential approval.  Interestingly, Senator Lummis of Wyoming, a state with a concentration of digital businesses due to its almost unique statutory flexibility for chartering atypical entities tied to block-chain, was one of the bill sponsors.

Regulatory guidance would include addressing internal governance, external audits, policies providing operational controls, security of assets, mitigation of risk, and management changes. Intriguingly, also mentioned is organizational “culture,” a vague reference to the sometimes hyperbolic presentation of both cryptocurrency and digital assets by intermediaries.

Two other noteworthy items: guidance also will be aimed at use of digital assets for illicit activities; and, companies issuing digital currency will be given direct access to the Federal Reserve System’s mechanisms for payment transfers (now restricted to banking institutions; it is through utilization of banks that crypto currently is handled when transactions require it, which imposes a cost in dollars, delay and potential vulnerability).

Privacy in California

It is not news that California’s laws reflect personal rights as seen through a liberal political lens.  Thus a few years ago when California adopted an atypical law giving consumers the right to learn the nature of personal information collected by a business and to be assured it would not be resold, there was little surprise; a couple of other States have similar laws.  (Beginning in 2023, consumers also will have right to cause the deletion of such information, creating problems of definition for companies that often claim that such information is needed for client service.)

In 2023, these provision automatically become applicable to employees of a company.  Putting aside that information about an employee could be recorded in a million places within a company and in both electronic and hard copy form, surely some such information is needed in support of the employment and compensation relationships.  How do companies make sure they find it all, and what happens if they must delete it all?  How does a company track employee compensation and insurance, retirement benefits, etc.?

I expect there will be clarifying regulatory pronouncements so stay tuned.  Even California voters do not want the State economy, largest in America and much larger than that of very many entire countries, to grind to a halt over protection of employee data.

APB on an NFT

Who copped Fred Simian?  Is it IP theft, copyright infringement, or plain old-fashioned larceny?  Most of America’s lawyers want to know the answers, even though they do not represent any party to the seemingly nefarious affair.

Okay– as Sargeant  Joe Friday would say: “just the facts.”  Fred Simian is a non-fungible token (an unique electronic image without physical embodiment)  owned (per the definitive block-chain record of NFT ownership) by actor Seth Green.  Its image, which Green was using as a basis for an upcoming TV show and which thus had apparent commercial value (putting aside that the market for NFTs issued by Bored Ape Yacht Club have greatly appreciated in value since issuance even without commercial utilization) was somehow stolen; at least, it is no longer in the possession of Green, but was sold on the trading market to an identified third party.

Access to the image was taken and was thus possessed by a second party thief who passed possession to a third party purchaser on Open Sea (the exchange for NFTs).  Imagine you have a house and the deed is recorded at the registry.  You live in the house and own title to it.  Then someone throws you out of the house and moves in.  That person is in possession.  But does not own it.

It is not even clear whether historical laws concerning theft apply (a thief cannot pass good title to stolen goods to a buyer even if the buyer is innocent).  Does the law of copyright apply instead?  Would the result be different in copyright–that would be a dumb result, wouldn’t it.

NFTs are not crypto currency, though they are protected (allegedly but apparently not yet fully in sense of possession) by blockchain technology.  That technology is not unique to currency; it is an open ledger system with many other applications, including so-called smart contracts which are a type of legal agreement which could involve anything (think, the sale of 100 barrels of herring can be sold over blockchain).

It is indeed a brave new world.

Microsoft Kills Noncomps

The big news in the press last week about Microsoft was that it would publish compensation data, but the most important part of the Microsoft announcement was that it would no longer require non-competes nor enforce old ones.

The obvious driver is the competition for top talent.  But there also seem to be two fundamental changes: first, big tech used to be most ardent enforcers of noncomps but I bet Microsoft is in the forefront of a sea change; second, the pace of change in tech is such that protecting today’s ideas seems useless since progress will obsolete tomorrow the cutting edge technology of today.


Red Sox News

It has been many moons since I posted about the Red Sox; somehow, the last couple of years it never seemed like a real baseball season with no fans, etc.  But this year the Major Leagues are making a run at a regular season, ignoring (like many of us)  occasional infectious outbreaks.

So what is the status of our beloved (by some) Redstockings?  Well, they are mediocre on the field, and lost their last game 10-0.  But do not despair; they are first not only in our hearts but also in one other major category, a category where they outclass even the Yankees and Astros:  a day at Fenway park is THE most expensive baseball experience in all the Majors.

If you, spouse and two kids go to Fenway, park your car, share two beers total, four sodas, four dogs and splurge for two Sox caps, you have on average spent $385.37!  The league average in $256.41; the Yankees are a mere $348.84.

But wait– there’s more.  At Fenway, unlike many other modern parks, while Fenway may be billed as “America’s Most Beloved Ballpark,” you still risk big-league infections in the bath-room stalls, not to mention that this is one of the very few parks still featuring pole obstructions unless you spring for seats that either are located in Natick or drive your day’s costs well over $500.

Note that I am not complaining, I am only reporting!  I will be at the Park tomorrow night, June 1. Why, you ask?

I have sympathy for principal owner John Henry.  I know how expensive fuel is these days, and his yacht (the one often parked on the Boston waterfront, cannot miss it, the one with the dual spiral staircase) must burn a lot of diesel.  I mean, in the words of Boston vernacular, that boat is wicked pissah gigantic….

GO SOX!!!!!!

New Corporate Regulatory Elephant

Seldom has an elephant-in-the-room had so little publicity:  The Corporate Transparency Act, a new Federal law with draft regulations expected to become effective during 2022, creates mandatory hoops though which companies, including start-ups, must jump.  Here is the briefest of summaries:

The Act and proposed regs aim to discourage money laundering by requiring all “smaller private” companies which are registered in any State of the United States to report the following: corporate name, address and Federal tax ID number; identity of control people including 25% beneficial owners and those having substantial control of operations (name, date of birth, ID number from a state-issued ID); similar personal information for each “applicant”– a person who registers the company with the secretary of State of the jurisdiction of formation (perhaps indeed your lawyer!).

This applies to existing companies and newly formed companies; extant companies have a year to comply, while new entities per current draft regs have 30 days to file.  Changes must be filed within 30 days of the change. The definition of companies picks up corporations, LLCs, most partnerships, some trusts and other kinds of entities.  I suspect this will even reach the newest entity invention, the Wyoming DAO (Decentralized Autonomous Organization), an opaque entity seemingly popular with cyber and NFT communities).

Exempt per current draft regulations: entities employing more than 20 FTEs in the US, and filing Federal income tax returns showing $5M in sales, and with a physical US office (all three elements must be present).  Also exempt: companies already regulated by banking, insurance, SEC regulatory bodies.

Access to this collected is afforded of right to Federal agencies and by consent granted to State regulators. It is expensive not to comply: civil fines of $500 per day and possible criminal fines of $10,000 and two years in prison.


Take That, SEC!

Violators of various laws enforced by the Securities and Exchange Commission long have been subjected to in effect a trial on the merits of alleged violations conducted by judges working within the SEC itself.  And indeed the whole systems always has had the unfortunate overtone of constituting one agency as both prosecutor and judge.  In 2010, the Dodd Frank Act nonetheless expanded the powers of SEC administrative judges, part of the effort to facilitate enforcement following the economic meltdown of 2008.

A few days ago, a panel of judges in the Federal Fifth Circuit (one of many circuits but the senior appeals court level in the Federal system before you end up in the Supreme Court) declared they SEC administrative judge system unconstitutional as violating the right to a jury trial, let alone by judges who cannot be removed from office.

This will be appealed, as it strikes at the core of the SEC matrix of enforcement and is a bell-weather case for many other governmental agencies.  The underpinning of the decision is a theory known as “non-delegation”: it is imporoper for Congress to delegate its legislative powers.

These issues already are on the SCOTUS docket for next session, and there is great uncertainty as to expected results given the conservative bent of the Supreme Court.  This is the third consecutive post by me this date admonishing readers to “stay tuned” in significant areas of legal practice.

A word of apology for failure to post for a bunch of weeks; the law racket is pretty busy, we had a viral visitor in our house, the college kid returned spreading expected chaos.  As Bogie once said: “destiny takes a hand.”  I will try to do better….

DEI Takes a Hit in California

The State of California garnered great praise a couple of years ago for advancing the cause of diversity on boards of business corporations by requiring public companies with a principal office in California to include specific numbers of minority community members on their boards.

A recent decision by a Los Angeles judge has struck down the law as unconstitutional, although the State pointed out that no company had ever been fined for a violation and that no tax dollars ever were used to enforce the law.  Fines were permitted, up to $300,000 for multiple violations. In fact, about half of the affected companies did file required compliance reports, which means about half did not.

This may not be the last word in California, and California is not the only jurisdiction with some sort of law seeking to achieve board diversity (not to mention several foreign countries with similar national legislation).  But conservative groups long have opposed such laws favoring minorities and women as a discriminatory quota.

Many companies have adopted efforts to diversify boards even absent legislation, for business reasons or for the poor public optics of failing to diversify; and, for public companies the pressure for diversity can be intense from the public and from the proxy consulting firms that often advise institutional investors as to how they should vote their shares at annual meetings.  Again, this is one arena in which future battles clearly will be joined.

Massachusetts Employees Beware

Every employee knows that it owes a duty of loyalty to an employer, must abide by agreements with an employer (in non-com0petition, provided Massachusetts law is observed), and certainly that an employee cannot steal the files, secrets and data of a former employer to start a competing business.

Most people in business in Massachusetts also are aware of “Chapter 93A,” a statute designed to protect consumers against unfair or deceptive practices in the conduct of any trade or in commerce.  Given the purpose of the statute, courts over the five-plus decades this statute has been on the books have refrained generally from applying 93A to intra-corporate matters, including claims by companies against former employees for breach of employee agreements or fiduciary duties.

However,, in a recent case (Governo) involving (of all things) a group of lawyers departing their old firm, these attorneys copied files and papers from that firm and used them in their new law practice.  Perhaps outraged that lawyers would ever (gasp!) do such a dastardly thing, the Massachusetts Supreme Court did allow the old firm to make a claim under 93A, holding that where a defecting employee uses purloined materials, that use “is not purely an internal matter; rather it comprises a  marketplace transaction” falling under the statute.

Since 93A provides extraordinary recoveries (legal fees and double or triple actual damages), the price of using a former employer’s information has just gone way up.   Short of actual litigation, this ruling also may change the balance of power in negotiations wherein a former employer is threatening a claim against a business accused of using stolen information.  Stay tuned….

SPAC Attack: the SEC Acts

After months of SEC warnings that SPAC regulation was coming, and after numerous SPAC deals lost investor value post-deal, the SEC has proposed rules (subject to comment and amendment) that are a combination of traditional SEC disclosure requirements and imposition of substantial penalties if a deal goes South.  Highlights follow (but the proposals, all 372 pages of them, are worth a read at least if you are a SPAC investor).

Disclosure is required in great detail as to the profits being taken by the promoters of the deal which, of course, take investor cash off the table and dilute retail investor equity (the idea seems that if it is clear how much the promoters rake off the top then those promoters will have to cut back on their returns).  Disclosure is also directed at possible conflicts of interest (the promoters and management of the companies the SPAC acquires are richly rewarded if the SPAC actually proceeds and buys the target company, presumably inspiring a lack of care).

Enforcement teeth also are sharpened here.  Under current practice it is the promoters, the people who collect funds into the SPAC to attract an operating company into a merger, who are responsible under the Securities Laws for the accuracy and completeness of the disclosures to investors.  The SEC proposals would add the management of the target company to the group liable for the inaccurate public disclosure, which presumably would force the target company to be more candid about the value and operations of the target entity being acquired by the SPAC.

Further, certain statutory provisions written into Federal Law in 1995 protect issuers of securities from liability if their projections are honestly generated even if proven wrong. This is particularly important in SPAC offerings, where projections of future performance, seldom placed in traditional IPO prospectuses, typically are included in the public disclosures.  The SEC proposal makes this statutory protection unavailable to SPAC deals, putting great pressure on keeping projections more shall we say “modest.”

There are other technical proposals having to do with who is an underwriter of securities (that status can create liability in a bad deal) and, for edification of the truly curious, a discussion of how to keep a SPAC out of classification as an Investment Company (to save space, let me just say that being an Investment Company creates huge regulatory issues).

Again, I am constrained to note, the sole surviving Republican SEC Commissioner voted “nay,” claiming that adoption of these proposals was a death knell for SPACS.  Although not likely, surely these regulatory changes may well take the sizzle out of SPACs — although one might think that the market reaction to existing SPACs would have had that result already, that is if any retail investors were paying attention.