The Law and Other Anomalies

The wires this week are all aflame with the news of passage of the new Farm Act, which was promptly signed by the President.  The bill legalizes hemp, a plant with substantial industrial use which has been banned in the US because of its chemical relationship to cannabis.  One cannot fail to note the business buzz about, and substantial investment in companies involved in, the cannabis business.

Hemp has very low content of THC, which is the stuff that gives weed its kick, and higher content of CBD, another derivative of marijuana which is non-hallucinogenic and which is removed from the controlled substance list by the Farm Bill.  The impact on the THC side of the business is the subject of current trade speculation, although since now-legal CBD can be derived from marijuana there will be at least some positive effect; query whether this is another step towards Federal acceptance of marijuana, thus ending the absurd stand-off between the States and the Feds.

A footnote from the trade press: looks like cannabis beer is on the horizon; various companies have formed cannabis partnerships or undertaken research.

Seems Harvard is under attack by everyone these days.  One group has sued claiming bias in favor of white undergraduate applicants to the detriment of Asian students.  But Harvard Law School, including particularly the Harvard Law Review, is being sued on behalf of white males, claiming the membership on the prestigious Board of Editors and the selection of articles is biased in favor of “racial, gender and sexual orientation-based diversity.”

While I must confess that no one ever chased me to either join or write for the Review notwithstanding my patent male white-ness, I always understood that election to the Review was merit based and, hence, I was confident that my exclusion was wholly appropriate.  Further, it seems unclear who if anyone should be sued; the Review is a separate entity not owned or run by the University.  And while I guess I can understand why the same claims are being asserted against NYU and its law school also, the naming of US Secretary of Education Betsy DeVos seems attenuated.

Perhaps if I had in fact been named to Law Review I would have better understanding of the legal issues involved here.

But since the lawsuit names no one who has been or is about to be injured by whatever the policies of Review may be, I don’t understand how someone can bring a lawsuit in order to establish an idea or practice, as opposed to the seeking of a judicial determination of an actual case.  Indeed, lawyers for the University argued as much in Federal Court yesterday.

Not to slip into policy debate, particularly as my fact base is derivative and limited, but if the demographics of our country are changing then we would expect that the Review membership and the mix of submitting scholars would change also.  Further, one must suspect that if history is any guide, then the need for remedial action is to protect groups other than white males at Harvard Law School.

I must stop posting now and sit by my mailbox, awaiting my Law Review invitation.  It is about five decades late.  Mail service is so slow around the Holidays….

It has been a while since my last post but end of year is pretty busy for attorneys.  I have been collecting items about which I want to share my views, however, and this is the first of a brief series of posts which caught my attention as matters of general interest.

Everyone reads almost daily that the SEC has shut down some virtual currency deal as involving the illegal sale of unregistered securities.  Yet Bitcoin and Ether are still around, which means they are not perceived to involve a security.  Why is that?  Both use block-chain and are distributed ledgers.  Both contemplate so-called smart contracts.  Both purport to be a currency but are highly volatile.

Let us go back to the seminal Supreme Court case defining a security, Howey, in the mid-40s.  A security is an investment utilized to finance an enterprise of some sort wherein the investor expects to make a profit from the efforts of others.  The ’33 Act has specific  examples, including stocks and notes, but Howey found a security existed in a management contract to run orange groves that the investor purchased.  (Another side-light: although the Act declares that notes are securities, court cases have decided that some notes are commercial instruments and not investments intended to be covered, for example the note you sign when you take out a house mortgage.)

Applying the common sense approach of what an investment actually is, in June the head of the SEC’s Division of Corporate Finance suggested that Ether fulfills a commercial function. There is no central “issuer” who takes the money and promises a return.  Control is decentralized.  Ether is a method of payment.

Enter the Commodity Futures Trading Commission, addressing futures contracts and options on Bitcoin and Ether.  This month the CFTC, in an effort better to understand Ether, posed the following questions:

How is ether being used?  How many transactions before we can be sure that transactions do not end up on an invalid block?  How do we know Ether can support smart contracts?  When will Ether move from  a “proof of work” standard where miners are rewarded for processing transactions to a “proof of stake” where control falls to users of the system as currency, or for contracting, or as an open ledger?  How is the network governed (is it liable to splinter apart due to disagreements)? Will there be negative impact if there is a derivative market for Ether?  What is status of cyber security?

Interestingly, the SEC is of the view that digital currency that once was marketing generally or to the public with speculative aspects might have been a security at the time but, by substantive use in real transactions, may morph out of being a security.  Implicit in this observation is the likely result that the SEC is not going backwards to punish what might once have been a violation; indeed, whom would they be punishing at this point?

Regulation D, as I fully expect most readers know, is the typical (though not exclusive) way to raise business capital without SEC registration; it permits issuers to sell securities to wealthy investors with minimal formal disclosure requirements.  But lurking in Reg D is a “bad boy” disqualification for companies and people who do bad things.

Recently Tesla and Elon Musk pleaded to a $20M fine (each) for Elon’s loose talk about having lined up financing to go private.  Some elements of that settlement, restricting Elon’s actions and his agreement not to “do it again,” seemingly triggered the “bad boy” provisions that would eliminate Tesla’s use of Reg D.  Off to the SEC scurried the Tesla lawyers to ask for a waiver so Tesla could indeed use Reg D for private financing.

The SEC granted the waiver in a No Action Letter dated October 16, on condition that Elon indeed complied in the future with the SEC orders against him; this waiver is not in and of itself extra-ordinary, and indeed SEC regulations contemplate the possibility where there is showing of good cause, but the need for asking the SEC for No Action highlights the wide repercussions of loose talk by executives and board members.

Leaving the interesting question of why Reg D availability is so important to Tesla; assuming they would go to capital markets for financing, one would assume they would be looking for big dollars from big players, as to which other exemptions from registration would be available.  Maybe Musk will tell us some day  — or not.