Baseball Effrontery

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Although I had promised you an ongoing commentary on the changing landscape of the law concerning business matters in light of actions by the Federal administration, I feel compelled to interrupt on a matter of great importance: baseball.  You may have noted that the artwork on top of these posts includes a baseball scene and, early on, I did post from time to time on that subject–but not for years.

Last Friday night, the Sox played the LA  Dodgers and all the Los Angelenos wore hats with a letter “B” on them.  How dare they usurp the Brooklyn history of the Dodgers and try to transport that aura to the tacky fake area of California known as tinsel-town?  LA stole the team but they cannot steal history and move it across the continent to that high-way laden, fake-persona wasteland of smog, earthquakes and forest fires.

Those of us who grew up with the Dodgers, whose players almost all lived in Brooklyn, knew that the fabric of the team was part and parcel of the place and time.  When Walter O’Malley announced in the mid-50s he would move to the West Coast rather than be diddled by Robert Moses, we all knew that the end of an era was nigh, particularly those of us who cut school to walk to Ebbets Field and pay 25 cents for a bleacher seat (you needed 10 Elsie ice cream caps or wrappers to get that price).

When the Dodgers were in town, which was half of the 154 game schedule plus another bunch of days when they were playing the Giants, dinner out for our family meant going downtown Brooklyn where the team always ate so we could see them, cadge an autograph or just stand up and applaud.

So now these West Coast Creeps presume to wear a “B” which they do not deserve.  For shame!! I am sure you all are as upset as I am so let’s be pissed off together.

Those who know me well have heard the “classic Brooklyn joke” or have learned of it from other literary sources of distinction.  For those of you who have not:

QUESTION: You find yourself in a room with Hitler, Stalin and Walter O’Malley.  Unfortunately, your pistol has only two bullets.  What do you do?

OBVIOUS ANSWER:  You shoot O’Malley twice.  You want to be sure that the son of a bitch is really dead!

I have long ago lost my little book of Dodger player signatures, as well as my small jar of dirt from the Ebbets Field infield (taken during demolition to put up the ugliest apartment houses in the City).  But I have not misplaced my loyalty and need for accuracy as to facts and morality both– I am not sure after 68 years if any of the Brooklyn Dodgers players are still even alive to feel the outrage, but allow me to feel that outrage for them!

Crypto Rising

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Even putting aside Trump’s own venture into his own coins, however improper that may be, there is no doubt but that crypto is a rising asset class under the current administration.

Yesterday the House of Representatives passed three laws relating to crypto, two of which expand the reach of crypto assets.  Bipartisan support approved a bill regulating stable coins and another to regulate crypto markets. Critics, mostly Democrats but also a smattering of Republicans, have criticized the legislation as opening up crypto markets without adequate controls and without empowering state regulators with tools for policing.

A third law, interestingly, prohibits the Federal Government from establishing a governmental coin or digital dollar.  Democrats duly noted the anomaly of the president personally being able to profit under the new regulatory climate while prohibiting the government he leads from doing so; California Democratic Representative Maxine Waters described the legislation as a “billion-dollar handout to the president himself.”   Whether this is fair commentary or sour grapes I leave to you the reader.

In separate news, per Bitcoin Magazine July 10, my law firm Duane Morris advised one deal party in securing a $1 billion capital raise for its bitcoin treasury, half under a securities purchase agreement and half through a standby equity purchase agreement.  There is no doubt but that crypto is big business in today’s America.

Finders for Financing: Free at Last?

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Those who introduce investors to companies seeking financing (“finders”) have had an historically uneven regulatory history.  Although there were moments in time when a finder, receiving compensation, did not run afoul of the SEC as being an unregistered broker-dealer, for the most part (and today) such finders typically are undertaking an illegal action in receiving compensation; and such action taints the fund-raising itself, perhaps creating a recission right on the part of all investors and regulatory action against the company itself.

Half a decade ago, the SEC toyed with an amendment to its regulatory scheme to define a safe harbor path for finders who were not registered BDs, provided their role in the fundraising process was narrow and within specific parameters.  The SEC finally granted a path for unregistered compensated finders in M&A transactions (now on the books) but balked at extending relief to finders in a pure corporate finance mode.

Republican SEC commissioners in the past have always been inclined to relax regulation of finders in the interests of free flow of capital and ease in financing new enterprises.  Today, the Republican majority of commissioners is pushing a variety of liberalizations of SEC regulatory practice, and has announced last week that at the Commission meeting a week from today they will reconsider the abandoned 2020 proposal to permit small businesses to compensate financial finders.

It is unclear whether the 2020 proposal itself will be discussed and it is premature to suggest what may eventuate.  It should be noted that there will remain objection to the entire enterprise; the broker dealer community not surprisingly is opposed (this would cut into the market for BDs), FINRA (the broker-dealer regulatory body) has always been opposed, and state regulators historically have been fearful of unregulated and unprofessional fund-raising that might create risk to the investor community.

I will try to get an inkling of what is afoot on the 22nd, and likely will be aided by releases by the various commissioners, or a public announcement of a regulatory process, coming out of that meeting.

Future promised regulatory relief from the SEC is anticipated also for the operation of SPACs (public acquisition companies) and crypto.  So it will be an interesting season for the SEC!

Back on Line

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It has been a couple of months between posts; apologies, this period has been intense on the work and travel fronts.  Further, the US government, as I am sure everyone knows, has been active in changing the  ground-rules for businesses on so many fronts that to make further comment seemed superfluous given the assiduous press coverage.  Those of you who were tempted to cancel the NYTimes during this period have my sympathy.

My intent going forward is to address certain key developments in the corporate and securities arenas in the face of the changing governmental landscape.  I will avoid the Great Big Beautiful Bill, but if anyone has any tax questions please just email me at smhonig@duanemorris.com and I will attempt to clarify; the press and CPA firms have already dissected the statute in minute detail but in that regard may not have provided clarity.  Stay tuned.

The Start-Up Board of Directors

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Many start-ups are rightly absorbed in technological and product development, protection of innovation, hiring, market research and– oh yes, money to survive.  Although CEOs abstractly admit that having an experienced  board of directors could indeed be very helpful, as a practical matter the building of a robust early board often get short shrift.  It takes time, wooing people, and finding some mode of compensation for the time cost and assumed risks to fiduciary board members.

Many start-up boards thus include founders and a very early seed-level financial backer who is rightly concerned with how a new enterprise takes care of their money.  Sometimes scientists, doctors or others with domain expertise find their way onto a non-fiduciary advisory board, in exchange for modest amounts of equity which accrue over time; these advisory folks often are important links to satisfy inquiries and concerns of early stage investors who want someone other than the CEO or CTO to explain in detail the proposed performance of the product or service contemplated, but are not privy typically to the nuts and bolts operational decisions that get considered by a full board.

Lawyers will tell entrepreneurs that they are nonetheless wise to spend the effort to add experienced expertise to the board.  There is nothing like advice from someone who has been there and done that, and has the time (and corporate duty) to do deep dives into the myriad decisions that are of mixed content: finance, domain and investor expertise.  This advice is of course echoed by the “directorship community” as witnessed by an article in the current magazine of the National Association of Corporate Directors (confession: this writer is a member of the NACD New England Chapter).

In furtherance of this viewpoint, I respectfully refer you to the immediately prior post to this blog site, which makes clear that current  Federal Administration policy will make entrepreneurship more difficult in many ways; investors and acquirers are going to be more cautious in making investments in new ventures of any sort, and the presence of a senior person who is neither a founder (whose enthusiasm is vital but indeed viewed with caution) nor an early stage investor (whose experience and vision can be skewed to a narrower view with a weather eye on the burn rate eating up initial investments) can be of comfort to future investors who are concerned about the experience level of management in many start-up enterprises.

Medtech Federal Freezes

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No secret that the Administration is cutting funding in many ways, including University research and the FDA.  Although we do not know the full extent of these cuts as to substance and time, no doubt start-ups and M&A activity will be affected.

Many start-ups roll out of university research.  With less funding new enterprises will need to spin out more quickly, meaning need for more time and money to get to an inflection point in the business plan.  VCs will evaluate the greater risk, may step back or alternately price their investments with greater return and thus dilute founders.

Cuts at FDA will negatively impact FDA ability to monitor technology progress, will increase review times, and similarly will increase investment risk and make early stage money more expensive. Delay means longer to get to market/cash flow.

Depending on the facts of a given case, M&A approaches will be impacted; in some instances emerging companies may join forces for greater strength to persevere; in some cases doing so might simply make the investment nut just so much larger.  Established companies may be tempted to do a quick early-stage acquisition, which could enhance existing products and/or fund further and faster development, but with less return to entrepreneurs and to any seed stage investors.  Low current value also could attract larger enterprises with established markets to “catch and kill” innovation at a low price.

Further afield, think about possible shrinking of Federal financial support for insuring/covering medical costs.  Markets for cures for less common diseases, often with high development cost for palliatives, may be negatively impacted as successful costly cures may not find reimbursement.

All the above also ignores a possible growing pessimism as to financial support for emerging technologies, not even just restricted to med-tech– fear and caution surrounding equity markets bespeaks difficulty in exits as well as dampening of entrepreneurial zeal.

Delaware Modernizes Corporate Law

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My post of March 14 discussed pending legislation in Delaware to stop the migration of companies from  that State to jurisdictions less protective of shareholder rights (such as Texas and Nevada). These new laws have just been passed, with Delaware expressly saying that they were intended to keep Delaware as the “premier” jurisdiction for business.

These changes, briefly summarized below, affect different constituencies differently: control persons will have greater latitude to effect deals that are in their interest; other shareholders will have a more difficult time challenging deals that are thought to be too favorable to control persons; and, lawyers will continue to be really necessary in the complex area of corporate governance, because the new laws make changes but do not eliminate the need for careful corporate process.

Assume a transaction occurs which has economic benefit for persons in control; there are several ways for control people to avoid getting sued by disgruntled shareholders.  The shareholders by majority vote of disinterested parties can approve it after full disclosure.  The directors by majority vote of disinterested parties can approve it after full disclosure.  If challenged as detrimental and unfair to minority interests, the courts can review the action and decide whether or not it was  entirely fair.

These standards sort of remain, but the roadmap has been altered: now for most interested party transactions you need board approval of a majority of only the independent board members, and the interested members count towards a quorum; you can have a disinterested committee make that determination; in only special cases is it necessary to get both board-level and shareholder approval.  In determining whether a director is independent a clear standard has been set: not a party to nor interested in the transaction nor has a “material relationship” with the control people. And now a minority shareholder not given proper process when a transaction was authorized is able to ratify and consent to it afterwards (think Musk, though he has already gone to Texas).

Another subtle change is that the old law required an affirmative vote of all shareholders to okay a transaction; now the vote of a majority of only those shareholders who actually cast a vote is sufficient.  This alone is a major loosening of standards as many shareholders don’t get around to voting about anything, and that apathy no longer will constitute a negative note.

New law also makes it harder for suspicious shareholders to uncover the details of a transaction; the ability under law to demand documents about a transaction has been shrunk to a specific list.  To get background papers you need to make a court showing justifying suspicion.

The above is not a complete outline and there are nuances; you may suspect I am happy to state the following but it is true: you need to hire a lawyer for this stuff.

Crypto and Securities Regulation

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It may be confusing, if you are not a lawyer with securities law background, to understand some of the current chatter about Crypto and whether it is a security such that it need be registered with the SEC.  Before the present administration, the SEC was aggressive in this area; the new SEC is attempting to make rules to guide people in the crypto industry.

Quick primer: a US Supreme Court case now almost a century ago (you may see this case referred to as Howey) defined a security as the offering of a reward for providing money to an organization managed by others and sharing in the profits.  Typically that security is a share of stock or a bond.  In Howey, the business was managing orange groves and the investor got a share of profits from the oranges; no “stock” or debt instrument was issued. It can be seen readily that the economic bargain is the same: I give you money, you make a profit from it and you give me money back and my interest increases in value– whether a stock certificate is generated is irrelevant.

Some early crypto-type interests were digital interest or NTFs (non-fungible tokens) issue by emerging enterprises.  You bought an NFT, the issuing company took your money and created a club or resort or restaurant, you had rights to go there, and by the way the NFT could be sold to third parties.  These NTFs were often hyped by celebrities and appreciated in value while the founders either or both of built a new enterprise and sold their own appreciated coins.  These deals often looked a lot like the Howey case (you didn’t get a stock or a return from the business, or a tiny return, but you earned money by selling the NTF), and the SEC was active against such schemes.

There is another category of digital assets, so-called meme coins, which are issued and are traded but do not create an investment in an enterprise.  These sometimes represent interests in works of art, comic images and the like. It may be that the new SEC will find these not to be securities.

The SEC is now doing a deep dive into identifying how to approach the almost endless variants of coin issuances and NTFs with a goal of creating predictability to the marketplace.

 

 

CTA Declawed

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By now all should know that CTA is shorthand for a program requiring a federal filing of ownership and control for businesses in the United States which are below a size threshold.  No doubt many readers here have control or ownership of one or more such entities and many I presume have completed and paid for their filings, or incurred expense in preparation of such filings.

The purpose of CTA was to find out the names of  money launderers and scam artists by making them reveal themselves.

On March 21 the US government issued a release exempting from the program requirements all companies formed under the laws of the United States, even if owned overseas. BELOW ARE PERSONAL OBSERVATIONS, neither legal advice (which is never given in my posts) nor reflecting whether the March 21 action of the government was legally taken.  (There is substantial sentiment that the March 212 announcement is contrary to the statute.)

The original statutory scheme, reduced to brass tacks, was this: if you are a crook please register and tell us who you are.  You don’t have to say you are a crook, of course; just register and leave the accusation to us. We want to be able to find you crooks and assess further liability upon you.  So, it required people who are crooks to register.  It might take a particularly stupid crook, with the nerve to steal and swindle, to actually make a filing but we need not address that anomaly here.

The March 21 policy announcement stated that if you were a crook but were acting through an entity that you formed in the US then you still did not have to register, because you set up an entity here.  The result is that even you are a foreign crook and were dumb enough to reveal yourself under the original interpretation of the law, all you now need to do (in order to not violate CTA) is spend a couple of grand to set up a simple entity in the US and then you need not undertake the dumb step of opening yourself up to greater peril by failing to file.

It is not clear to this reader that the new interpretations of the law, exempting businesses from filings just because the crook set up a US front, is consistent with the law as enacted by Congress; the new March 21 announcement is functional guidance today but who can say for the long run.

However, one thing IS clear: the statute, as originally embodied in the filing scheme, did address one major issue: foreign crooks defrauding people in the US by setting up a US front had to make some filing in the US if they set up an entity here.  As flawed as the original statute may have been, the current interpretation makes the statute 100% irrelevant to foreign crooks–you may be a crook but there is no greater risk if you set up a US front.   Even though recent public reportage revealed sophisticated foreign operations at work all over the world, including in the US.

Delaware Is Scared of Texas– or rather its Corporate Law

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You have likely noted that Elon Musk, and many other CEOs, have been moving their corporate registration to Texas, which has shall we say more management-friendly laws than Delaware.  What you likely did not know is that 20% of Delaware’s state budget is covered by corporate fees.

The Delaware Senate has just passed and sent to the House  an amendment to the Delaware general corporate statute giving more power to management, tracking Texas law.  The thrust of the law, which passed the House unanimously, was two-fold: first, to permit control persons (directors, officers, majority shareholders) to enter into transactions wherein they have a personal interest if endorsed by either, not both, of the independent directors or stockholders; second, to limit the right of stockholders to access corporate records.

One part of the proposed changes did NOT pass: restricting legal fees for lawyers representing disgruntled shareholders upset by management or control stockholder safe-dealing.  So for those companies staying in Delaware, they still will be policed by the so-called “plaintiff’s bar.”

I will update if, as and when these new proposals become law.