On November 28, 2018, Judge Gonzalo P. Curiel of the U.S. District Court for the Southern District of California denied the U.S. Securities and Exchange Commission’s motion for a preliminary injunction against Blockvest, LLC and Reginald Ringgold in connection with Defendants’ initial coin offering (“ICO”).  In doing so, the court found disputed issues of fact existed regarding whether the so-called “BLV” tokens constituted “securities” under the test set out in SEC v. W.J. Howey Co.[1]  This is not the first time a court has characterized the question of whether an ICO token satisfies Howey’s requirements as a factual one.[2]  But, the decision is notable for being the first instance of a court ruling against the SEC in an ICO and because it focused its inquiry under Howey on the subjective understanding of particular investors rather than the objective characteristics of the tokens themselves. Continue Reading California District Court Denies SEC Preliminary Injunction in ICO Case, Says Tokens’ Status As Securities Is Question of Fact

On November 16, 2018, the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance (“Corp. Fin.”), Division of Investment Management, and Division of Trading and Markets issued a joint public statement on “Digital Asset Securities Issuance and Trading.”  The public statement is the latest in the Divisions’—and the Commission’s—steady efforts to publicly outline and develop its analysis on the application of the federal securities laws to initial coin offerings (“ICOs”) and certain digital tokens.  These efforts have combined a series of enforcement proceedings with public statements by Chairman Jay Clayton and staff, including a more detailed statement of the SEC’s analytical approach in Corp. Fin. Director William Hinman’s speech on digital assets in June 2018. Continue Reading SEC Divisions’ Issue Public Statement on Digital Assets and ICOs, Echoing Recent Enforcement Actions

On November 8, the Securities and Exchange Commission (“SEC”) imposed a cease-and-desist order against Zachary Coburn for causing his former company, EtherDelta, to operate as an unregistered securities exchange in violation of Section 5 of the Securities Exchange Act of 1934 (“Exchange Act”).  Notably, EtherDelta, a trading platform specializing in digital assets known as Ether and ERC20 tokens,[1] was not operated like a traditional exchange with centralized operations, as there was no ongoing, active management of the platform’s order taking and execution functions. Instead, EtherDelta was “decentralized,” in that it connected buyers and sellers through a pre-established smart contract protocol upon which all operational decisions were carried out.

In the SEC’s view, EtherDelta met Exchange Act Rule 3b-16(a)’s definition of an exchange notwithstanding the lack of ongoing centralized management of order taking and execution.  Robert Cohen, the Chief of the SEC’s Cyber Unit within the Division of Enforcement stated after the order’s release, “The focus is not on the label you put on something . . . The focus is on the function . . . whether it’s decentralized or not, whether it’s on a smart contract or not, what matters is it’s an exchange.” This functional approach echoes prior SEC guidance and enforcement actions in the digital asset securities markets in emphasizing that the Commission will look to the substance and not the form of a market participants’ operations in evaluating their effective compliance with U.S. securities laws. Continue Reading SEC Brings First Enforcement Action Against a Digital Assets Trading Platform for Failure to Register as a Securities Exchange

On November 2, the SEC’s Enforcement Division released its annual report detailing the facts and figures of its enforcement efforts in fiscal year 2018.  At first blush, this year’s report looks strikingly similar to those from recent years, as the headline numbers in most categories are nearly indistinguishable from 2015, 2016, and 2017.  This consistency may be surprising given that 2018 is the first such report reflecting exclusively the enforcement priorities of the Commission since it was reconstituted under Chair Jay Clayton.

But a closer examination of the report, including the components feeding into the top-line facts and figures and commentary by Division co-directors Stephanie Avakian and Steven Peikin, reveals a clear shift in priorities by the Division.  These range from a philosophical shift in its mission to the reallocation of resources during a hiring freeze.  We address here the most notable of these subtle but important changes.  Continue Reading Retail, Remedies, Resources and Results: Observations From the SEC Enforcement Division 2018 Annual Report

On October 16, 2018, the Securities and Exchange Commission released a Report of Investigation that cautioned public companies to consider cyber threats when designing and implementing internal accounting controls.  The report was based on an investigation of nine victims of email cyber-fraud schemes for potentially failing to have adequate internal accounting controls, in violation of the Securities Exchange Act of 1934.  The report highlights the need for companies to reassess their controls in light of the current cybersecurity risk environment.  By describing the remedial steps taken by the investigated companies, it further provides guidance about the key areas that companies should consider when assessing their own policies and procedures. Continue Reading SEC Investigative Report Urges Public Companies to Guard Against Cyber Threats When Implementing Internal Accounting Controls

On September 26, 2018, the attorney generals of all 50 states and the District of Columbia (“State AGs”) announced a record-breaking $148 million settlement with Uber Technologies Inc. (“Uber”) over Uber’s alleged failure to disclose a massive data breach in 2016.[1] The settlement holds significant implications for U.S. companies concerned about their cybersecurity measures in the face of increasing incidents of data breaches, as well as intensifying scrutiny by authorities. Continue Reading State AGs Announce Settlement With Uber Over Data Breach

On September 27, 2018, the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) filed parallel actions in federal court against an internet dealer that sold “contracts for difference” (CFD) based on securities and commodities margined with bitcoin.  The actions, which were assisted by the Federal Bureau of Investigation and the Department of Justice, signal continued coordination among federal agencies to police market activity involving financial transactions in cryptocurrencies. Continue Reading The CFTC and SEC Bring Charges Against International Securities Dealer for Bitcoin-Funded Swaps Activity

Over the past year, the U.S Securities and Exchange Commission (“SEC”) has increasingly scrutinized initial coin offerings (“ICO”) and certain digital assets.  On September 20, 2018, the SEC’s Enforcement Division co-Director, Stephanie Avakian, gave a speech in which she addressed the Division’s approach to dealing with these new forms of tradeable assets.  This speech came only days after the SEC settled its first case charging an unregistered broker-dealer for facilitating the sale of digital tokens from several ICOs since the 2017 DAO Report.  In her speech, Avakian provided three key insights into the Division’s enforcement strategy. Continue Reading SEC Enforcement Division Co-Director Provides Insight Into Commission’s Approach to ICOs and Cryptocurrencies

On Tuesday, September 11, 2018, Judge Raymond J. Dearie of the Eastern District of New York issued a decision holding that Initial Coin Offerings (“ICO”) may qualify as securities offerings and therefore be subject to the criminal federal securities laws.  This ruling came as two U.S. regulators—the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”)—announced separate actions under securities laws against companies engaged in the cryptocurrency marketplace, including the sale of digital tokens.  As the popularity of cryptocurrencies grows and businesses and entrepreneurs increasingly turn to ICOs to raise capital, these developments may serve as guideposts for how cryptocurrencies and ICOs will be viewed by courts and federal regulators in cases to follow. Continue Reading Federal Court, SEC, and FINRA Scrutinize Cryptocurrencies and ICOs

The consequences of a cybersecurity incident can be severe. The economic loss associated with an incident can often be compounded by reputational damage, loss of trade secrets, destruction of assets, operational impairment, lost revenue following the announcement of the cybersecurity incident and the expense of implementing remedial measures. The timing and content of any public communication about a suspected or confirmed cybersecurity incident can exacerbate this loss and have a significant impact on the trading price of the issuer’s securities.[1] The disclosure considerations become even more complex when a company is subject to overlapping, and potentially conflicting, regulatory obligations in multiple jurisdictions, including the United States and the European Union (“EU”). This issue is now at the forefront with the EU’s new data security and privacy regime, the General Data Protection Regulation (“GDPR”), which became effective on May 25, 2018.

Continue Reading Untangling the Tangled Web of Cybersecurity Disclosure Requirements: A Practical Guide