SEC to Increase Scrutiny on Good Faith in Rule 10b5 1 Insider Stock Plans

This month, newly-appointed SEC Chair Gary Gensler delivered remarks regarding how the SEC might “freshen up” Rule 10b5-1, which permits corporate insiders and others to buy and sell stock pursuant to trading plans adopted in good faith prior to learning material non-public information. Gensler’s focus on Rule 10b5-1 continues in the footsteps of his predecessor, Jay Clayton, who was appointed by the previous administration. In September of last year, Clayton wrote a letter to U.S. Representative Brad Sherman (D Ca), Chairman of the House Financial Services Subcommittee on Investor Protection, expressing concerns about interest alignment and fairness of law compliant Rule 105b 1 plans under the current SEC regulations. Congress has acknowledged the SEC’s concerns. Just this week Senators Chris Van Hollen (D-Md) and Deb Fischer (R-Neb) reintroduced the latest version of the Promoting Transparent Standards for Corporate Insiders Act, which formally directs the SEC to explore amendments to Rule 105b 1 and, within three months, provide Congress with a report discussing possible abuses of the Rule.

Rule 10b5-1 plans provide a “safe harbor” for insiders, commonly directors and officers, in possession of a company’s material non-public information (MNPI), to purchase or sell stock of that company without running afoul of insider trading laws. The Rule relies on the premise that if an insider agrees to a trading plan in good faith before possessing MNPI, then the insider will not be making decisions based on subsequently acquired MNPI at the time the transaction occurs in the future.

The increasingly widespread use of Rule 10b5-1 plans has led to what Gensler characterized as “cracks in our insider trading regime.” Gensler noted: 1) there is no required “cooling off” period before the first trade can occur, 2) plans can be canceled at any time, 3) there are no disclosure requirements, and 4) insiders can adopt more than one Rule 10b5 1 plan. Gensler further noted the SEC would consider reforms related to share buybacks in connection with a Rule 10b5 1 plan. In early 2016, as the popularity of Rule 10b5 1 plans continued to grow, the Harvard Law School Forum on Corporate Governance republished an article first published in Insights, that forecasted many of Gensler’s remarks. The article highlights the benefits of Rule 10b5 1 plans and provides suggestions on best practices that should be implemented to comply with the intent of the Rule’s safe harbor, including, amongst other recommendations: establishing only one plan, adopting the plan during an issuer’s open trading window, public disclosure of the plan, establishing a waiting period before the first trade, and avoiding multiple modifications, suspensions, and terminations.

With increased scrutiny of Rule 10b5 1 plans on the horizon, companies and their insiders should review their Rule 10b5-1 plans in light of anticipated SEC scrutiny and regulatory changes. A report published in January this year offers recommendations on how the SEC should regulate Rule 10b5-1 plans that rely on the safe harbor of the Rule, including: requiring minimum cooling-off periods of four to six months before the first trade can occur, eliminating single trade plans that effectively act as an option, eliminating plans in which the first trade occurs before the next earnings announcement, and requiring public disclosure by electronic filing when a plan is adopted, modified, suspended, or terminated, rather than a non-public filing only after the sale of restricted stock. These recommendations are consistent with the Chairs’ comments over the past year and are a good starting point for insiders when reviewing their Rule 10b5 1 plans.

Please contact your Carrington Coleman securities counsel should you have any questions related to Rule 10b5 1 plans, or any other securities related questions.

CLAYTON AND HINMAN GO ON THE RECORD URGING CORPORATE DISCLOSURES RELATED TO COVID-19

In a Public Statement issued by the SEC, Chairman Jay Clayton and Division of Corporate Finance Director William Hinman urged public companies to include corporate disclosures related to the effects of COVID-19 in their “quarterly earnings releases and analyst calls, as well as in subsequent communications to the marketplace.” The SEC requested that corporate disclosures address: “(1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as [ ] efforts to fight COVID-19 progress.” Suggested disclosures include, “[d]etailed discussions of current liquidity positions,” “expected financial resource needs,” “efforts to protect worker health and well-being and customer safety,” and “financial assistance received under the CARES Act or other similar COVID-19 related federal and state programs.”

The SEC acknowledged that “providing detailed information regarding future operating conditions and resource needs is challenging . . . but is important on many levels.” For investors, forward-looking COVID-19 disclosures foster more well-reasoned investment decisions. For the market more-generally, such disclosures “enhance valuable communication and coordination across our economy—Including between the public and private sectors." And for the greater fight against COVID-19, such disclosures increase confidence and understanding about particular business and industries which, in turn, “reduces risk aversion and facilitates action.” As an example of this third, “less familiar” policy consideration, the SEC explained, for example, that “if the owner of an industrial laundry business becomes comfortable that the hotel industry is soon to pursue a credible plan for increasing activity, the laundry business may be less likely to furlough (or may plan to rehire) employees.”

The SEC warned that even though “it may be tempting to resort to generic, or boilerplate, disclosures,” such disclosures “do little to inform investors.” Instead, the SEC urged companies to convey “meaningful information” that give investors “a level of insight that allows them to see the key operation and financial considerations and challenges the company faces through the eyes of management” even though such information will be “unavoidably based on a mix of assumptions, including assumptions regarding matters beyond the control of the company.”

Of course, companies are typically cautioned to limit the forward-looking disclosures—they are discouraged from making forward-looking financial estimates. Recognizing this, the SEC stated that companies should still try their best to make forward-looking disclosures related to COVID-19 and to “avail themselves of the safe-harbors” found in Section 27A of the Securities Act and Section 21E of the Exchange Act. In effect, companies should avoid making boilerplate COVID-19 disclosures, but should identify them as “forward-looking statement[s]” and couple them with customary “cautionary statements identifying factors that could cause actual results to differ materially from those in the forward-looking statement.”

The SEC concluded by assuring public companies that “[g]iven the uncertainty in our current business environment, we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.” Nevertheless, the SEC continues to closely monitor markets for fraud relating to COVID-19, suspending trading of stock for companies making questionable claims. See, e.g., Predictive Tech. Group, Inc., SEC Order of Suspension of Trading, File No. 500-1 (April 21, 2020) (suspending trading “because of questions regarding . . . statements PRED made about being able to immediately distribute large quantities of serology tests to detect the presence of COVID-19 antibodies”). The best course remains for public companies to follow the SEC’s guidance in order to inform their investors, assure markets, assist in the nation-wide fight against COVID-19, and ultimately protect themselves from enforcement actions and shareholder litigation.

For questions regarding this post, please contact the authors:

GOING TO JAIL WITHOUT PASSING GO – SECOND CIRCUIT HOLDS “PERSONAL BENEFIT” NOT REQUIRED TO MAINTAIN TITLE 18 SECURITIES FRAUD CLAIM

On December 30, 2019, the Second Circuit issued its United States v. Blaszczak¹ opinion, eliminating a serious hurdle that might otherwise dissuade federal prosecutors from pursuing a Title 18 fraud claim against an alleged inside trader. The court determined that, unlike Title 15 securities fraud, federal wire fraud and Title 18 securities fraud claims do not require proof that the alleged insider received any personal benefit in exchange for the disclosure of non-public information.

In Blaszczak, federal prosecutors alleged that an employee of the Centers for Medicare & Medicaid Services (CMS) had been illegally disclosing information about reimbursement rate adjustments to a political consultant, who in turn, had been forwarding the information to a group of hedge fund managers, who were trading and profiting on the non-public information.

After the presentation of evidence, the district court instructed the jury that, in order to convict the defendants with Title 15 securities fraud, they would have to find the defendants received a “personal benefit” in exchange for the disclosure of non-public information. However, the court did not include the same “personal benefit” instruction in its Title 18 charge. After many days of deliberation, the jury acquitted each defendant on all counts alleging Title 15 securities fraud, but found the CMS employee guilty on one count of wire fraud, the political consultant guilty on two counts of wire fraud and two counts of Title 18 securities fraud, and the hedge fund managers guilty on one count of wire fraud and one count of Title 18 securities fraud.

On appeal to the Second Circuit, the appellants argued that pursuant to the Supreme Court’s Dirks v. SEC² opinion, the district court erred by not including the “personal benefit” instruction in its Title 18 question. The Second Circuit rejected appellants’ argument, reasoning that Title 15 and Title 18 were enacted for very different purposes. Title 15 (the statute at issue in Dirks) was enacted as part of the Securities and Exchange Act of 1934. While Title 18 was enacted as part of the Sarbanes-Oxley Act of 2002. And, despite both statutes prohibiting schemes to “defraud,” the meaning of the operative term was not shared.

According to the court, Title 15 was enacted for the limited purpose of eliminating insider trading for “personal advantage.” Whereas, Title 18 “was intended to provide prosecutors with a different and broader—enforcement mechanism to address securities fraud than what had been previously provided in the Title 15 fraud provision;” it was purposed to overcome the “technical legal requirements” that other fraud provisions created.

The court determined that because the statutes were enacted for two very different purposes and because the personal benefit test in Dirks was “judge-made doctrine” specifically premised on the limited purpose of Title 15, the personal benefit test should not apply to Title 18 securities fraud claims. Still, the court rejected appellants’ argument that the district court had opened a “backdoor” through which prosecutors could effectively pursue securities fraud claims that would otherwise require proof of a personal benefit. The court rejected this argument, stating that there will always be statutory overlap—where prosecutors can choose between multiple statutory causes of action for the same underlying conduct—but that such overlap is no reason to ignore legislative intent. According to the court, if the legislature believed they had inadvertently created a “backdoor,” it was up to them to intentionally close it.

The takeaway is simple. Whether or not the alleged disclosing party has secured any benefit by sharing non-public information, it could face criminal liability for its actions. Defense attorneys should be cognizant of Title 18’s requirements when assessing the chances of acquittal and make their clients aware of such risk.

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1 18-2811, 2019 WL 7289753 (2nd Cir. Dec. 30, 2019).^↩
2 463 U.S. 646, 662 (1983).^↩

2019 ENFORCEMENT PRIORITIES FOR THE FORT WORTH REGIONAL OFFICE

On February 25, 2019, Eric Werner and Marshall Gandy from the Fort Worth Regional Office of the Securities and Exchange Commission presented to the Dallas Bar Association’s Securities Section on the topic: “2019 Enforcement Priorities for the Fort Worth Regional Office.”

The presentation started and largely centered on the Regional Office’s ability to “do more with less.” Mr. Werner told the audience that in 2018 the Regional Office employed 30 enforcement agents, but currently only employs 20. He remarked that fewer agents will necessarily result in fewer enforcement actions, though the downturn would “not be significant.” Still, Mr. Werner assured the audience that they would not see any notable change in the type of actions pursued by the Commission. And, if any change were observed, it would simply be a function of the type of cases ripe for prosecution, not a realignment of priorities. Perhaps most striking, Mr. Werner suggested resources would need to be reallocated to relitigate cases effected by the Supreme Court’s Lucia decision. His comment hinted at the Commission’s interpretation of the Supreme Court’s stance on relief for respondents with non-pending cases that were previously decided by the Commission’s Administrative Law Judges.

Mr. Gandy commented on the Commission’s examination processes, paying particular attention to the Commission’s desire to engage registrants and empower them to self-police. He told the audience the Office of Compliance Inspections and Examinations does not measure success by how many cases are referred to the Division of Enforcement. He sought to dispel the idea that “if you call [OCIE], you will be examined,” stating, “nothing could be further from the truth.” Mr. Gandy also commented on registrants’ compliance programs and the OCIE’s willingness to help prepare adequate programs.

Both Messrs. Werner and Gandy emphasized the Commission’s focus on Main Street, individual accountability, and the proper allocation of resources. Their tone was cooperative.

SCOTUS POISED TO RESOLVE CIRCUIT SPLIT REGARDING SECTION 14(E) SCIENTER

On January 4, 2019, the U.S. Supreme Court agreed to hear an appeal of the Ninth Circuit Court of Appeal’s controversial decision in Varjabedian v. Emulex Corp., 888 F.3d 399, 401 (9th Cir. 2018), cert granted, 19-459, 2019 WL 98542 (U.S. Jan. 4, 2019). The outcome of the appeal turns on the Court’s interpretation of Section 14(e) of the Securities Exchange Act. The relevant language reads:

It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.

15 U.S.C. § 78n(e). The Second, Third, Fifth, Six, and Eleventh Circuits have all determined that Section 14(e) requires proof of scienter—the defendant must be shown to have intended to omit or make an untrue statement of material fact to be held liable. The Ninth Circuit decision is the first to break with this trend.

Contrary to its sister courts, the Ninth Circuit determined that Section 14(e) differs from, and therefore should not be read together with, Exchange Act Rule 10b-5. The Ninth Circuit relied on the Supreme Court’s holding in Ernst & Ernst v. Hochfelder to reason that, despite identical language, Section 14(e) and Rule 10b-5 were promulgated at different times and for distinct purposes and therefore require differing proofs of mental culpability. Unlike Section 14(e)—enacted by statute—the Ninth Circuit recognized that Rule 10b-5 is an SEC Rule derived from the Commission’s powers under § 10(b), powers purposed to control “manipulative or deceptive device[s].” 15 U.S.C. § 78j(b). The court found Section 14(e) governing a “broader array of conduct” and therefore requiring less mental culpability. The Ninth Circuit reasoned that in order to interpret “statutes dealing with similar subjects . . . harmoniously,” Section 14(e) of the Exchange Act ought not require proof of scienter, just as the Supreme Court determined to be the case for the nearly identically worded Section 17(a)(2) of the Securities Act of 1933 in Aaron v. SEC. Finally, the Ninth Circuit concluded that Section 14(e) was never purposed to include a scienter requirement because it was passed as part of the Williams Act of 1968 and was accompanied by a Senate Report stating the purpose of the Williams Act was “to insure that public shareholders . . . will not be required to respond without adequate information,” suggesting “[an] emphasis on the quality of information . . . [not] on the state of mind harbored.” All eyes now turn to the Supreme Court to resolve the Circuit Court split.

THE TRUMP TRANSITION: CONSEQUENCES FOR SECURITIES AND FINANCIAL REGULATION

Federal—A Change in Course for Financial Regulation and the SEC?

President-elect Trump gave few specifics on how he would handle financial regulation and the SEC during his campaign. His comments regarding Dodd-Frank, including his promise to “dismantle” it, imply a new era of reduced regulation. But he also repeatedly criticized his opponent for being “owned” by big banks, and his website called for a “21st Century Glass-Steagall,” referring to the law that required separation between investment and commercial banking until its repeal in 1999. Trump’s choices during the transition, however, have now clarified his approach.

To lead the transition team’s efforts on financial regulation, Trump chose former SEC commissioner Paul Atkins. Atkins is a staunch libertarian, according to reporting by The Wall Street Journal, and he has long been critical of aggressive financial regulation.  Atkins’s role signals that the SEC will not likely follow the Labor Department’s footsteps in promulgating a tougher fiduciary duty rule. Atkins criticized the Labor Department rule, stating in a 2015 congressional hearing that the Labor Department “should go back to the drawing board.” Speculation is rampant about other potential changes, including scaling back corporate auditing requirements, shifting SEC focus from large corporate penalties to holding individuals accountable, and requiring whistleblowers to first report to their companies (for which Atkins advocated in 2011).

Answering those questions during his confirmation hearing is Trump’s selection to chair the SEC: corporate attorney Jay Clayton. Clayton is a partner with Sullivan & Cromwell in New York focusing on M&A and capital raising, along with representing clients in regulatory and enforcement actions. Commentators view this pick as signaling a shift in focus away from enforcement to other SEC goals. Critics note Clayton has spent years as a “Wall Street insider,” but outgoing Chair Mary Jo Wright praised Clayton as “very smart, very thoughtful, very knowledgeable of the markets and the securities laws and I think a terrific person.” Regardless, the general trend appears to be friendlier to Wall Street. Anthony Scaramucci, a hedge fund manager advising the transition team, said the new head of the SEC needed to “get back to reffing the game properly and end the demonization of Wall Street.”

Finally, the Director of the Consumer Financial Protection Bureau (created by Dodd-Frank), Richard Cordray, may be forced to step down under Trump, despite language in Dodd-Frank preventing the CFPB director’s removal except for cause. The statute creating the CFPB prohibits removal of the director of the agency except for cause during his five-year term, which would insulate the director from political change. In October, however, the D.C. Circuit Court of Appeals held that structure unconstitutional because it gave too much power and autonomy to the sole director. The Obama administration is appealing that ruling, but some legal scholars believe Trump can simply withdraw the appeal after his inauguration, leaving the D.C. Circuit’s ruling intact and allowing Trump to immediately remove Cordray. Trump certainly seems open to firing Cordray, as he met with Representative Randy Neugebauer from Texas, a strong CFBP critic, about possibly replacing Cordray.

State—Regulators Fear Federal Preemption of Enforcement

Paul Atkins has also allegedly been discussing “ways to ensure that federal securities laws preempt state [Blue Sky] laws” such as the New York Martin Act, as reported by Fox Business. This news, along with Trump’s comments regarding Dodd-Frank, has prompted state regulators to push back and assert their authority. “You need a national regulator; and if they can’t, the states need to do the job and should,” said William Galvin, secretary of the commonwealth of Massachusetts. “It sounds like we’re going to be under the same type of problems there were prior to the Great Recession, with securities and financial services being ‘lightly regulated,’” Galvin explained. “I think that’s a problem.”

Other state regulators have echoed Galvin’s sentiments. Mike Rothman, Minnesota’s commerce commissioner and president of the North American Securities Administrators Association, commented: “Any attempt to weaken the investor protections provided by state ‘Blue Sky’ laws would erode investor confidence and remove a vital first line of defense for all investors working to provide a secure future for themselves and their children.” And New York Attorney General Eric Schneiderman warned that “any attempt to gut these consumer and investor protections would severely undercut state police powers and only embolden those who seek to defraud and exploit everyday Americans.” “At a time of regulatory uncertainty at the federal level, it is essential that we maintain the very laws that have helped state and local law enforcement keep consumers and investors safe for over one hundred years,” he said. Schneiderman’s office recently reached a $25 million settlement agreement in New York’s case against Trump University for violation of state education laws, among other things.

NEW YORK: APPLYING THE BUSINESS JUDGMENT RULE TO GOING-PRIVATE TRANSACTIONS

This month, in a case of first impression, New York’s highest court held that under New York law, courts should review a going-private merger under the business judgment rule, provided among other things that the merger is approved by a Special Committee of independent directors and a majority of the minority stockholders. In re Kenneth Cole Prods., Inc., No. 54, 2016 N.Y. LEXIS 1059 (N.Y. May 5, 2016). In a going-private merger, a majority shareholder seeks to effectively remove public investors and gain ownership of the entire company. Plaintiffs who challenge going-private transactions often ask that courts review such transactions under the so-called entire fairness standard, which puts the burden on a company’s directors to show that they engaged in a fair process and obtained a fair price for the company. By contrast, under the business judgment rule, courts defer to the good faith determinations of officers and directors acting in the company’s interests.

In Kenneth Cole Productions, the Court of Appeals of New York specifically adopted the standard of review set by the Delaware Supreme Court in Khan v. M & F Worldwide Corp. (MFW), 88 A.3d 635 (Del. 2014). The Delaware Supreme Court held in MFW that “in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” Id. at 645. The New York Court of Appeals applied this standard and determined that dismissal was appropriate where the plaintiff failed to sufficiently and specifically plead facts that would negate any of the six conditions enumerated in MFW. As a result, the business judgment rule applied, and the court deferred to the determinations of the special committee, which recommended approval of the merger at issue. Notably, the court made this determination based only on the pleadings and without permitting the plaintiff to proceed with discovery. This decision clarifies New York law regarding the standard of review in a going-private transactions, and shows that New York courts may rely upon Delaware case law at least with regard to lawsuits challenging these transactions. The full text of the Opinion is available here.

FIFTH CIRCUIT: NO FIDUCIARY DUTY TO COFOUNDER

In a recent Fifth Circuit opinion, the Court held that a company’s President and Chief Operating Officer did not owe fiduciary duties to the company’s cofounder. Johns v. Kaelblein, No. 15-50969 (5th Cir. March 28, 2016) (link to full opinion). The Court explained: “As President and COO, Kaelblein certainly owed fiduciary duties to the company. But that does not translate into a duty to Johns as one of the cofounders of the company. Indeed, as the district court noted, a separate duty to an individual founder of the company would likely create a conflict. Texas law does not impose a fiduciary duty under these circumstances.”

WHAT LIES BEYOND DISCLOSURE? KEY POINTS FROM SEC CHAIR’S ADDRESS

Recently at the annual “SEC Speaks” program, SEC Chair Mary Jo White addressed the agency’s agenda for 2016. The theme of Ms. White’s speech was the SEC’s increasing need to go “beyond disclosure.” While she recognized disclosure as the SEC’s “core authority,” Ms. White explained that the SEC is more often exploring “carefully targeted substantive requirements – like controls on technology or limitations on activities.” Other substantive requirements of the SEC include setting financial standards for broker-dealers, review of the rule filings by exchanges and other SROs, supervision of the clearing of securities, and oversight of the Public Accounting Oversight Board. Under the Dodd-Frank Act, the SEC also oversees security-based swaps, restricts proprietary trading, mandates risk retention for securitizers, and limits incentive-based compensation for financial institutions.

Ms. White said that these areas “have become more important” to the SEC’s mission, and outlined several examples from recent regulatory reform. First, Ms. White reviewed Regulation SCI (Systems Compliance and Integrity), which imposes requirements for systems controls and technology standards. Second, Ms. White described money market fund reforms becoming effective in October 2016, which will require prime funds to float their NAV (Net Asset Value) rather than use a fixed NAV. Third, Ms. White discussed Regulation A+ and the SEC’s new crowdfunding rules, which address disclosures for startups and small businesses raising capital, as well as impose limits on investment. Ms. White also highlighted several outstanding SEC proposals and initiatives, including imposing minimum liquidity requirements and derivatives limits in asset management, supervision for changes in the operation of alternative trading systems, and new standards for the governance and operation of clearing agencies. After reviewing these issues, Ms. White reasserted that “using other policy tools to strengthen our regulatory regime does not reflect a retreat from our core disclosure powers.” Rather, Ms. White stressed the need for “additional protections beyond those that can be achieved through disclosure alone.”

For more information about the SEC’s recent rulemaking, initiatives, and compliance contact us at Carrington Coleman. You can read the full text of Ms. White’s address here.

BITCOIN AND SECURITIES LAW—RECENT EVENTS

October 15, 2015—As the bitcoin industry has grown, it has increasingly drawn the attention and involvement of the securities industry and its regulators. Last week, the Winklevoss twins (known for suing Mark Zuckerberg, claiming he stole the idea for Facebook) launched their own bitcoin exchange, Gemini, which advertises itself as a “fully regulated, compliant, New York-based bitcoin exchange for both individuals and institutions alike.” Meanwhile, on October 1, federal authorities raided the offices of another digital currency company called Gemcoin after the Securities and Exchange Commission obtained a court order freezing the assets of the company and its founder, Steve Chen. The SEC complaint alleges, among other things, that Chen misrepresented Gemcoin as backed by millions of users, $15 billion in assets, and amber mining operations, all of which was false. Last month, Texas resident Trendon Shavers pleaded guilty to securities fraud in connection with a bitcoin Ponzi scheme. That action began last year as an SEC investigation into Shavers’ company, Bitcoin Savings and Trust, which raised over $50 million after promising its investors up to 7% interest per week based on the company’s bitcoin exchange arbitrage strategy.

Fraudulent schemes of this nature are nothing new, but the increasing popularity and market capitalization of bitcoin ($3.7 billion) and similar digital currencies attract both legitimate business interests and fraudsters alike. As with any industry, investors should be wary of too-good-to-be-true opportunities, and some basic education and diligence about bitcoin may improve understanding of this market and inoculate against certain risks. Bitcoin is a decentralized digital currency not backed by government fiat or any particular commodity, although the Commodity Futures Trading Commission has classified bitcoin as a commodity. The exchange rate of U.S. Dollars to Bitcoin (BTC) fluctuates substantially (1 BTC to $253.66 USD at the time of publication), and while economists, experts, and users contest the viability of bitcoin as a currency, a consensus supports the viability and utility of the technology underlying bitcoin, called the blockchain. The blockchain is an encrypted transaction ledger maintained by voluntarily participating networked computers, which prevent duplicative and fraudulent transactions by verifying transactions against each other on an ongoing basis. The blockchain therefore provides clearing and settlement services traditionally provided by financial institutions for a fraction of the cost.

Regardless of whether bitcoin itself survives as a currency (or commodity), many entrepreneurs see opportunity in the underlying blockchain technology. In April, Overstock.com registered $500 million worth of equity with the SEC in the form of digital securities. In its Form F-3 filing, the company disclosed that it may offer and distribute the securities using blockchain technology. See Overstock.com, Inc., Registration Statement (Form S-3) (Apr. 24, 2015). In other words, rather than registered securities trading on an exchange like the NYSE, these Overstock.com shares would trade on a custom-built blockchain designed for exchanging these digital securities over a decentralized peer-to-peer network. Whether and how the SEC will regulate these kinds of bitcoin-like securities remains to be seen, and before considering investing in digital currencies like bitcoin or developing new blockchain implementations, you should consult an attorney with experience in this area to understand the risks of and ensure compliance with the rapidly-evolving regulatory framework surrounding them.

OUT-OF-STATE FORUM SELECTION BYLAW HELD VALID BY DELAWARE CHANCERY COURT

In Providence v. First Citizens Bancshares, Inc., Chancellor Bouchard dismissed a complaint contesting a merger because the acquiring company, First Citizens Bancshares, Inc. (“FC North”) had amended its bylaws the same day as the merger was announced to include a forum selection bylaw that required such claims to be brought in North Carolina. The Court found that the Delaware General Corporation Law grants broad powers to corporations, including the ability to amend bylaws by Board action, and that shareholders are on notice that the Board may do so. While previous Delaware authority had confirmed the validity of such forum selection bylaws generally, this decision was the first to address a forum selection bylaw that chose a state other than the state of incorporation, here, Delaware. The Court reasoned that nothing in Delaware law prohibited such a selection, and further that the plaintiffs did not question the integrity of North Carolina courts. Judicial review of the plaintiffs’ claims could occur, but only in a North Carolina court, not the Delaware Chancery court. Click here for the full opinion.