Security token offerings

This paper posits that distinguishing security token offerings (STOs) from initial coin offerings (ICOs) is important for the study of entrepreneurial finance. We first provide a working definition of a security token and present an overview of the STO market using a unique STO sample. The STO activity developed after the end of the ICO market bubble. The STO market is, however, still a nascent market. STOs are geographically dispersed but concentrated in jurisdictions with accommodating securities laws. Next, we explore STO success factors. We show that various issuer and offering characteristics traditionally used in the ICO literature also matter for STO success. We also find that success is associated with good governance practices, consistent with the corporate finance literature. We conclude by discussing the implications of native digital securities, the next generation of security tokens, for entrepreneurial finance.

Private Securities Litigation

This chapter focuses on the erratic and unacceptable private securities litigation framework that prevails in the United States. The litigation structure contained in the federal securities acts was based on a different era and is not suitable for today’s securities markets. Although federal legislation has been enacted to address perceived shortcomings on an episodic basis, significant gaps and inconsistencies exist. Likewise, the federal courts, faced with a fractured statutory regimen, frequently have construed the remedial provisions in a wooden and unduly restrictive manner. The consequence of these congressional and judicial actions is a disparate liability framework that lacks sound logic, consistency, and even-handed treatment for plaintiffs and defendants alike. This chapter provides several examples of the inconsistencies and disparate treatment that prevail under the federal securities laws. Thereafter, recommendations for corrective measures are proffered. These proposals, if adopted and effectively implemented, should instill a substantially greater degree of certainty, uniformity, and equity than currently exists.

Federalization of Corporate Governance

This chapter examines the federalization of corporate governance from both historical and contemporary perspectives. It addresses gaps in the corporate governance framework and recommends the implementation of improved standards on the federal levels. These recommendations focus on such timely matters as board of director composition, greater gender and racial diversity on corporate boards, employee representation on boards, adoption of director term limits, excessive executive compensation, the implementation of a more realistic definition of “independent director,” and shareholder access to a company’s proxy statement to nominate a specified number of directors. The chapter also posits that federal court invocation of state law principles to ascertain the parameters of the federal securities laws in the corporate governance sphere is misplaced in view of the entrenched federalization of corporate governance.

Rethinking Securities Law—Laying the Groundwork

This chapter explains the need for the “rethinking” of the federal securities laws, with particular emphasis on the Securities Act of 1933 and the Securities Exchange Act of 1934. Recognizing the historical preeminence of the U.S. securities law framework, the chapter first highlights key attributes that facilitate the effectuation of this achievement. Thereafter, the chapter addresses problematic characteristics of U.S. securities regulation. As set forth therein, the framework of securities regulation that exists today in the United States is comprised of piecemeal federal legislation, judicial decisions, SEC action, state securities (blue sky) activity, and self-regulatory organization oversight. As a consequence, the presence of consistent and logical regulation all too often is absent. With frequency, in both transactional and litigation settings, mandates apply that are erratic and antithetical to sound public policy. Setting the stage, in a preliminary manner, the chapter identifies several of the key problematic areas, succinctly explains their deficiencies, and suggests corrective measures that should be implemented.

The Disclosure Regimen of the Federal Securities Laws

This chapter focuses on the disclosure framework of the federal securities laws. It explores the benefits as well as drawbacks of the current regimen and recommends measures that should be implemented to enhance its efficacy. Subjects addressed in this chapter include the focus of the securities laws on adequate disclosure rather than substantive fairness, the concept of materiality, the mandatory disclosure framework, the integrated disclosure system, the SEC’s dismantling of the mandatory disclosure framework in certain contexts, and the disclosure obligations placed upon publicly-held companies by the national securities exchanges. Upon analysis, significant gaps and drawbacks exist in this framework that should be remedied. The chapter thereupon proffers adaptable solutions that should meaningfully improve the disclosure regimen. Implementing these measures, including the requirement that companies (absent a meritorious business justification) promptly and adequately disclose all material information to the securities markets and investors, should enhance both market efficiency and investor protection.

Rethinking Securities Law

Rethinking Securities Law focuses on a very important and timely subject that merits comprehensive analysis: “rethinking” the securities laws, with particular emphasis on the Securities Act of 1933 and the Securities Exchange Act of 1934. The system of securities regulation that prevails today in the United States is one that has been formed through piecemeal federal legislation, Securities and Exchange Commission (SEC) invocation of its administrative authority, and self-regulatory organization episodic action. As a consequence, the presence of consistent and logical regulation all too often is lacking. In both transactional and litigation settings, with frequency, mandates apply that are erratic and antithetical to sound public policy. Over four decades ago, the American Law Institute (ALI) adopted the ALI Federal Securities Code. The Code has not been enacted by Congress and its prospects are dim. Since that time, no treatise, monograph, or other source has comprehensively focused on this meritorious subject. The objective of this book is to identify the deficiencies that exist under the current regimen, address their failings, provide recommendations for rectifying these deficiencies, and set forth a thorough analysis for remediation in order to prescribe a consistent and sound securities law framework. By undertaking this challenge, the book provides an original and valuable resource for effectuating necessary law reform that should prove beneficial to the integrity of the U.S. capital markets, effective and fair government and private enforcement, and the enhancement of investor protection.

Does the system reward investors for fraud risk? A clinical analysis

Purpose The purpose of this study is to show that despite the profound and commendable efforts of the SEC staff and many others in the legal system, aimed at combatting a billion-dollar hedge fund manager fraud, the perpetrators were effectively not held accountable for the unlawful conduct and hence did not bear the consequences of the conduct. This case highlights the presence of a significant risk that hedge fund investors are not fully accounting for and very likely not earning a commensurate premium for it. During the 1999–2002 period, Lauer and Associates inflated hedge funds’ valuations, misrepresented the holdings of the funds, shared fake portfolios with investors, did not provide reasonable basis for the excessive valuations of the investee companies and manipulated their security prices. In 2009, Lauer was found guilty of violating anti-fraud provisions of the federal securities laws and was ordered to pay US$18.9m in prejudgment interest and to surrender US$43.6m in ill-gotten gains. Despite the substantial evidence, on 11 April 2011 Lauer was acquitted in federal court, of wire fraud and conspiracy to commit securities fraud. Five other associates received light sentences. Yet investors were around US$1.0bn which were never recovered or compensated. Design/methodology/approach The study applies clinical case analysis. The study produced detailed research and analysis of the of the US based Lancer Management Group fraud case. The focus is on the consequences to investors and other stakeholders in the hedge fund industry. Findings In 2009, Lauer was found guilty of violating anti-fraud provisions of the federal securities laws and was ordered to pay US$18.9m in prejudgment interest and to surrender US$43.6m in ill-gotten gains. Despite the substantial evidence, on 11 April 2011 Lauer was acquitted in federal court, of wire fraud and conspiracy to commit securities fraud. Five other associates receive light sentences. Yet investors were around US$1.0bn. Investors’ losses were never recovered or compensated. Research limitations/implications This is a clinical case study. It is not an empirical study. Findings should be carefully construed. Practical implications This study directs hedge fund investors and industry stakeholder to the real possibility of not fraud but also to the limited efficacy of the system in terms of providing protection and compensation to investors. Investors and stakeholders must pay close attention in the due diligence process to minimize probability of fraud. Social implications Hedge fund industry fraud leads to devastating consequences to investors and obviously to their wealth and very possibly adversely impact local economy and community. Originality/value This study presents many events that show the extent of the fraud and how it was conducted. This paper shows despite the extensive effort of the regulatory and judicial system, the perpetrators of the fraud were not held accountable for their actions. This case does not point toward a macro system failure. It highlights the presence of a real risk that investors are not accounting for and very likely not earning a commensurate reward for it.

The future of SEC enforcement under the Biden administration

Purpose To examine what to expect from Chair Gary Gensler’s SEC and the new Biden presidential administration following Chair Gensler’s U.S. Senate confirmation on April 14, 2021. Design/methodology/approach Reviews past SEC Chair Jay Clayton’s legacy and Chair Gensler’s prior regulatory actions and focus, and outlines Chair Gensler’s expected initiatives, including a heightened focus on cryptocurrency regulation, investigation of COVID-19-related fraud, and ESG and climate change disclosure. Findings This change will bring forth a Democratic majority at the SEC which, in turn, suggests that the Commission will change its current emphasis on capital formation to focus more on investor protection, rules required by the Dodd-Frank Act, inspections, examinations, and enforcement Practical implications Firms should examine their compliance programs in anticipation of heightened advocacy for investor protection; an increased focus on cryptocurrency and blockchain technology, as well as ESG disclosures with an emphasis on climate change; and an increase in inspections and examinations which will drive more enforcement in the fund industry, as well as increases in initiatives regarding transparency, additional disclosures, and investor protection. Organizations will also benefit by reexamining their existing compliance programs with the advice of counsel as a mechanism to mitigate the risk of potential securities laws violations. Originality/value Practical guidance from experienced securities enforcement and litigation lawyers.

Investor protection, corporate governance and private information-based trading

Purpose This study aims to examine the effects of investor protection (PROT), internal and external corporate governance (CG) on private information-based trading (PIBT). Design/methodology/approach This study uses a sample of 3,438 firms from 42 countries for the period 2002–2015 to examine the effects of the broad and specific measures of PROT, internal CG and external CG (product market competition and block ownership [BOWN]) on a more accurate measure of PIBT using regression analysis. Findings The results show that PROT and BOWN are effective in reducing PIBT. However, the specific measure of PROT (strength of PROT) is not significant in emerging markets and civil law countries. The internal CG is also significant but has a positive effect on PIBT. Research limitations/implications The results suggest that PROT law matters in the efforts to prevent PIBT. Policymakers and securities market regulators, particularly in emerging markets and civil law countries, should focus more on refining existing securities laws and enacting detailed securities rules that explicitly prevent specific market manipulation and PIBT. Originality/value This study provides evidence for the importance of specific and detailed securities rules in different market and legal environments. Furthermore, this study uses the segregated private information-based speculative trading component to accurately measure the PIBT.

A Tale of Two Enforcement Venues: Determinants and Consequences of the SEC's Choice of Enforcement Venue After the Dodd-Frank Act

The Dodd-Frank Act allows the SEC to choose either an administrative proceeding or a federal court as an enforcement venue for resolving violations of federal securities laws. I examine the determinants and consequences of the SEC's choice of enforcement venue after the Dodd-Frank Act. Results show that material cases are 28% - 35% more likely to be assigned to federal courts, and politically connected defendants are about 14% more likely to be routed to administrative proceedings. While monetary penalties by venue are statistically indifferent, politically connected defendants in administrative proceedings are associated with lower penalties. Additionally, I find that administrative proceedings process cases 27 times faster than federal courts. Results suggest that the SEC's private incentives affect enforcement venue selection and possibly enforcement outcomes. SEC is more likely to use administrative proceedings when political and economic costs are greater, and use federal courts when political and economic benefits are greater.