Securities Law Commons^™

Disclosure's Limits, Usha Rodrigues, Mike Stegemoller

Scholarly Works

Special purpose acquisition companies (SPACs) have exploded in popularity, luring both adventurous retail investors and sophisticated institutional investors. In a SPAC, a publicly traded shell corporation acquires a private target, thereby taking it public in a manner that circumvents the rigors of a traditional initial public offering (IPO). Proponents vaunt SPACs’ ability to simplify the process of accessing the public markets and democratize capitalism, but in their current form they pose risks to retail investors and to the market as a whole. Using a hand-collected dataset, this Article fills a gap in the literature by providing new empirical data regarding …

Embrace The Sec, Usha Rodrigues

Scholarly Works

Securities law traditionally only permits corporations that have registered with the Securities and Exchange Commission (SEC) and completed an initial public offering (IPO) to sell equity to the general public—often a long, expensive process. Initial coin offering (ICOs) emerged in 2013 as a fundraising tool for non-public blockchain-based companies to raise billions of dollars while circumventing the SEC and public offering process altogether. But their early success brought the attention of the SEC, and in 2017 the SEC asserted the right to regulate ICOs. Since then, U.S. ICO promoters have struggled to avoid the SEC’s assertion of jurisdiction, contorting their …

Financial Contracting With The Crowd, Usha Rodrigues

Scholarly Works

Equity crowdfunding is broken. The current model imposes too many burdens on entrepreneurs in exchange for too little money. For alternative models, this Article looks to the time-tested venture capital financial contract, and the recent experience of initial coin offerings (ICOs). ICOs made headlines over the past two years, as the means by which blockchain technology companies raised billions of dollars to launch new cryptocurrency ventures. Although their novelty as a monetary and investing device is well known, ICOs also presented significant, unappreciated insights into financial contracting.

ICOs furnished an unprecedented experiment into how bargains would look if entrepreneurs raised …

The Up-C Revolution, Gregg D. Polsky, Adam H. Rosenzweig

Scholarly Works

Over the past few years, a revolutionary new tax structure, known as the Up-C, has become increasingly popular, particularly in instances where an LLC is being taken public. In such an Up-C IPO, a newly formed C corporation is placed on top of the existing LLC, which continues to operate the business. Shares of the C corporation are sold to new investors, and the proceeds are used by the C corporation to buy an interest in the LLC. Meanwhile, the legacy owners of the LLC (typically, founders and private investment funds) retain their interests in the LLC, while receiving exchange …

Does Shareholder Voting Matter? Evidence From The Takeover Market, Paul Mason, Usha Rodrigues, Mike Stegemoller, Steven Utke

Scholarly Works

Voting rights are a basic shareholder-protection mechanism. Outside of the core voting requirements state law imposes (election of directors and votes on fundamental changes), federal law grants shareholders additional voting rights. But these rights introduce concomitant costs into corporate governance. Each grant of a voting right thus invites the question: is the benefit achieved worth the cost the vote imposes?

The question is not merely a theoretical one. Recently the SEC, concerned about Nasdaq’s potential weakening of shareholder voting protections, has lamented that little evidence exists on the value of the shareholder vote. This Article provides that evidence. It examines …

Center-Left Politics And Corporate Governance: What Is The 'Progressive' Agenda?, Christopher Bruner

Scholarly Works

For as long as corporations have existed, debates have persisted among scholars, judges, and policymakers regarding how best to describe their form and function as a positive matter, and how best to organize relations among their various stakeholders as a normative matter. This is hardly surprising given the economic and political stakes involved with control over vast and growing "corporate" resources, and it has become commonplace to speak of various approaches to corporate law in decidedly political terms. In particular, on the fundamental normative issue of the aims to which corporate decision-making ought to be directed, shareholder-centric conceptions of the …

Unintended Consequences: The Link Between Judge Friendly's Texas Gulf Sulphur Concurrence And Recent Supreme Court Decisions Misconstruing Rule 10b-5, Margaret V. Sachs

Scholarly Works

In his Texas Gulf Sulphur concurrence, Judge Henry J. Friendly coun- seled the federal district courts concerning the numerous pending satellite class actions that had been filed under Section 10(b) of the Securities Ex- change Act and Rule 10b-5. In the course of so doing, he argued forcefully that private Rule 10b-5 litigation should be curtailed. Finding his argument convincing, the Supreme Court issued four major decisions restricting the Rule between 1975 and 1994, while nonetheless expanding it in Basic Inc. v. Levinson. Congress responded by blessing both aspects of the Court’s jurisprudence – imposing its own set of …

Dictation And Delegation In Securities Regulation, Usha Rodrigues

Scholarly Works

When Congress undertakes major financial reform, either it dictates the precise contours of the law itself or it delegates the bulk of the rulemaking to an administrative agency. This choice has critical consequences. Making the law self-executing in federal legislation is swift, not subject to administrative tinkering, and less vulnerable than rulemaking to judicial second-guessing. Agency action is, in contrast, deliberate, subject to ongoing bureaucratic fiddling and more vulnerable than statutes to judicial challenge.

This Article offers the first empirical analysis of the extent of congressional delegation in securities law from 1970 to the present day, examining nine pieces of …

Superstar Judges As Entrepreneurs: The Untold Story Of Fraud-On-The-Market, Margaret V. Sachs

Scholarly Works

This Article unites two disparate subjects of profound interest to legal scholars. One is fraud-on-the-market, reaffirmed late last term in Erica P. John Fund, Inc. v. Halliburton Co. (Halliburton II). Probably the most important claim in the securities litigation universe, fraud-on-the-market is the sine qua non of almost every securities class action that is filed. The other subject consists of the work of Judges Frank Easterbrook and Richard Posner, the “superstars” of the current federal appellate bench.

My purpose is several-fold: first, to show that fraud-on-the-market’s evolution, up through and culminating in Halliburton II, has been driven in significant measure …

Regulation By Hypothetical, Mehrsa Baradaran

Scholarly Works

A new paradigm is afoot in banking regulation—and it involves a turn toward the more speculative. Previous regulatory instruments have included geographic restrictions, activity restrictions, disclosure mandates, capital requirements, and risk management oversight to ensure the safety of the banking system. This Article describes and contextualizes these regulatory tools and shows how and why they were formed to deal with industry change. The financial crisis of 2008 exposed the shortcomings in each of these regimes. In important ways, the Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) departs from these past regimes and proposes something new: Call it …

In Search Of Safe Harbor: Suggestions For The New Rule 506(C), Usha Rodrigues

Scholarly Works

I devote most of this essay to exploring how, exactly, the Securities and Exchange Commission (“SEC”) should go about providing guidelines to implement the statutory requirement that issuers have a reasonable belief that a purchaser is accredited. The SEC has proposed rules, but these rules merely restate what Congress has already required, thus sidestepping Congress’s direction that the agency itself articulate some verification methods. Taking the SEC’s decidedly amorphous proposal to task, I recommend that the SEC offer two nonexclusive safe harbors for issuers to guide them in determining whether a natural person is an accredited investor. The paragraphs below …

Securities Law's Dirty Little Secret, Usha Rodrigues

Scholarly Works

Securities law’s dirty little secret is that rich investors have access to special kinds of investments—hedge funds, private equity, private companies—that everyone else does not. This disparity stems from the fact that, from its inception, federal securities law has jealously guarded the manner in which firms can sell shares to the general public. Perhaps paternalistically, the law assumes that the average investor needs the protection of the full panoply of securities regulation and thus should be limited to buying public securities. In contrast, accredited—i.e., wealthy— investors, who it is presumed can fend for themselves, have the luxury of choosing between …

Is The Corporate Director's Duty Of Care A "Fiduciary' Duty? Does It Matter?, Christopher M. Bruner

Scholarly Works

While reference to "fiduciary duties" (plural) is routinely employed in the United States as a convenient short-hand for a corporate director's duties of care and loyalty, other common-law countries generally treat loyalty as the sole "fiduciary duty." This contrast prompts some important questions about the doctrinal structure for duty of care analysis adopted in Delaware, the principal jurisdiction of incorporation for U.S. public companies. Specifically, has the evolution of Delaware's convoluted and problematic framework for evaluating disinterested board conduct been facilitated by styling care a "fiduciary" duty? If so, then how should Delaware lawmakers and judges respond moving forward?

In …

Employers United: An Empirical Analysis Of Corporate Political Speech In The Wake Of The Affordable Care Act, Elizabeth Weeks Leonard, Susan Scholz, Raquel Meyer Alexander

Scholarly Works

Is the Patient Protection and Affordable Care Act (ACA) bad for business? Did the countries' most prominent companies game the Securities and Exchange Commission (SEC) disclosure process to make negative political statements about ObamaCare? Immediately following the ACA's enactment on March 23, 2010, a number of companies drew scrutiny for issuing SEC filings writing off millions – and in AT&T's case, one billion dollars – against expected earnings for 2010 alone, based on a single, discrete tax-law change in the ACA. Congressional and Administration officials accused the firms of being "irresponsible" and using "big numbers to exaggerate the health reform's …

Spacs And The Jobs Act, Usha Rodrigues

Scholarly Works

The law has long confined the average investor to trading in public securitieswhile allowing wealthy—or “accredited”—individual investors access to a panoply of private securities, including investment vehicles such as hedge funds and private equity funds. Nevertheless, pressure to let the general public into private equity has been growing. Two forces have contributed to this mounting pressure. First, public investors are eager to try their hand at investing in private enterprise. Second, private firms need capital. In the face of these forces, the sharp line that has long separated public and private firms has become increasingly blurred

Consider the story of …

Social Proposals Under Rule 14a-8: A Fall-Back Remedy In An Era Of Congressional Inaction, Margaret V. Sachs

Scholarly Works

More than a decade ago, institutional investors, notably labor unions and pension plans, began using shareholder proposals as a vehicle for advancing progressive social causes. These proposals have recently garnered heightened levels of shareholder support. While even majority support for a proposal does not insure its adoption by the board of directors, appreciable (even if not majority) support can nonetheless sometimes precipitate adoption, or at least negotiation (which can lead to adoption). This Essay argues, first, that with Congress now largely dysfunctional, social proposals have acquired a whole new role—that of a company-by-company, fall-back mechanism for solving social problems that …

Corporate Governance In An Age Of Separation Of Ownership From Ownership, Usha Rodrigues

Scholarly Works

The shareholder empowerment provisions enacted as part of the recent bailout legislation are internally incoherent because they fail to address the short-termist realities of shareholder ownership today. Ownership has separated from ownership in modern corporate America: individual investors now largely hold stock through mutual funds, pension funds, and hedge funds. The incentives of these short-term financial intermediaries only imperfectly reflect the interests of their long-term holders - an imbalance only exacerbated by the bailout’s corporate governance legislation. The bailout’s focus on shareholder empowerment tactics - such as proxy access, say-on-pay, and increased disclosure - makes little sense if shareholders are …

Governing Securities Class Actions, Elizabeth Chamblee Burch

Scholarly Works

This short essay, written for a symposium on The Principles and Politics of Aggregate Litigation: CAFA, PSLRA, and Beyond, decouples due process from a proceduralist’s intuition and explains why it matters in securities class actions. It begins by exploring several analytical models that shed light on the representative relationship in class actions, including a public law analogy to the administrative state, a private law analogy to corporate law, and another, more modern public law analogy to political governance. After finding that the political-governance model best addresses both sources of inadequate representation in securities class actions — rifts between class members …

Managing Corporate Federalism: The Least-Bad Approach To The Shareholder Bylaw Debate, Christopher M. Bruner

Scholarly Works

Over recent decades, shareholders in public corporations have increasingly sought to augment their own power - and, correlatively, to limit the power of boards - through creative use of corporate bylaws. The bylaws lend themselves to such efforts because enacting, amending, and repealing bylaws are essentially the only corporate governance actions that shareholders can undertake unilaterally. In this Article I examine thecontested nature of bylaws, the fundamental issues of corporate power and purpose that they implicate, and the differing ways in which state and federal lawmakers and regulators may impact the debate regarding thescope of the shareholders' bylaw authority.

The …

Placebo Ethics, Usha Rodrigues, Mike Stegemoller

Scholarly Works

While there are innumerable theories on the best remedy for the current financial crisis, there is agreement on one point, at least: increased transparency is good. We look at a provision from the last round of financial regulation, the Sarbanes Oxley Act of 2002 (SOX), which imposed disclosure requirements tailored to prevent some of the kinds of abuses that led to the downfall of Enron. In response to Enron's self-dealing transactions, Section 406 of SOX required a public company to disclose its code of ethics and to disclose immediately any waivers from that code the company grants to its top …

From Loyalty To Conflict: Addressing Fiduciary Duty At The Officer Level, Usha Rodrigues

Scholarly Works

Conflicts of interest are the quintessential agency cost-the constant, lurking danger that agents may seek their own personal gain, rather than the good of the corporation. Yet many corporate employees lack knowledge as to exactly what constitutes a conflict of interest. This ignorance facilitated the kind of fraud seen in Enron, WorldCom, and the options backdating scandals, and may help explain the out-sized payouts that many high-level corporate officers received even as the financial institutions they headed verged on self-destruction. Each case required not only affirmative fraudulent behavior on the part of a few, but also the tacit acceptance of …

Securities Class Actions As Pragmatic Ex Post Regulation, Elizabeth Chamblee Burch

Scholarly Works

Securities class actions are on the chopping block-again. Traditional commentators continue to view class actions with suspicion; they see class suits as nonmeritorious byproducts of self-interest and the attorneys who bring them as rent-seekers. Their conventional approach has popularized securities class actions' negative effects. High-profile commissions capitalizing on this rhetoric, such as the Committee on Capital Markets Regulation, have recently recommended eliminating or severely curtailing securities class actions. But this approach misses the point: in the ongoing push and pull of securities regulation, corporations are winning the battle.

Thus, understanding the full picture and texture of securities class actions necessitates …

The Fetishization Of Independence, Usha Rodrigues

Scholarly Works

According to conventional wisdom, a supermajority independent board of directors is the ideal corporate governance structure. Debate nevertheless continues: empirical evidence suggests that independent boards do not improve firm performance. Independence proponents respond that past studies reflect a flawed definition of independence.

Remarkably, neither side in the independence debate has looked to Delaware, the preeminent state source for corporate law. Comparing Delaware's notions of independence with those of Sarbanes-Oxley and its attendant reforms reveals two fundamentally different conceptions of independence. Sarbanes-Oxley equates independence with outsider status. An independent director is one who lacks financial ties to the corporation and is …

Reassessing Damages In Securities Fraud Class Actions, Elizabeth Chamblee Burch

Scholarly Works

No coherent doctrinal statement exists for calculating open-market damages for securities fraud class actions. Instead, courts have tried in vain to fashion common-law deceit and misrepresentation remedies to fit open-market fraud. The result is a relatively ineffective system with a hallmark feature: unpredictable damage awards. This poses a significant fraud deterrence problem from both a practical and a theoretical standpoint.

In 2005, the Supreme Court had the opportunity to clarify open-market damage principles and to facilitate earlier dismissal of cases without compensable economic losses. Instead, in Dura Pharmaceuticals v. Broudo, it further confused the damage issue by (1) perpetuating the …

Materiality And Social Change: The Case For Replacing "The Reasonable Investor" With "The Least Sophisticated Investor" In Inefficient Markets, Margaret V. Sachs

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The current materiality standard for federal securities fraud is a mid-twentieth-century construct that fails to accommodate certain twenty-first century realities. This Article argues that its reach should be restricted to preserve it for the many circumstances in which it continues to function well.

The current standard measures materiality from the standpoint of "the reasonable investor," a savvy person who grasps market fundamentals. This standard has a fatal flaw: its inability to protect unsophisticated investors who are duped by implausible falsehoods in inefficient markets. This flaw can no longer be ignored given Internet and telemarketing securities fraud and its many unsophisticated, …

Let The Money Do The Governing: The Case For Reuniting Ownership And Control, Usha Rodrigues

Scholarly Works

Part I of the Article outlines the problems with the current method of board selection and functioning. Management or management-sympathetic board members often select the board nominees, who share social ties with other board members. Boards tend to avoid "rocking the boat" by questioning management's recommendations, and because of the way the proxy process is structured, shareholders cannot effectively use their votes to oust unsatisfactory board members.

Part II analyzes the SEC's recent proposals for reform, which center on granting shareholders more opportunities to nominate candidates to the board. These proposals attempt to give shareholders a greater voice in the …

Understanding Price-Based Antidilution Protection: Five Principles To Apply When Negotiating A Down-Round Financing, Robert P. Bartlett

Scholarly Works

As most venture capital investors are aware, the economic downturn of the past two years—and the concomitant decrease in private company valuations—has created an opportunity for significant returns on new venture investments seldom seen since the early 1990s. Yet while the investment opportunities of the current economic environment may have attractive financial valuations, they frequently come with the added cost of significant transactional complexity. In particular, the issuance of securities by a private company at a price that is below the price previously paid by the company's investors (typically referred to as a “down-round” financing) may trigger one or more …

Regulation S - Rules Governing Offers And Sales Made Outside The United States Without Registration Under The Securities Act Of 1933, Caroline Mary Rutherford Lee

LLM Theses and Essays

Underpinning a regulatory regime is a dichotomy between achieving certainty of outcome and achieving perceived fairness. While such a discussion may seem out of place in the context of a regulatory regime dealing with offshore offerings, it nonetheless serves to emphasize some of the considerations encountered in the following examination of Regulation S. Part Two of this thesis outlines the development of the disclosure regime that is evidenced in the United States Federal Securities Regulations and then goes on to examine how this regime, first established in the 1930s, dealt with the advent of globalization. Part Three then looks at …

Harmonizing Civil And Criminial Enforcement Of Federal Regulatory Statutes: The Case Of The Securities Exchange Act Of 1934, Margaret V. Sachs

Scholarly Works

Many federal regulatory statutes (including those governing antitrust, securities, and the environment) are hybrid statutes: their prohibitions are enforceable in criminal actions as well as in private or governmental civil actions (or both). Courts have long divided over whether prohibitions in hybrid statutes can be construed differently in different enforcement contexts. Resolution of this uncertainty has become urgent now that criminal enforcement of federal regulatory statutes is relatively frequent.

In this article, Professor Sachs argues that prohibitions in hybrid statutes should be limited to a single interpretation. How to apply this principle (referred to in this article as “the core …

The Legal Regulation Of Hedge Funds In The United States Long-Term Capital Management Episode, Jong Cheol Park

LLM Theses and Essays

Mutual funds and hedge funds are popular forms of investment in the United States and throughout the world. Mutual funds are regulated by securities' regulators in the United States. Hedge funds, however, are not regulated because of their operational flexibility in investment. U.S. regulators are concerned that if they regulate hedge funds, hedge funds will, along with their economic benefits, emigrate to offshore havens. However, if we consider the importance of the American financial markets in the world, this idea can be dismissed. Due to globalization in the capital markets, small events in the United States can have large effects …