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I am a corporate and securities attorney in Seattle.  Over the years, I have represented numerous private companies, VC funds, placement agents, and others in venture transactions.  Today, much of my work involves capital markets transactions, public company SEC reporting, and related corporate and disclosure advice.  I have advised in dozens of initial public offerings, stock exchange listings, secondary offerings, public and private M&A deals, international transactions, PIPEs, spin-offs, going private transactions, and other transactions.

Yesterday, the SEC issued an enforcement order regarding Munchee’s token offering and SEC Chairman Jay Clayton released a general public statement on cryptocurrencies and ICOs.  For those who previously read our post about the SEC’s report in the DAO, much of this might not be a surprise – although the SEC staff did answer the call of discussing so-called “utility tokens.”

The SEC action against Munchee is notable to us because Munchee had at least some argument that its tokens had utility. As quick background, the Munchee app is built around a crowd-sourced restaurant review concept.  The Munchee app was built before the token offering.  The Munchee tokens (MUN) were designed to function as an internal currency for “use in the Munchee app for rewards and interactions.”  Munchee had a somewhat polished white paper, replete with disclaimers and carefully avoiding terms such as “ICO” and “investors,” and a management and advisory team with relevant technical and industry experience.  For those of us working in this space, this fact pattern is familiar – and did not feel like the edge cases that had previously caught the ire of the SEC, such as a massive loss of investor capital or a recidivist promising 1,354% profit in less than 29 days.

So what takeaways can other potential token issuers glean from the Munchee order? How much “utility” is needed?
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One of the more interesting phenomena in early-stage investing is the recent emergence of initial coin offerings (“ICOs”), token generation events (“TGEs”), or similar distributed ledger or blockchain-enabled means for raising capital. Much has been written, including by many skilled lawyers in the technology sector, about whether the tokens issued in these structures involve “securities” – and, frankly, some of it is unhelpful. Hungry for something that seems like crowdfunding, but that actually works to raise meaningful capital for promising technology initiatives, many in the technology space really want these
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For some time now, corporate venture capital (CVC) has been a significant part of the funding ecosystem. According to Pitchbook, in 2016 alone over $20 billion was invested in 745 US venture deals in which CVC participated.  CVC is not a new phenomenon. In a post in April 2016, Pitchbook, noted that since the beginning of 2010, $125.57 billion has been invested in rounds involving CVCs. Over the past few years, much attention has been paid to the large investment amounts coming from CVCs and the growing
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Yesterday the SEC adopted rules intended to facilitate intrastate and regional securities offerings.  The SEC made general updates and modernized old Rule 147, the safe harbor exemption for intrastate securities offerings under Section 3(a)(11) of the Securities Act. The SEC also adopted a new exemption in Rule 147A, which differs from Rule 147 primarily in that it expressly permits general solicitation and does not require the issuer to be formed in the same state as its principal place of business and investors.  This should allow Rule 147A to work more effectively with state-level crowdfunding exemptions.  (We have previously blogged about the challenges of crowdfunding under Rule 147.)

The SEC also revised Rule 504 to increase the aggregate offering amount limitation from $1m to $5m and to add “bad actor” disqualifications (aligning it with recent updates to Rule 506). In addition, the SEC repealed the little used and now largely redundant to Rule 505.

These rules have various effective dates tied to publication of the rules in the Federal Register, which will likely occur next week:

  • Revised Rule 147 – 150 days after publication in the Federal Register
  • New Rule 147A – 150 days after publication in the Federal Register
  • Revised Rule 504 – 60 days after publication in the Federal Register
  • Repeal of Rule 505 – 180 days after publication in the Federal Register


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The Division of Corporation Finance of the Securities and Exchange Commission has announced that “Tandy” representations are no longer needed in filing review correspondence.

If you have been involved in filing a registration statement any time after 2004, you have probably seen Tandy language.  Named after Tandy Corporation, the first company to receive a letter requesting this language, Tandy representations required, in the event that a company requested acceleration of the effective date of a registration statement, to acknowledge in writing that:

  • should the SEC or the staff,


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The SEC has updated the net worth threshold for “qualified clients” from $2.0 million to $2.1 million, effective August 15, 2016.

Section 205 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) generally prohibits a registered investment adviser from entering into an advisory contract that provides for compensation to the adviser on the basis of a share of capital gains upon or capital appreciation of funds of an advisory client.  This prohibition on “performance-based fees” prohibits compensation arrangements commonly used in fund vehicles, such as “carry”
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Data breaches are expensive. They cost an average of $5.4 million each to US companies in 2011 for mitigation and remediation alone, while also causing significant harm to brand and reputation.  The first 24 hours after you discover a breach are critical to restoring security, minimizing harm, obtaining and preserving evidence and complying with contractual and legal obligations.  Read here for tips on responding to a breach.
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The PCAOB has adopted new rules and accompanying amendments to auditing standards, which require audit firms to disclose the names of each audit engagement partner, as well as information regarding other audit firms that participated in any audit of a public company. The new rules are intended to provide investors with more information about the partner and firms involved in the audit in order to facilitate evaluating audit quality, and to incentivize auditors to organize audit teams carefully.

The new rules will require auditors to file with the PCAOB a new Form AP, Auditor Reporting of Certain Audit Participants, for each issuer audit, disclosing:

  • The name of the engagement partner;
  • The names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5% or more of the total audit hours; and
  • The number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours.


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Every so often a public company finds itself unable to file periodic reports for a protracted time.  For example, a company may upgrade auditors and the new firm may advise of the need to re-audit prior years, which can take significant time.  Until there is a reliable starting point for financial statements, new filings are in limbo.  As time marches on, the older missed filings have less and less signficance to investors but would still entail the same amount of effort and expense to complete as any periodic report.

Over
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The SEC has proposed rules requiring listed issuers to adopt and comply with written “clawback” policies. These policies would need to provide that, if a listed issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, then the issuer will recover the amount of any incentive-based compensation erroneously awarded to an executive officer. The listed issuer would also be required to disclose its clawback policy, disclose information about actions taken pursuant to its policy, and file its policy as an exhibit to its annual report.
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