Schwartz on Crowdfunding

Crowdfunding Securities, by Andrew A. Schwartz, University of Colorado Law School, was recently posted on SSRN.  Here is the abstract:

A new federal statute authorizes the online "crowdfunding" of securities, a new idea based on the concept of "reward" crowdfunding practiced on Kickstarter and other websites. This method of selling securities had previously been banned by federal securities law but the new CROWDFUND Act overturns that prohibition.

This Article introduces the CROWDFUND Act and explains that it can be expected to have two primary effects on securities law and capital markets. First, it will liberate startup companies to use peer networks and the Internet to obtain modest amounts of capital at low cost. Second, it will help democratize the market for financing speculative startup companies and allow investors of modest means to make investments that had previously been offered solely to wealthy, so-called “accredited” investors.

This Article also offers two predictions as to how securities crowdfunding will play out in practice. First, it predicts that companies that sell equity via crowdfunding may find themselves the subject of hostile takeovers (though the founders of such companies can easily avoid that outcome if they act with a little foresight). Second, it predicts that issuers may prefer to crowdfund debt securities, such as bonds, rather than equity. The Article concludes with a few thoughts on the SEC’s implementation of the Act in light of the potential for fraud.

Consulting Work at New York Financial Institutions

Deloitte Financial Advisory Services agreed to a one-year suspension from consulting work at financial institutions regulated by the New York State Dept. of Financial Services because of alleged misconduct during its consulting work at Standard Chartered on anti-money laundering issues.  It also agreed to make a $10 million paymment and to implement a set of reforms designed to address conflicts of interest in the consulting industry.  CUOMO ADMINISTRATION REACHES REFORM AGREEMENT WITH DELOITTE OVER STANDARD CHARTERED CONSULTING FLAWS

According to the press release, in 004, Standard Chartered executed an agreement with the New York State Banking Department and Federal Reserve Bank of New York, which identified several compliance and risk management deficiencies in the anti-money laundering and Bank Secrecy Act controls at Standard Chartered's New York branch. The agreement required Standard Chartered to retain a qualified independent consulting firm to review anti-money laundering issues at the bank. Standard Chartered engaged Deloitte to conduct that review.

DFS’s investigation into Deloitte’s conduct during its consultant work at Standard Chartered found that the company:

■Did not demonstrate the necessary autonomy required of consultants performing regulatory work. Based primarily on Standard Chartered's objection, Deloitte removed a recommendation aimed at rooting out money laundering from its written final report on the matter to the Department. The recommendation discussed how wire messages or “cover payments” on transactions could be manipulated by banks to evade money laundering controls on U.S. dollar clearing activities.

■Violated New York Banking Law § 36.10 by disclosing confidential information of other Deloitte clients to Standard Chartered. A senior Deloitte employee sent emails to Standard Chartered employees containing two reports on anti-money laundering issues at other Deloitte client banks. Both reports contained confidential supervisory information, which Deloitte FAS was legally barred by New York Banking Law § 36.10 from disclosing to third parties.

SEC Chair Says Agency Will Require Admissions in Some Settlements

It has been widely reported that SEC Chair White stated that the agency will seek admissions in settlements in certain cases, because "public accountability in particular kinds of cases can be quite important."  Reuters, UPDATE 2-U.S. SEC to seek admissions in some settlements -White

Although described as a big change in enforcement policy, a majority of cases still will be settled without requiring any admissions from the defendants.  Since becoming SEC Chair, there has been speculation about whether White, a former prosecutor, would change the "neither admit nor deny" policy.  Senator Elizabeth Warren has pressed the SEC for details on its settlement policy.  Meanwhile, the Second Circuit has not yet issued an opinion in its review of the SEC and Citigroup settlement, which Judge Rakoff refused to approve because he had no basis for determining the fairness of the settlement.