Financial Technology (fintech) is a catch-all term to describe new technology used to improve and automate financial services. Although the concept has existed for some time, breakthroughs in blockchain and other distributed ledger technology, artificial intelligence, quantum computing, and biometrics have accelerated the rate of change. This recent evolution has created an influx of a broad range of startups with diverse business models looking to gain market share or offer new products or services.^[1]

Similar to other industries that have reached this stage in their development cycles, fintech will likely experience an increase in M&A activity as the industry consolidates and incumbent companies look to capitalize on emerging disruptive technology to improve the financial services they provide through a buy-or-build model. Deal lawyers need to be keenly aware of industry-specific risks to engineer transactions that maximize value and ensure that their clients receive a commensurate share of the gains.

Mechanisms to Reduce Transaction Costs in M&A Deals

Representations and warranties (reps and warranties)—along with their associated disclosure schedule, indemnifications, covenants, conditions to consummate the deal, and earn-outs—are ubiquitous in M&A transactions as means to contractually reduce information asymmetry, efficiently allocate risk, and minimize moral hazards between the buyer and seller. In the hands of a skilled transactional lawyer, these tools and mechanisms have the potential not only to sway the allocation of gains from a transaction in favor of their client but to increase the deal’s value net legal fees by reducing transaction costs and helping to close the valuation gap between the parties.^[2] As such, deal lawyers can play an integral role in the fintech ecosystem’s development by helping to facilitate value-creating transactions and the efficient use of capital in the industry.

Along with information provided in the diligence process, representations (statements of facts about a business’s past or present operations) and warranties (promises about future business operations) help minimize information gaps between the buyer and seller in a transaction. To enforce the reps and warranties, acquisition agreements typically contain an indemnification clause in which the breaching party compensates the non-breaching party for losses or damages sustained from the breach. Drafted carefully, indemnity provisions create an incentive structure for the parties to accurately disclose material information to each other, allowing the parties to allocate risk efficiently.

Additionally, the parties to a transaction ordinarily enter into a set of covenants in which the parties promise to take or not to take certain actions before and after closing to preserve the anticipated value of the deal gleaned during the diligence process. Unless a deal is structured as a simultaneous sign and close, many acquisitions will have a significant gap between when the acquisition agreement is signed and when the transaction is closed. Covenants help mitigate the risks between signing and closing and the risks following the consummation of the transaction by incentivizing the parties to refrain from taking unusual risks that might jeopardize the value of the deal.

Lastly, acquisition agreements generally contain a set of conditions that must occur before the parties are obligated to close the deal. Two customary pre-closing conditions are (1) that the parties remain in compliance with the pre-closing covenants and (2) that the reps and warranties remain true and accurate as of the closing date. Additionally, the indemnification clause typically includes breaches of the conditions as a cause for compensation. The pre-closing conditions, along with the indemnification clause, provide a powerful incentive for the parties not to breach the terms of the agreement while the transaction is being consummated and help to reduce transactional costs.

Although deal lawyers have many tools to help reduce transactional costs and facilitate agreement on key issues, parties often disagree on the prospective value of the target business, creating a barrier to what would otherwise be a value-creating transaction. To help bridge the valuation gap, earn-outs or deferred payments provide a valuable tool to help the parties reach an agreement. Earn-outs, when appropriately structured, can benefit both parties, minimizing risk and providing an incentive for management to continue working diligently to achieve agreed-upon benchmarks. As such, the seller has the opportunity to receive the full value for its business, and the buyer can protect itself and ensure that the asset performs as anticipated.

The reps and warranties, disclosure schedules, indemnification provisions, and closing conditions work in tandem in M&A deals to reduce transaction costs by helping to minimize information asymmetry between the negotiating parties and allowing them to efficiently allocate risks, price the deal, and plan for future operations. Along with these mechanisms, deal lawyers have various levers at their disposal to calibrate a party’s risk exposure—particularly knowledge, materiality, scope, and time qualifiers. These mechanisms and levers are essential for transactions in sectors fraught with risk and uncertainty.

The Fintech Industry’s Idiosyncratic Risks

The framework above of the mechanisms and levers deal lawyers use to facilitate efficient capital asset transfer is by no means exhaustive. Rather, this framework illustrates the potential for transactional lawyers to add value to deals and the fintech ecosystem by engineering efficient transactions to help foster synergy and economies of scale in the fintech industry.

The fintech ecosystem is vast and encompasses an extensive range of businesses offering various products and services, ranging from digital payment platforms, robo-advisors, non-fungible tokens, and digital currencies to digital lending platforms. The variety of idiosyncratic risks in the fintech industry is equally broad, including regulatory uncertainty, fintech companies’ heightened operational risks stemming from handling consumer financial data, the volatility associated with certain crypto assets, cybersecurity risks, and unique intellectual property risks. These risks can create tremendous friction in the deal-making process; however, well-crafted deal documents can help mitigate these risks and facilitate the efficient transfer of fintech assets.

For instance, cybersecurity and data breach issues are prevalent in the fintech industry, giving rise to data privacy risks. Reps and warranties from the seller regarding IT and data security policies, historical breaches, and compliance with regulatory obligations (along with indemnifying the buyer for breaches of those reps and warranties) are instrumental to reducing information asymmetry between the parties and efficiently allocating data privacy risks associated with handling sensitive customer information.

Further, buyers of fintech assets should consider including in the deal documents disclosures of and indemnification from the use of open source software in the development of business technologies of the seller. This can mitigate the risk that the source codes of the seller’s products derived from an open source software could be required to be distributed or disclosed to the general public, which could materially reduce the value of the fintech asset.

The deluge of fintech activity has garnered an influx of regulatory attention at the federal, state, and international level,^[3] as evidenced by the President’s recent Executive Order 14067 on Ensuring Responsible Development of Digital Assets (EO).^[4] The EO provides an excellent example of the litany of regulatory risks in the fintech industry, as it requires a number of federal agencies to submit reports on various issues that directly impact fintech companies’ operations. The issues covered include consumer and investor protection, data privacy and security, preventing illicit finance (AML/CFT/KYC), financial inclusion and stability, and central bank digital currencies (CBDCs). Notably, the EO does not enact any explicit policies but rather establishes a coordinated, interagency process to deliberate the issues.

It will take some time for the federal government to operationalize a coordinated approach toward regulating digital assets. Additionally, state and international regulators add another layer of uncertainty and complexity to the fragmented fintech regulatory regime. The lack of regulatory clarity in fintech provides a prime opportunity for deal lawyers to add extraordinary value to transactions through the private ordering of regulatory risks.

Illustratively, the investor protection regulatory regime of digital assets has been in a state of flux as the SEC and CFTC attempt to provide regulatory guidance on the characteristics of digital assets that will deem a product a security or a commodity—a factor that could have a substantial impact on the value proposition of a project. However, the principle-based definition of securities does not bode well for bright-line rules. Central to the analysis are the nuanced and fact-intensive “reasonable expectation of profits” and “from the efforts of others” prongs of the Howey test.^[5]

Ordinarily, the seller will have more knowledge and information about the regulatory status of a business, whether through interactions with regulators or advice previously received from financial and legal advisers—information that would be difficult or expensive for the buyer to obtain and would have a significant bearing on the valuation of an asset. Carefully crafted reps and warranties coupled with a set of bespoke indemnity provisions can help reduce the information asymmetry between the buyer and seller to allocate the risks between the two parties appropriately and efficiently price the asset. Additionally, innovative use of earn-out provisions can be extremely useful to allocate regulatory risk among the parties efficiently—for example, making part of the consideration contingent on obtaining an SEC no-action letter.

Undoubtedly, the evolving fintech regulatory regime will tremendously impact fintech companies’ operational risks and create endogenous risks within the fintech industry. The EO prominently features the specter of a potential deployment of a US-issued CBDC. It is difficult to determine if the US will eventually launch a CBDC or its design function. However, the possibility of a US Federal Reserve-issued CBDC (US CBDC) for retail consumption creates competitive risks for privately developed payment systems and stablecoins. The design function for a potential US CBDC would have a consequential impact on the fintech ecosystem; particularly of interest would be whether or not the US CBDC undermines the two-tiered banking system and whether the US CBDC is interoperable with other forms of digital currencies.

A US CBDC has the potential to spur or stifle private economic innovation. Even improvements to the payment rails of our current Federal Reserve System can create risks for the value proposition of private payment system projects. Deal lawyers will need a deep understanding of the policy priorities of key regulators to help clients navigate the risks government action or inaction creates in the fintech ecosystem. Concretely, deal lawyers can play a vital role in helping clients manage the risk of acquiring a fintech asset susceptible to increased regulatory scrutiny, which could result in a material loss of value.

Lastly, many M&A transactions’ projected value derives from the patentability of a product. However, fintech products stemming from blockchain technology on a peer-to-peer network to validate transactions create endemic impediments to clearing the Alice/Mayo two-part test for patent subject matter eligibility. Particularly, the likelihood is high that a claimed invention derivative of blockchain technology will be deemed directed at an abstract idea, which the Supreme Court has held is not patentable as an implicit exception to the four statutory categories of invention pursuant to 35 U.S.C. §101. Although a claimant can overcome a judicially recognized exception if it recites additional features that amount to significantly more than the abstract idea, in light of the proliferation of Satoshi Nakamoto’s white paper, the code supporting blockchain technology is “well known in the art,” casting a hurdle for novel and non-obvious applications.^[6]

The United States Patent and Trademark Office (USPTO) has granted numerous blockchain patents. However, prosecuting a patent in the blockchain technology space is laden with risk. Although the USPTO has provided guidance on issues related to patent subject matter eligibility deriving from the Alice/Mayo test, applying the test in practice has been murky. Deal lawyers can play an instrumental role in helping allocate the risk associated with patent issues when structuring transactions to help bring the parties to closing.

Conclusion

Fintech is revolutionizing the way we transfer value and conduct commerce. Commensurately, the industry has attracted an enormous amount of capital and has surpassed a $3 trillion market cap. Along with the considerable capital inflow, the fintech industry has garnered the attention of regulators at the federal, state, and international level. As illustrated, the increased regulatory scrutiny and market dynamics engender significant risks and friction in deal-making, creating an opportune environment for deal lawyers to add tremendous value not just for their clients, but for the fintech ecosystem as a whole. Beyond having a keen understanding of deal structures, and the fintech industry’s idiosyncratic risks and market dynamics, transactional lawyers need impeccable judgment, foresight, and ingenuity to become trusted advisers when helping clients structure efficient transactions in a constantly evolving industry full of risks and opportunities.

1. Ishaan Seth, Zane Williams, Max Flötotto, Oliver Engert, and Sean O’Connell, “Realizing M&A value creation in US banking and fintech: Nine steps for success,” McKinsey & Company, November 15, 2019. Available at: https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/realizing-m-and-a-value-creation-in-us-banking-and-fintech-nine-steps-for-success. ↑

2. Ronald J. Gilson, “Value Creation by Business Lawyers: Legal Skills and Asset Pricing,” Yale Law Journal December 1984. Available at: https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=1956&context=faculty_scholarship. ↑

3. Andy Lorentz and Thomas Kost, “Fintech Laws and Regulations 2022,” Davis Wright Tremaine, LLP, September 8, 2022. Available at: https://www.dwt.com/-/media/files/blogs/financial-services-law-advisor/2022/09/fintech-laws-and-regulations-2022.pdf. ↑

4. Executive Order 14067, March 9, 2022. Available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/. ↑

5. Frantz Jacques, “Securities Law and Digital Asset Products,” Bloomberg Law, January 22, 2021. ↑

6. Chaudhry, Inayat. “The Patentability of Blockchain Technology and the Future of Innovation.” ABA: Landslide, March/April 2018. Available at: https://www.americanbar.org/groups/intellectual_property_law/publications/landslide/2017-18/march-april/patentability-blockchain-technology-future-innovation/. ↑

Tumultuous, exasperating, difficult, nerve-wracking, and frustrating are all apt descriptions of the 2022 SPAC market. We’ve summarized some of its ups and downs in our year in review blog post from October and have touched on them again in our December podcast with Doug Ellenoff.

In this article, we’ll examine the hard data, which, in some cases, is yielding surprising and—dare we say it—positive trends and conclusions.

SPAC Lawsuits by the Numbers

In 2021, there were 199 closed de-SPAC transactions, a number that is almost double the 102 de-SPACs that closed in 2022. In 2021, we observed 33 securities class actions (SCAs), which were filed following 2020, a year with only 64 closed de-SPACs. Based on the average time after the merger (nine months) or the SPAC IPO (22 months) that it takes for an SCA to materialize, we were expecting a much higher number of SCAs in 2022. But, in fact, only 24 SCAs were filed in 2022—a 27% decline from 2021 numbers.

Reasons for Decline in SCAs

What could be causing the decline in the number of SPAC securities class action lawsuits? First is the increased sophistication of SPAC market participants, including SPAC teams and their advisors, over the last two years. This sophistication grew out of both new, more experienced teams and advisors entering the market and out of the increased experience of all those teams and advisors as the SPAC rush of 2020 and 2021 progressed. Many ended up handling more SPAC transactions, both on the IPO and the de-SPAC side, than they ever had before, and, naturally, they learned from previous missteps. This is the so-called self-correction that we referred to in our previous posts and podcasts.

The second reason for decreased litigation volume is the overall decline of the financial market in 2022. Many companies, including those that went public via a traditional IPO and a SPAC, have been experiencing disappointing performance. When the entire market is hurting, it is difficult for a plaintiff’s attorney to claim that one particular team or merger did particularly badly.

The third reason could be the proposed SEC rules regarding SPACs, which came out in March 2022. Even though these rules are still not finalized, many adopted them as a playbook and quickly adjusted their disclosures and transactions to comply.

SPAC Litigation Compared to SPAC Activity

Taking a look at the number of SCAs and the number of de-SPACs in each year leads to the interesting graph below. Although some SPACs and their targets were sued prior to the completion of the merger, the majority of SPAC-related SCAs occur post-merger. It typically takes a few months—nine months on average—after the merger occurs for a lawsuit to be brought. Understanding the lag between a SPAC merger and a lawsuit, it is interesting to see the decline not only in the absolute number of SCAs from 2021 to 2022 but in the number of SCAs relative to the number of completed mergers in each of those years.

Funky Suits

Of course, the SPAC SCA is not the only type of lawsuit that exists. We saw quite a few new types of lawsuits against SPACs in 2021 and a few more novel fact patterns that resulted in disputes in 2022. For example, we saw a few skirmishes around a merger termination fee when the SPAC team decided to keep the fee without sharing it with its investors (e.g., FAST Acquisition Corp., Concord Acquisition, and Pioneer Merger Corp.).

Other types of unusual suits that we had not seen many of in the past include:

• A suit by an executive of Digital World Acquisition Corp., a SPAC tied to Donald Trump, alleging fraud at the SPAC and asserting that the executive was frozen out of the deal.
• A suit against a parent of Quantum Fintech Acquisition’s target for sabotaging the target’s deal with the SPAC.

There have also been a few derivative (and some direct) actions filed against the D&Os of a SPAC for breaches of fiduciary duties in proceeding with a merger that later turned out to be unsuccessful. The usual themes for a derivative suit, which is typically filed in tandem with an SCA, include rushing into a transaction, failing to conduct proper due diligence, entering into a deal outside of the SPAC’s targeted industry, and the SPAC omitting information relating to potential dilutive effects of the merger.

Likelihood of Getting Sued

One of the questions we often get from clients is focused on the likelihood of their team or venture getting sued. The answer to this question is meant to assist the teams in deciding on the amount or type of the directors’ and officers’ (D&O) insurance they will ultimately purchase. The answer is not simple, but some recent data we collected may be instructive.

Companies that go public via a traditional IPO are more likely to get sued than mature public companies, and companies merging with a SPAC are more likely to get sued than those going public via a traditional IPO.

As a rough estimate, one can expect about 3% of companies that have been public for 10 years to become subject to an SCA. That number is significantly higher for newly IPO’d and de-SPACed companies. The reason is simple—new public companies are more likely to stumble out of the gate.

An interesting risk question is whether there is a difference in likelihood of a lawsuit for companies going public via a traditional IPO and those choosing the SPAC route. The answer is yes, and the graph below illustrates that difference.

Although there is indeed an increased risk of a lawsuit for companies going public via a SPAC rather than a traditional IPO, that differential in risk is not enormous.

Settlements

Now let us turn from lawsuits to settlements. There have been very few publicly disclosed settlements, and some of them did not stem from an SCA, so it is very difficult to draw conclusions about trends. The ones that made the news include:

• Akazoo: A SCA settlement totaling $38.8 million in October 2021. This action involved bad diligence and fraud.
• Triterras: SCA settlement of $9 million in April 2022. The action was filed after a short seller report raised issues with disclosures about a related party.
• Multiplan: A direct-action breach of fiduciary duty claim that settled for $33.75 million in November 2022. After a short seller report raised issues with the company’s largest customer, the suit was filed in Delaware. The judge denied the motion to dismiss, and the parties settled.
• TradeZero: Private action settlement of $5 million in December 2022. A SPAC (Dune Acquisition) entered into a merger agreement with TradeZero. The merger fell apart, and Dune sued TradeZero.

It is worth remembering that outside of the actual settlement amounts, some of which were covered by a D&O insurance policy in the above cases, the defendants had to also pay substantial attorney fees. When deciding on the limit of a D&O policy, it is worth factoring in the potential costs of the attorney fees, which will be due whether or not the lawsuit ends up being frivolous or ultimately gets dismissed.

Regulatory Enforcement Actions

The other piece of the risk puzzle is, of course, the risk of regulatory enforcement actions and investigations. With the SEC taking an openly hostile stance towards SPACs in 2022, many of us expected to see a barrage of SPAC-related investigations and enforcement actions. That expectation has not yet been realized. While there have been a few investigations reported, there have been fewer than a handful of enforcements. Here are some examples that made the headlines:

• Momentus: Settlement total of $8.04 million in July 2021. The SEC alleged that Momentus and the founder misled Stable Road, the SPAC with which it planned to merge, about its technology and national security issues and that Stable Road had failed to perform its due diligence to identify those issues.
• Nikola: Settlement total of $125 million in December 2021. The enforcement was preceded by a short seller report and an SCA and centered around misleading statements about Nikola’s products, technical advancements, and commercial prospects.
• Perceptive Advisors: Settlement of $1.5 million in September 2022. This was the SEC’s first enforcement action against an investment adviser. The SEC charged the adviser with violating the Investment Advisers Act in connection with its involvement with SPACs.
• Gordon: Administrative charges settled against CEO in 2019 for $100,000. The SEC charged Benjamin Gordon, the former CEO of Cambridge Capital Acquisition Corporation, a SPAC, with failing to conduct appropriate due diligence to ensure that the SPAC’s shareholders voting on the merger were provided with accurate information concerning the target’s business prospects.

An interesting way to think about these settlements and enforcement actions is through the lens of the enterprise value of the SPAC business combinations that were completed in the last few years. The total expenditures on private settlements and government enforcement actions run in the millions of dollars and constitute a tiny fraction (likely no more than 0.05%) of the billions of dollars in enterprise value of closed de-SPACs.

Now it is true that SEC typically takes several months—if not longer—to bring and conclude an enforcement action. Considering that the SPAC market went into overdrive in late 2020 and two years have already passed since then, it is interesting that the SEC’s enforcement division has not been able to locate more examples of situations worth pursuing. Could it be that aside from the less than a handful of egregious cases that have been flagged thus far, the rest of the SPAC market teams and deals are operating within regulatorily acceptable parameters?

Update on the D&O Insurance Market

All of the above data is interesting not only in an academic sense. It has real implications for the risk and risk mitigation decisions that SPAC sponsors, their target companies, investors, and deal teams make. Those decisions inevitably involve decisions on the size and structure of each outfit and team’s directors and officers (D&O) insurance. Higher risk yields lower availability of coverage and higher premiums. But aside from the risk itself, the availability and premiums are also dictated by the state of the overall insurance market.

After many months of an almost impossibly hard SPAC D&O market, substantially diminished deal volume both in the SPAC world and the traditional IPO world has caused many carriers to reconsider their stance. In the last few months, we have witnessed a palpable easing of terms and even of pricing. Of course, carriers are keeping a close eye on each new case and enforcement action. However, if litigation and enforcement trends continue to hold at the current level or decline further, we are likely to enjoy a period of reasonable D&O insurance pricing for SPACs in 2023.

An earlier version of this article appeared in the Woodruff Sawyer SPAC Notebook.

The past three years have been fraught with challenges for law firms and early-career attorneys. Demand for legal services has continued to expand, and the need for legal talent to help meet that demand has been at an all-time high. The market for associates has been incredibly hot with escalating salaries, big signing bonuses, and the offer of more flexibility around where associates can work than ever. However, firms have struggled with managing and developing attorneys in a remote and hybrid workplace. In a profession that leans heavily on an apprenticeship model for development, many senior practitioners are spending less time in the office and have not significantly shifted the way that they work with their junior counterparts to match the development that would have happened in a pre-pandemic, principally in-person work environment.

The lag in associate professional development (and consequential poor work product and less than ideal professional conduct) has not been met with the consequences and repercussions that those now in partnership and leadership would have experienced when they were junior attorneys.

And recent surveys say that many of these well-paid, flex-working, and highly sought-after early-career attorneys are not happy. They report feeling isolated and not being meaningfully connected with peers and colleagues in this remote work environment. They do not see how the work they are doing relates to the bigger picture and the career they want for themselves.

Today it is more important than ever for associates to take the lead in the progress of their professional and career development. With a looming recession, we are already seeing firms making cuts. Here, we review things associates can do now to improve their experience at work and ensure they avoid being on the list of people considered for layoffs if (when) things slow down.

Take ownership of your work and seek to add value

As an associate, you’ve been told to think of the firm’s partners as your clients. This means that you should be thinking about how your work can make a partner’s life easier. When you are given an assignment, avoid treating the work just as a task to be completed so you can move on to another task. Start to think like a partner; understand how the assignment fits into the larger client strategy, and take ownership of the work you are assigned. Look at deadlines and plan your time accordingly, be proactive, and ensure what you are working on is seen all the way through. “Your ownership shouldn’t end when you send a draft to the partner in an email,” said Vanessa Widener, managing partner and civil litigation attorney at Anderson, McPharlin & Conners LLP in California. “I get so many emails every day, it is likely I may not see something right away, so an associate that follows up stands out as a go-getter and is highly appreciated.”

To be an appreciated team member, learn partners’ styles and preferences. When it comes to communication, ask at the onset how they prefer to be communicated with: Do they want you to just call when you have a question, send a text, ask via email, schedule time to discuss? Do they have a writing style you can learn from their redlined drafts? Do they prefer single spaces after sentences, or do they avoid using adjectives or adverbs? “The associates that I enjoy working with the most write intentionally ‘for me,’” said Mark T. Cramer, shareholder in Buchalter’s Los Angeles office and chair of the class action practice group. “They know what edits I am going to make; they know if they start a sentence with ‘however’ I am going to change it to ‘but,’ so they use ‘but’ when they write for me. It shows me that they care and they are learning, and that really differentiates them.”

Communication is key when seeking to add value. The partner (and most definitely the client) won’t be happy to learn you spent ten hours researching something that the partner has the answer to on their desk. Managing expectations and facilitating regular communication are necessary to provide the level of service that will make you stand out. If you are unsure about something, ask a senior person, but do not wait and do nothing. “I’d rather rein someone in than have to prod them like a wet noodle,” said Cramer.

Add value by anticipating what needs to happen next. Josh Wurtzel, civil litigation partner at Schlam Stone & Dolan in New York, suggests: “If a motion to dismiss comes in, don’t wait for the partner. If you haven’t heard from anyone, read through everything, then make a call to the partner, give your suggestions on how you think it should be approached, and offer to write the first draft opposition.” When you are asked to do research, go the extra step and come back with what the law is and how it applies to the case, along with your recommendations for the approach moving forward. “Even if your suggestions are not 100% on point, people appreciate and recognize the value add and effort in that situation,” said Wurtzel.

Express your interest to learn, improve, and grow

Associates I work with sometimes worry that they will be perceived as overzealous or bothersome if they ask for help or feedback from the senior people they work with. I hear the opposite complaint from the partners I work with: If they notice the absence of questions and follow-up, they interpret it as either the associate feels confident, or they don’t care about improving. “If you are working on something that takes a good amount of time, make sure you talk with the partner to understand how your assignment fits in the bigger picture of what the strategy and objectives are for the client,” said Pooja Nair, partner and business litigator at Ervin Cohen and Jessup in Beverly Hills. “Expressing interest in learning should always be well received because ultimately the partner knows the work product will be better if you have a better understanding of the situation.” Make a point to ask questions and get feedback on your work. After a motion or contract is finalized, you should reach out to the partner to schedule a conversation to discuss and better understand the changes made and why they were made.

Identify areas where you would like to improve your skills, and then find professionals in your organization who have mastered those skills. “You can reach out to someone and say, ‘I hear you are amazing at depositions; I would love to sit in, I won’t bill for it,’ or ‘I think you are a fantastic writer; I would really love to work with you on something,’” suggests Cramer. It is likely the attorney will be flattered, and this kind of interaction will further develop the relationship. Plus, you will learn something you’re interested in, and the attorney you work with will likely feel invested in your success.

Build relationships

A huge benefit of regular physical proximity with colleagues is the opportunity to build familiarity and communicate often, which leads to connection and meaningful relationship-building. In other words, people at work get to know you and like you, and you get to know and like the people you work with. These relationships are avenues to improved learning of legal skills along with the inner workings and politics of a law firm and are critical in building a professional support system and ultimately true friendships. “Some of my best friends are people that I have met through work and have gotten to know over the last twenty-five years,” said Cramer.

With fewer in-person interactions available organically at law firms because of reduced in-office work expectations, as well as different preferences and changed habits around socializing in the office, associates need to take an expressly active role in creating opportunities to connect with peers and colleagues. To expedite these interactions, use technology to initiate relationships, so that when you do connect in person you can get the most out of those exchanges. Research the experienced people at your firm and identify things that you admire in their experience, background, or practice. Then you can reach out with a note like, “I am very interested in working with (X category of clients/Y type of matters/Z type of extracurriculars), and I see that you have had a lot of success in that area. If you are open to it, I would love to share some of my objectives and strategies around building my practice in that direction and would really appreciate hearing your thoughts. Are you available for a video call next Thursday or Friday?”

If you are working with a partner or a peer who is in the same region you are, suggest meeting in person for lunch/breakfast/drinks so you can get to know them a bit better. If you are attending a professional social event, invite a peer you would like to know better to come with you. Find out if a senior colleague you are working with on something is available to discuss the matter in person the next time they are in the office.

There are plenty of opportunities to connect in routine interactions, too. When you start calls or emails to review client matters, ask the partner about their weekend or their experience at that conference you know they attended. Look for opportunities to connect about something besides the work at hand. Mention the volunteer work or extracurriculars you are participating in, and share things that you care about. Show up to the events the firm puts together. Interactions at these events will be even more successful if you have made those initial introductions via email beforehand. Plus, you never know who you might end up talking to and about what. There are opportunities to connect in person that will start or bolster significant relationships that would not be possible otherwise, so be sure to show up so you can take advantage of them.

Develop unique expertise/knowledge that makes you essential

Wurtzel says the best way to ensure that your firm would not consider letting you go is to make yourself indispensable. “Be a critical person on the matter. Know all of the facts of the case—the procedural history, read all the deposition documents. Be on top of deadlines with a clear sense of where the case is going.”

Being of value to partners also means knowing how to effectively and efficiently solve their problems. If you know who internally to go to for help because they are good (paralegals, secretaries, other attorneys) and who it’s best to avoid because they will not be helpful, and where to find templates, and how to utilize and leverage the technology available, you can accurately estimate timelines and will be highly appreciated.

Look for a niche or distinctive expertise you can develop. There are a multitude of reasons why attorneys benefit when they build a niche expertise, and one of them is that when you are the go-to person at a firm for a specific type of matter or issue, it adds value for the firm’s clients and a benefit to the attorneys that will make it more likely they will want to make sure you stay at the firm.

Be visible

There is science behind the saying “out of sight, out of mind,” with a multitude of studies showing that physical and psychological distance are directly related. Attorneys who have not experienced the benefits that come with regularly working in close physical proximity with peers and colleagues may not recognize that they are losing out on opportunities to grow professionally. It is important to be a highly visible presence if you want to be known, recognized, and valued at your firm.

Building your reputation and visibility may happen by spending time in the office, but it is important to be increasingly intentional to get the most benefit out of now-reduced face time. Many associates report that when they go into the office no one is there, or the few people who are there are working with their doors closed. Associates can get more out of working in the office if they let people know that they are interested in connecting. Maximize your opportunities for face time, and schedule your days in the office around when your colleagues and peers will be there.

Be present and visible in video meetings; that means keeping your camera on, even if not everyone does. Moving to video instead of in-person meetings creates efficiency, but it is wise to treat these meetings with the same intention and objectives you would an in-person meeting. People should see you and hear you. Contribute, ask questions, and use the chat section to connect on a more personal level.

Use your growing niche to get exposure. “People notice when an associate takes the initiative to write or get involved outside of the firm; when it is clear an associate sees themselves as a leader,” said Nair. Nair started her career at a big firm and made a concerted effort to get involved in professional organizations outside of the firm. “Do things collaboratively with the firm, giving the firm exposure. Big firms will allow for that and eventually will encourage it, especially when it yields new or additional revenue. Beyond the short-term value for the firm, it’s vital that associates build their reputations for the long-term benefits to their careers.”

Cramer advises that when work eases up, associates should do things proactively to be visible or to improve themselves. “A dream day for me would be if a competent person came to me and said, ‘I am very interested in working on a class action advertising matter—do you have anything I can work with you on?’ And if I don’t at the moment, they suggest that we collaborate on an article and they take the lead on a draft. We’d get to work on something together, and it could likely lead to another thing… new work, attending a conference together, or another article.” Educate your colleagues on your expertise by sharing articles you’ve written and presentations you are giving on LinkedIn and internal channels, and be sure to bring it up in the conversations you are actively scheduling.

Be productive and professional

Treating partners like clients demonstrates your skill and ability to work with actual clients. Be sure to err on the side of being overly professional, especially in your communication. In emails, use greetings and sign-offs, complete sentences, and accurate grammar. Dress professionally if you are going to be on a video call or in-person meeting with colleagues; show up as if a client were going to be there.

Presentation is important, and revenue is essential. When a firm is preparing to make cuts, it is likely they will review hours billed to assess who is pulling their weight and creating economic value for the firm. If your hours are low, leadership will wonder if there is a reason none of the partners want to give this person work, or they may assume that partners are assigning the person work and this person is just not working enough.

Associates today can’t afford to wait for their firms to take the lead in their professional development. If you want to build a successful and fulfilling legal practice, you need to be more proactive and intentional than any associate before you. And as a junior professional interested in optimizing the experience of working at a law firm, you must prove you have what it takes to be a good lawyer and a valuable partner, and you must adapt to the professional expectations of the firm partners and clients. Even if markets don’t shift and demand for legal services continues to increase, when you take the actions mentioned here, you will gain better, more fulfilling work; make valuable connections and friendships; and advance more quickly in your career.

Technology companies in the payments space should pay close attention to the Federal Reserve’s (the Fed’s) upcoming launch of a long-awaited new payment system, the FedNow Service. The system will change the consumer payments landscape by providing a new instant payment alternative to existing retail payment rails.

It is rare for the U.S. central bank to build a wholly new payment rail, and importantly, the federal government has also announced its backing for instant payment systems. The FedNow Service promises to both pose challenges to fintech companies whose business models depend on activity over existing payments rails and offer key new opportunities to innovators in the space. These new drivers and risks will be important considerations for many players in the market and critical to their success.

The Fed’s Instant Payments Platform

An instant payment is a new type of payment from one bank account to another, where the recipient receives final funds in near real time, enabled by immediate interbank settlement of the payment. This means there is no buildup in interbank obligations, and end users can instantly send and receive money. This is an improvement to payments via credit or debit cards and automated clearinghouse (ACH), which come with higher costs or delays to receiving final funds.

FedNow, expected to launch between May and July of this year, will be the central bank’s new core instant payment infrastructure. It will process retail payments in real time, twenty-four hours a day, 365 days a year, with funds made available immediately for use by the payment recipient. Eligibility to participate in the new system will generally be limited to U.S. banks; these banks, in turn, would offer instant payment services to individuals and businesses. The new system is a much-needed upgrade to the national infrastructure for retail payments, which is currently closed on weekends and can at times take several days before funds are available. The Fed’s ultimate aim is to give consumers and merchants faster access to their funds and greater flexibility to manage cash flow, at low cost and with reduced payment risk.

A key milestone was the Fed’s October 2022 publication of the legal terms and conditions governing FedNow transfers, which contain granular legal details about the service. These terms reveal important shifts to the status quo and critical ways the FedNow Service will impact the competitive outlook for retail payments, especially for fintech companies.

Challenges and Opportunities for Technology Companies

The Fed’s launch of FedNow this year is significant because it will enable banks of any size to offer convenient instant payments with nationwide reach. This will alter the retail payments landscape in three critical ways:

FedNow will challenge some major players in the payments industry: Instant payment systems like FedNow may ultimately prompt companies that depend on revenue from activity over existing payment rails, such as fintechs and partner banks that rely on credit or debit card interchange fees, to rethink their business models. It will similarly impact established nonbank providers of peer-to-peer payment services, such as dominant fintech companies that offer alias-based payment services (which allow senders to more conveniently make payments using only the email address or cell phone number of the recipient, without having to know their bank account information). Understanding the relative strengths and limitations of instant payments will be critical for both types of entities to adapt.

In addition, emerging digital asset payment rails, such as stablecoins and cryptocurrencies, may appear risky compared to payments over FedNow. To address this problem, it will be even more critical for companies offering these digital asset-based products to adopt robust legal foundations, risk-based measures to ensure regulatory compliance, and appropriate controls to manage operational risk.

FedNow will offer a fast, low-cost payment rail for digital platforms: The Fed’s legal terms and conditions for FedNow generally limit eligibility to banks, but e-commerce merchants and other digital marketplaces that have accounts with banks participating in FedNow can also take advantage as recipients of instant payments. If these merchants and marketplaces enable an instant payment option that a customer can select when purchasing goods or services online, they would have a significantly lower-cost alternative to traditional credit and debit card rails.

Digital wallet companies and payment platforms could similarly leverage instant payments via FedNow to improve customer offerings. Consumers and businesses will be able to immediately fund and defund wallet balances at low cost. For example, they can instantly move funds sitting in a digital wallet to an interest-bearing or wealth management account to more efficiently manage money, or immediately fund the wallet to make an in-store purchase without a card.

Likewise, electronic billing and pay vendors should take note that bill pay is among the core use cases the Fed has pitched for FedNow. Instant settlement of bill payments means that consumers and businesses can conveniently move money immediately from their own accounts to biller accounts, at any time.

Fintech companies will have a new central bank platform to provide innovative consumer and enterprise services: The Fed’s approach to designing and growing FedNow is new and envisions an efficient, open platform for technology companies to innovate and create ancillary services, end-user interfaces, and back-end processing support. A range of fintech companies and service providers (such as payment processors, mobile and online banking platform providers, payment hubs and gateways, and bill pay service providers) can take advantage of this early opportunity to contribute to the Fed ecosystem’s development.^[1]

Why This Matters

Importantly, the U.S. Department of the Treasury has endorsed the adoption of instant payment systems in its recently issued report on “The Future of Money and Payments,” encouraging U.S. government agencies to use instant payment systems where appropriate. As history has shown with the growth of ACH payments, participation by U.S. government agencies in a payment system drastically amplifies that system’s ability to scale and reach ubiquity.^[2] While it may take time for consumers and businesses to change deep-rooted payments behavior, the government’s support makes FedNow and instant payments well worth watching—not just for banks that are eligible for the service, but also payment processors, end-user interface providers, and other fintech companies.

Takeaways

There is a critical role for technology companies in the growing U.S. instant payments space: by rolling out the end-user interfaces needed to make instant payments convenient and safe, by offering the processing services that many banks rely on, or by integrating instant payments into platforms and products that drive the digital economy. Fintech companies that intend to take advantage of the faster movement of money through this new national payment rail will need a solid understanding of the service’s key features, the areas available to innovate and offer tailored functionality within the bounds of FedNow’s legal terms, and, importantly, the regulatory compliance obligations and their interplay with payments law, such as the Uniform Commercial Code.

1. The Fed itself has recognized the importance of the contributions of highly motivated and engaged technology companies and service providers in its outreach campaigns. Among other things, the Fed has created an Ecosystem Accelerator Group to promote engagement with these service providers and a Service Provider Showcase to connect service providers with FedNow banks. ↑

2. Indeed, Treasury notes in its report: “In settings where appropriate, U.S. government agencies should consider and support the use of instant payment systems. The U.S. government sends and receives millions of payments per day. Use of instant payment systems by U.S. government agencies could promote the expedient distribution of disaster, emergency or other government-to-consumer payments, potentially providing more rapid support for underserved communities.” ↑

The key challenge for regulating crypto assets is whether they can be classified as commodities or securities and, hence, whether the U.S. Securities and Exchange Commission (“SEC”) and/or the Commodity Futures Trading Commission (“CFTC”) has oversight. The collapse of FTX has highlighted the need to set clear guidelines on how the CFTC and SEC should divide the regulation of crypto assets.^[1] Following the collapse of FTX, the CFTC’s chairman, Rostin Behnam, said that the CFTC had limited authority for enforcement action because it lacks direct oversight.^[2] He stated the “CFTC does not have direct statutory authority to comprehensively regulate cash digital commodity markets.”^[3] Behnam asked for “bills that contemplate shared responsibility for the CFTC and the SEC” so that “the SEC would utilize its existing authority and reporting regime requirements for all security tokens, while the CFTC would apply its market-based rules for the more limited subset of commodity tokens, which do not have the same characteristics as security tokens.”^[4] Classification of crypto assets and subsequent regulation are important factors in the market. This article demonstrates that market participants’ classification of crypto assets as securities (or not) has been consistent with SEC and CFTC enforcement actions, with the notable exception of Ripple (“XRP”).

Ripple’s price movement following the SEC’s 2017 disclosure of the guidelines to identify crypto assets that are securities was in line with Bitcoin and Ethereum—crypto assets that the SEC has ruled are not securities.^[5] Iconomi and other crypto assets with equity-like features experienced a more pronounced price decline than Ripple following the SEC’s guidelines disclosure. Despite arguments by industry participants that Ripple was “very unlikely” to be identified as a security by the SEC because “there is no expectation of profit (dividends or payouts) expected for Ripple holders,” the agency filed a lawsuit against Ripple in December 2020 for allegedly conducting an unregistered securities offering.^[6] Ripple’s status as a commodity or security, and whether the SEC or industry players are correct about it, will soon be resolved as a court decision is expected soon.^[7]

On July 25, 2017, the SEC issued an investigative report concluding that tokens sold by a decentralized autonomous organization that used blockchain technology were securities (“the DAO report”). The DAO report identified for the first time a crypto asset as a security and outlined the factors the agency would consider in determining whether crypto assets are securities. In the DAO report, the SEC stated that a key feature of a security is being an investment of money in which the investor has an expectation of profits based on the efforts of others regardless of whether the securities “are distributed in certificated form or through distributed ledger technology.”^[8] The release of the DAO report had a notable impact on the crypto market, which we examine in this article to compare the regulatory decisions to the views of market participants regarding the classification of the crypto assets. The figure below presents the volume of crypto assets trading in the days immediately before and after the DAO report was issued. Daily trading volume increased from $2.2 billion the day prior to the report disclosure to $3.8 billion the day that the report was released, about a 75% increase.

Volume of Crypto Trading Following the Release of the DAO Report

The impact of the DAO report on the prices of crypto asset differed in that some prices remained stable while others dropped by more than 20% in a single day. In the discussion that follows, we demonstrate that the price of crypto assets reacted to the DAO report in a manner consistent with the market’s views about the type of crypto asset at issue. That is, the prices of certain crypto assets dropped notably for tokens that were viewed by market participants as likely to be securities, while the reaction of other assets was less noticeable or completely absent.

In analyzing market views regarding the classification of the crypto assets, we relied on two articles by Steemit, among other sources. The 2017 Steemit article “Is Your Crypto Digital Gold, Gas, or Something Else?” classified several crypto assets into four categories: pegged coins, store of value coins, utility coins, and equity coins.^[9] We examined the crypto assets considered in the Steemit article and their classification to examine the price reaction to the DAO report on various crypto assets. The prices for crypto assets identified as pegged coins remained stable. Pegged coins are crypto assets that aim to peg their market value to some other assets, including the US dollar or the price of gold.^[10] The prices for crypto assets identified as equity coins declined by about 20% following the DAO report. Equity coins are crypto assets that grant ownership rights to the token holders from profits generated by a project or product.^[11] Iconomi is an example of a crypto asset identified as an equity coin, based on its white paper, which asserts that “ICN tokens represent ownership of the ICONOMI platform, allowing their holders to receive dividends and vote on ICONOMI related issues.”^[12] Price declines for crypto assets that are considered to be store of value or utility tokens were not as pronounced. The purpose of store of value coins is to serve as a medium for transactions.^[13] Utility coins are meant to offer additional network utility by providing access to resources to build block-chain-based applications or to execute smart contracts or provide access to remote computing power.^[14]

The figure below presents the average price decline on the date that the DAO report was released across all crypto assets which were classified in the Steemit article. It is unlikely that pegged coins and store of value coins would be classified as securities “given their strong currency-like characteristics,” and “it is equally apparent” that equity coins are securities.^[15] The Steemit article stated that it is less clear whether utility coins are securities or not.^[16] The price decline of the coins classified as utility coins following the DAO report is consistent with the market’s view on the classification of the crypto assets. The average price decline was only 0.7% for the pegged coins and 7.5% for store of value coins, but it was 15.1% for utility coins and 19.2% for equity coins.

Price Decline Following the Release of the DAO Report by Type of Crypto Asset as Classified by the Steemit Article

A second 2017 Steemit article, “Which Cryptocurrencies Will Be Regulated by the SEC/CFTC?” categorized a larger set of crypto assets as very unlikely, unlikely, unclear, likely, and very likely to be classified as securities per the SEC.^[17] The figure below presents the average price decline on the date that the DAO report was released across all rating categories established in the second Steemit article. The price decline following the DAO report is again consistent with the market’s view on the likelihood of crypto assets being classified as securities by the SEC. The price decline was 11.5% for crypto assets classified as very unlikely to be deemed securities, 14.4% for unlikely, 16.8% for unclear, 18.4% for likely, and 19.2% for very likely.

Differences in Price Decline Following the Release of the DAO Report as Classified by the Steemit Article

The figure above lists the crypto assets under each rating category as identified in the second Steemit article. We identify in bold the subset of crypto assets that were later included in an enforcement action by the CFTC or the SEC. Bitcoin, Tether, Ethereum, DogeCoin, and Litecoin were included in enforcement actions by the CFTC, which oversees commodities and derivatives. Each had been classified by the Steemit article as very unlikely to be deemed securities.

Ripple and BitConnect were included in enforcement actions by the SEC, which oversees securities.^[18] While BitConnect was given an unclear rating by the second Steemit article, Ripple received a very unlikely chance of being classified as a security by the SEC. Regarding BitConnect, the Steemit article stated:

It’s somewhat difficult to find information on how this coin works. We have not been able to find a white paper describing it. We suspect it would be considered a security as its purpose is to earn interest by paying it back to BCC developers, but it is very unclear.^[19]

Regarding Ripple, the Steemit article said, “At this time there is no expectation of profit (dividends or payouts) expected for Ripple holders. It is used as a value holder for transactions in the Ripple ecosystem.”^[20]

Conclusion

Since the DAO report release, the CFTC and SEC have conducted numerous enforcement actions. The agencies’ decisions on whether particular crypto assets were securities have been generally consistent with the market price reaction of the crypto assets following the DAO report with the notable exception of Ripple. Following the DAO decision, the market classified Ripple as “very unlikely” to be considered a security, and its price movement was in line with other crypto assets that were not considered securities using the same market classification, including Bitcoin and Ethereum.^[21] Nevertheless, on December 22, 2020, the SEC charged Ripple with conducting a $1.3 billion unregistered securities offering. ^[22] The SEC argued there was no significant use for Ripple other than as an investment. The agency argued that the first potential use Ripple claimed for the token—to serve as a universal digital asset for banks to transfer money—never materialized. The SEC further argued that to date, the only product that permits Ripple use for any purpose is on-demand liquidity (“ODL”). ODL allows for cross-border payments to be settled in seconds, not days.^[23] The SEC claimed, however, that ODL has gained little traction and that “ODL transactions comprised no more than 1.6% of XRP’s trading volume during any one quarter.”^[24] The SEC has repeatedly clarified that “merely calling a token a ‘utility’ token or structuring it to provide some utility does not prevent the token from being a security.”^[25] Both Ripple and the SEC submitted reply briefs in the ongoing lawsuit on December 2, 2022, and a court decision nears regarding whether Ripple can avoid the lawsuit.^[26]

As more information is disclosed about the various crypto assets, one can examine the price reaction to regulatory and litigation rulings to evaluate the likelihood that assets will be classified as securities, as reflected by the views of market participants.

The authors are with NERA Economic Consulting. The views in this article represent those of the authors and not NERA. Please do not cite without permission from the authors.

1. Fran Velasquez, Former SEC Official Doubts FTX Crash Will Prompt Congress to Act on Crypto Regulations, COINDESK, Nov. 16, 2022. ↑

2. Why Congress Needs to Act: Lessons Learned from the FTX Collapse: Hearing Before the S. Comm. on Agric., Nutrition, & Forestry 117th Cong. (Dec. 1, 2022) (testimony of Rostin Behnam, Chairman, Commodity Futures Trading Comm’n). ↑

3. Id. ↑

4. Id. ↑

5. William Hinman, Dir., Div. of Corp. Fin., Sec. & Exch. Comm’n, Remarks at the Yahoo Finance All Markets Summit: Crypto: Digital Asset Transactions: When Howey Met Gary (Plastic) (June 14, 2018). ↑

6. Basic Crypto, Which Cryptocurrencies Will Be Regulated by the SEC/CFTC?, STEEMIT, Aug. 14, 2017; Complaint, Sec. & Exch. Comm’n v. Ripple Labs Inc., Case No. 1:20-cv-10832 (S.D.N.Y. Dec. 22, 2020). ↑

7. Jessica Corso, SEC, Ripple Issue Final Salvos As Crypto Decision Nears, LAW360, Dec. 5, 2022. ↑

8. Press Release, Sec. & Exch. Comm’n, SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities (July 25, 2017). ↑

9. Basic Crypto, Is Your Crypto Digital Gold, Gas, or Something Else?, STEEMIT, Aug. 12, 2017. ↑

10. Id. ↑

11. Id. ↑

12. Id. ↑

13. Id. ↑

14. Id. ↑

15. Adrian Parlow, Securities Liability and the Role of D&O Insurance in Regulating Initial Coin Offerings, 167 U. PA. L. REV. 211, 223 (2018). ↑

16. Basic Crypto, Which Cryptocurrencies Will Be Regulated by the SEC/CFTC?, STEEMIT, Aug. 14, 2017. ↑

17. Id. ↑

18. Complaint, Sec. & Exch. Comm’n v. BitConnect, Case No. 1:21-cv-07349 (S.D.N.Y. Sept. 1, 2021). ↑

19. Basic Crypto, Which Cryptocurrencies Will Be Regulated by the SEC/CFTC?, STEEMIT, Aug. 14, 2017. ↑

20. Id. ↑

21. The Ripple price dropped by 8.7% following the DAO report, similar to the 7% decline for Bitcoin and the 9.7% decline for Ethereum and less pronounced than the 23.2% price decline for Iconomi. While Iconomi was deemed an equity coin by the Steemit article, Bitcoin was categorized as a store of value coin, and Ethereum was identified as a utility coin that also has store of value coin features. ↑

22. Jessica Corso, SEC, Ripple Issue Final Salvos As Crypto Decision Nears, LAW360, Dec. 5, 2022. ↑

23. Cross-Border Payments: Settlement in Seconds, Not Days, RIPPLE (last visited Dec. 29, 2022). ↑

24. Complaint, Sec. & Exch. Comm’n v. Ripple Labs Inc., Case No. 1:20-cv-10832 (S.D.N.Y. Dec. 22, 2020). ↑

25. The Roles of the SEC and CFTC: Hearing Before the S. Committee on Banking, Hous., & Urb. Affs. 115th Cong. (Feb. 6, 2018) (testimony of Jay Clayton, Chairman, Sec. & Exch. Comm’n). ↑

26. Id. ↑

This article is the first in a new series from the American Bar Association Business Law Section’s Rule of Law Working Group, exploring the intersections between business and the rule of law from a client perspective and discussing how attorneys can support businesses’ rule of law missions. The Business and the Rule of Law Client Diaries Series is looking for more businesses to feature. Readers working for businesses interested in the rule of law are welcome to get in touch.

1. Tell us about your company: Who are your founders? What is their vision for the company and, perhaps, the company’s vision for the world?

Jussi Vento, Volument Co-Founder and CMO: Volument is an insight-led, privacy-friendly web analytics tool designed to help anyone create more engaging content and curate better online experiences. We want to transform web analytics and make it accessible to everyone, not just experts.

Volument was started to solve a very specific problem: the internet is suffering from privacy issues, clutter, and bad usability choices. (Usability is a measure of how well a specific user in a specific context can use a product or design to achieve a defined goal.) Web analytics tools are supposed to improve usability. Instead, a fairly untested obsession with personal identity has led to data analysts stockpiling personal data without any clear goal in mind—adding to online clutter and undermining online privacy. We want to hit the reset button on web analytics to make it work for, rather than against, the internet.

Volument is a Finnish company. The idea for Volument came to Tero Piirainen when he counted the number of different report views inside Google Analytics. He felt frustrated by the poor user interface, information overflow, and significant privacy concerns. After creating jQuery Tools and Riot.js and co-founding Flowplayer and Muut, Tero set out to build a web analytics tool he didn’t hate. Lauri Heiskanen joined him as the company’s backend guru and second founder. Tero and I connected around a shared frustration with the impact that web analytics was having on the overall health of the internet. Tina Nayak joined as our fourth founder and CEO, infusing her passion for user-centered business development into everything we do. The four founders share a frustration with products that put marketing before design, an interest in helping people at all levels within an organization understand users and their needs, and a commitment to leaving the marketplace (and the internet) a little better off than when we found it by disrupting practices that don’t serve businesses or consumers.

2. When does law come into your thinking or your plans? How do you rely on the law/the rule of law?

Volument aims to make legal compliance with privacy regulations simple for start-ups and for small and medium enterprises; we are innovating to help people and businesses comply with data protection regulations. So law and the rule of law are very important to the work that we do. Law plays a huge role in helping us advance our aims–as much as a product like ours works to enhance legal compliance.

3. What is your business’s engagement with the rule of law, sustainability, and/or important social issues?

We see ourselves as a mission-driven business. We like to think that we are building a better way to understand how people interact with websites and ultimately make the internet a better place. We don’t necessarily use big-ticket ideas to describe what we do, so we don’t talk about “rule of law,” “sustainability,” or “DEI” too often. At the same time, if you attend any of our meetings, you will see a diverse team that expresses a genuine passion for equity and inclusion. Equally, we might not list “upholding the rule of law” as an action item on meeting agendas—but certainly we talk a lot about how conventional web analytics tools are gaming the internet against small businesses and everyday people and how we can fix that.

The meat and potatoes of all of the big ideas listed in the question matter deeply to us. Creating a more inclusive, safe, diverse, and sustainable digital world drives all aspects of the work we do—from the design choices we make, to the people we hire, to the other companies we partner with.

Oddly, it’s not a given that we will necessarily look to lawyers to help us advance our mission or broader social aims. We enjoy working with lawyers who can make the connection between the causes that drive our work and more theoretical concepts. We rely on our lawyers to understand our mission and broader aims, so that they can help guide us through the legal aspects of making our vision a reality. It also helps when lawyers know how to speak a language that we care about, one that encourages us to seek them out when we want to advance important causes.

Often, lawyers might miss the connection between the values that drive us and broader concepts, like the rule of law or democracy. Those kinds of lawyers are more interested in talking to us about bare-bones compliance and what we can and cannot do. So whether or not we get lawyers involved really depends on the kinds of lawyers we are engaging with.

4. How do you engage with lawyers, and at what stage of innovation? What part of your vision do you share with lawyers?

Law comes in right away for us because of the compliance-driven aspects of our mission. But lawyers, not necessarily. Lawyers and the law can be intimidating. So sometimes getting lawyers involved too early in any process can feel like more trouble than it is worth. Lawyers can be challenging to engage with because they use a lot of legal jargon. They also tend to assume that entrepreneurs don’t understand the law, which can be frustrating.

Trust is very important for us when we engage with lawyers. We tend to engage with lawyers throughout the course of the development of our products and services—especially for a product like Volument that aims to support laws. But we don’t always get what we need from a single lawyer. We talk to scholars, experts, regulators, and practitioners to work to build our own understanding of the issues. And that’s what we are looking for most often, to build our own understanding.

When we find lawyers who can see the underlying potential that all laws have for improving the business environment, we hold on to them. Especially for a product like ours, we want to understand not just the “what” of the law, we also want to understand the “why” of the law. Why are data protection regulations framed the way they are? What is the law trying to improve here? How is the law trying to make business work better? How is the law trying to make society function better? Using a more practical example, we would be interested in knowing not just that the law requires cookie banners but why cookie banners are required at all. We have asked many lawyers that question. To be honest, the quality of the answers varied—and even regulators gave us answers that were either plainly wrong or largely unsatisfying. Only a few lawyers were able to have a conceptual conversation with us about why a law exists and how it functions.

5. What advice would you give business lawyers on the best ways to partner with you to advance the causes you care about?

It’s always great if a lawyer understands the market. This feels like it should be non-negotiable, but it’s not something we find that we can take for granted. So for one, understand the market, and not just the Market with a capital “M” or general market conditions, but the ins and outs of the specific niche we are competing in—what is the product, who are our competitors, what will the market look like five or ten years from now.

Second, try to understand what it is that a business cares about, beyond the jargon of both law and business. It is important for lawyers to understand that entrepreneurs don’t necessarily chase profit. We think it’s more accurate to say that entrepreneurs chase dreams, and these dreams might have the potential to turn a profit—but the dreams themselves are rarely about profit. Profit is a currency; it’s a flex that innovators can use to communicate value. We can take our profit margins to capital markets to tell bankers and investors: look, we are doing something; something is happening. Help us. But it would be dangerous to imagine that profit is something that innovators use to describe their goals or measure the effectiveness of their products.

From an entrepreneur’s perspective, profit flows naturally from value. If you can think of a way to make something, anything, better than it was before, people will probably pay you for it. So it’s the people who are obsessed with tinkering and improving things who build profitable companies. It’s that drive to add value, to make things better, that really drives success.

We would advise lawyers to share in that drive to make things better, advise us from that drive, and keep that underlying drive in mind at all times. This might help them more easily connect important concepts that drive the law to the practical tasks of running a business day-to-day.

6. Any last comments?

Volument is beta-testing our web analytics tools. We are gradually inviting people to try our platform. If you’re interested to find out how Volument works you can sign up for early access on our website, or just reach out to me on LinkedIn (Jussi’s LinkedIn Profile) or email us at [email protected]. A single web analytics tool cannot ensure full legal compliance, especially when used alongside more conventional products and services. But Volument can help ensure that web analytics isn’t what holds back compliance.

A new Iowa Business Corporation Act was enacted last year. Like Iowa’s current corporation statute (the “Act”), the legislation (HF 844) is based on the Model Business Corporation Act (“MBCA”) developed by the Corporate Laws Committee of the American Bar Association.

The MBCA is the basis for the corporation statutes in the majority of states. Various updates to the MBCA have occurred from time to time, and Iowa has adopted amendments to the Iowa Business Corporation Act as a result.

In 2016, the ABA Corporate Laws Committee published a new edition of the MBCA. It is the first comprehensive revision since 1984 (which Iowa adopted in 1989). The 2016 edition is in part a restatement of the MBCA that includes all amendments made since the previous version, but it also makes stylistic and editorial changes that are clarifying and adds important and useful provisions based on developments in corporate law around the United States. The Corporate Laws Committee of the Business Law Section of The Iowa State Bar Association met over a three-year period to work on proposed legislation for Iowa that resulted in the new Act.

Highlights of the New Act

Remote-only meetings of shareholders

The new Act includes a provision allowing for remote-only shareholder meetings. The previous Act did not include such a provision. During the recent pandemic, Iowa business corporations had to rely on the governor’s emergency proclamations to conduct remote-only shareholder meetings. The new Act provides that unless the bylaws require a meeting of shareholders to be held at a place, the board of directors may determine that any meeting of the shareholders need not be held at a place and may instead be held solely by means of remote communication, provided that the corporation implements measures to: (1) verify that each person participating remotely as a shareholder is a shareholder; and (2) provide that shareholders have a reasonable opportunity to participate in the meeting, including an opportunity to communicate, and to read or hear the proceedings substantially concurrently with such proceedings, and to vote on matters.^[1]

The new Act also amends other Iowa entity statutes, including Iowa’s nonprofit corporation statute, cooperative statutes, and insurance statutes, to allow for remote-only member or policyholder meetings.^[2] The remote-only meeting provisions for the different types of entities (including business corporations) became effective upon enactment of the new Act.^[3]

Ratification of defective corporate actions

From time to time, a corporation may determine that, due to a misjudgment or oversight, certain actions may have been invalid. This could occur where there was an over-issuance of shares beyond the amount authorized in the articles of incorporation or where a transaction is within the corporation’s power but there was a failure of authorization as a result of procedural misstep. The new Act includes a ratification process that allows corporations to validate defective actions retroactively while fully protecting shareholder rights.^[4] The goal of these provisions is to protect the parties’ reasonable expectations as well as the shareholders’ rights and interests while securing compliance with Iowa’s corporate law. The ratification of defective corporate acts can be adjudicated by the courts as well as accomplished by the corporation itself. This process has proved to be extremely helpful to corporations in other states, including Delaware.

Director duties and liability/liability shield

Iowa’s current Act provides a description of the duties of directors, required standards of conduct, and standards of liability; these remain unchanged in the new Act.^[5] The effect of such a liability shield was the focus of a recent Iowa Supreme Court decision (Meade v. Christie, 974 N.W.2d 770 (Iowa 2022)), which is discussed in Stanley Keller’s article on recent decisions relevant to the MBCA. In addition, the previous Act authorized a corporation to include in its articles a provision that limits or eliminates monetary liability for any actions or failures to act subject to limited exceptions.^[6] The new Act retains these provisions and authorizes an additional liability shield. Under the new Act, a corporation may include a provision in the articles of incorporation that eliminates or limits any duty of a director to offer the corporation the right to a corporate or business opportunity before it can be pursued or taken by the director or other person.^[7] This provision is consistent with developments in LLC law and reflects an increasingly contractual or enabling approach to business law. Such a provision might be useful, for instance, with regard to a private equity investor that desires to have a nominee on the board but conditions its investment on limitation or elimination of the corporate opportunity doctrine because of the uncertainty about its application on account of the investor’s investments in multiple enterprises and specific industries. This provision also may be helpful in the situation of a joint venture or closely held corporation where the participants want to be sure that the corporate opportunity doctrine would not apply to their activities outside of the joint venture.^[8]

Officer’s duty to inform

Iowa Code section 490.842 continues to set forth the standards of conduct for officers, including the circumstances in which the persons on whom an officer may rely in discharging his or her duties. Under the new Act, the section is amended to require that an officer: (1) inform the superior officer to whom the officer reports, or the board of directors or the board committee to which the officer reports, of information about the affairs of the corporation known to the officer, within the scope of the officer’s functions, and known to the officer to be material to such superior officer, board, or committee; and (2) inform the officer’s superior officer, or another appropriate person within the corporation, or the board of directors, or a board committee, of any actual or probable material violation of law involving the corporation or material breach of duty to the corporation by an officer, employee, or agent of the corporation, that the officer believes has occurred or is likely to occur. A similar requirement is recognized in agency law^[9] and already imposed on directors.^[10]

Forum selection provision in bylaws

Under the new Act, a corporation is able to include in its bylaws a requirement that internal corporate claims be brought exclusively in a specified court or courts of Iowa or in any other chosen jurisdictions with which the corporation has a reasonable relationship.^[11] Still, such a provision may not prohibit bringing internal corporate claims in courts in Iowa, nor may it require such claims to be determined by arbitration. The term “internal corporate claim” is defined broadly to mean any of the following: (1) any claim that is based on a violation of a duty under the laws of Iowa by a current or former director, officer, or shareholder in such capacity; (2) any derivative action brought on behalf of the corporation; (3) any action asserting a claim arising pursuant to any provision of the Act, the articles of incorporation, or bylaws; and (4) any action asserting a claim governed by the internal affairs doctrine that is not included above. A forum selection provision can be an effective way for corporations to reduce litigation costs and enable Iowa courts to interpret Iowa law in the first instance.

Judicial determination of corporate offices and review of elections and shareholder votes

Under the previous Act, there was no provision for judicial review of elections and shareholder votes and determination of corporate offices. Under a section added by the new Act, the Iowa District Court has authority to determine the following issues: (1) the results or validity of an election, appointment, removal, or resignation of a director or officer of the corporation; (2) the right of an individual to serve as a director or officer; (3) the result or validity of any vote by shareholders; (4) the right of a director to membership on a board committee; (5) the right of a person to nominate or an individual to be nominated for election or appointment as a director, and (6) other comparable rights under the corporation’s articles or bylaws.^[12]

Domestication and conversion

The previous Act included provisions allowing for the conversion of a business corporation into another type of entity as well as the conversion of another entity into an Iowa business corporation. The new Act revises and relocates provisions authorizing conversion transactions, and it adds sections authorizing domestication, a procedure by which a foreign corporation can become an Iowa corporation or an Iowa corporation can change its jurisdiction of incorporation, assuming in each case the law of the other jurisdiction also authorizes the procedure.^[13]

Medium-form mergers

The previous Act included provisions for merger of a business corporation with another corporation or eligible entity, subject to shareholder approval. It also included a provision allowing for a merger without a shareholder vote when the acquiring entity owns more than ninety percent of the outstanding shares of the entity to be acquired. The new Act adds a provision to permit a “two-step” merger without a shareholder vote following a tender offer if sufficient shares are owned after the tender offer—namely, those owned before and as a result of the tender—to have approved the merger (typically, approval by a majority of the outstanding shareholder votes entitled to be cast).^[14]

Corporate records and reports

The previous Act provided rights to shareholders to inspect records. The new Act includes a comprehensive revision of the chapter on that subject to modernize shareholder access to information while protecting interests of the corporation. The organization of this chapter is improved and more comprehensive; importantly, the board can condition inspection upon agreement to confidentiality restrictions.^[15]

Benefit corporations

The new Act includes provisions allowing for the incorporation of benefit corporations in Iowa as well as the election of existing Iowa business corporations to become benefit corporations.^[16] Unlike an ordinary business corporation, which has been held to have shareholder primacy as a focus,^[17] a benefit corporation provides an option to mandate the interests of other stakeholders that are “known to be affected by the business of the corporation” to be at the same level as shareholders.^[18] The new Act contemplates pursuit “through the business of the corporation [of] the creation of a positive effect on society and the environment” as well as any other public purpose set forth in the articles of incorporation.^[19] Important in the analysis is not just what the corporation does but how it conducts its business and operations.^[20] The new Act includes provisions addressing the duties imposed on directors, required “benefit” reporting, and conditions for bringing any shareholder action.^[21] With the new Act, Iowa joins the nearly forty jurisdictions that have enacted benefit corporation statutes.

Official Comment

An important benefit of the MBCA is the Official Comment that may be used by practitioners and courts in interpreting and applying in practice various provisions and requirements in the MBCA. The 2016 Revision of the MBCA includes a new set of updated Comments. The Official Comment for prior editions of the MBCA is now out-of-date.

Unique IBCA provisions remain in statute

The new Act tracks the 2016 MBCA but continues to be tailored to reflect Iowa’s experience and preferences. As a result, the new Act includes non-MBCA provisions. These include the community interest provision that allows directors to consider interests other than shareholders’ interests when evaluating a tender offer or proposed business combination,^[22] the provision on business combinations with interested stockholders,^[23] the foreign-trade zone corporation provision,^[24] provisions on names and reinstatement following administrative dissolution,^[25] and provisions on filing of biennial reports.^[26]

Secretary of State business filings

In other states, including Delaware, the secretary of state’s office allows for pre-filing clearance review of documents as well as expedited filing services for a fee. These services are extremely beneficial to businesses of all types. Although not part of the MBCA, HF 844 includes provisions establishing these services with the Iowa Secretary of State’s office.

Conclusion

With the new Act, Iowa has a comprehensive and modernized statute that should enhance Iowa’s business climate and serve clients and their counsel well. In addition, by updating the Iowa Business Corporation Act, Iowa is able to continue to take advantage of a useful body of law that develops around the United States that will help increase the certainty and efficiency of corporate actions and corporate transactions.^[27]

This article originally appeared in the Winter 2022 issue of The Model Business Corporation Act Newsletter, the newsletter of the ABA Business Law Section’s Corporate Laws Committee. Read the full issue and previous issues on the Corporate Laws Committee webpage. It was adapted there from an article that was first published in “The Iowa Lawyer” (August 2021) and is reprinted with permission from The Iowa State Bar Association.

The views expressed in this article are solely those of the author and not Nyemaster Goode, P.C. or its clients. No legal advice is being given in this article.

1. Iowa Code §490.709. All Iowa Code citations are to citations in the new Act which, with the exception of the remote-only meeting provisions, become effective January 1, 2022. ↑

2. Iowa Code §§491.17, 515.25, 518.6A, 518A.3A, 499.27A, 499.64, 501.303A, 501A.807, 504.701, 504.702A, and 504.705. ↑

3. HF 844, §230(2). The enactment date was June 8, 2021. ↑

4. Iowa Code §§490.145 – 490.152. ↑

5. Iowa Code §§490.830 – 490.831. ↑

6. Iowa Code §490.202(2)(d). ↑

7. Iowa Code §490.202(2)(f). ↑

8. Model Business Corporation Act (2016 Revision), § 2.02, Official Comment. ↑

9. Restatement (Third) Agency, § 8.11 (Duty to Provide Information). ↑

10. Iowa Code §490.830(3). ↑

11. Iowa Code §490.208. ↑

12. Iowa Code §490.749. ↑

13. Iowa Code §§490.901A-490.935. ↑

14. Iowa Code §490.1104(10). ↑

15. Iowa Code §§490.1601-.1602. ↑

16. Iowa Code §§490.1701. ↑

17. Compare Iowa Code §490.1108A, which expressly allows a board to consider the interests of other stakeholders but does not require it. ↑

18. Iowa Code §§490.1701, 490.1704. ↑

19. Iowa Code §490.1701(2)(d). ↑

20. MBCA, §17.04, Official Comment. ↑

21. Iowa Code §§490.1704 and 490.1705. ↑

22. Iowa Code §490.1108A. ↑

23. Iowa Code §490.1110. ↑

24. Iowa Code §490.209. ↑

25. Iowa Code §490.1422. ↑

26. Iowa Code §490.1621 (currently, §490.1622). ↑

27. See Corporate Laws Committee, Model Business Corporation Act (2016 Revision), 72 Bus. Law 421, 430 (2017). ↑

The opioid epidemic that has gripped this country for decades has spurred more than 2,000 lawsuits and led to billions of dollars in damages. AmerisourceBergen Corporation (the “Company”), one of the “big three” wholesale pharmaceutical distributors, has paid over $6 billion in damages and incurred over $1 billion in legal fees in connection with its role in the crisis. In Lebanon County Employees’ Retirement Fund et al., v. Collis, et al., the Company’s stockholders sought to hold the Company’s directors and officers personally liable for those damages and fees. 2022 Del. Ch. LEXIS 358 (Del. Ch. Dec. 22, 2022).

The Defendants moved to dismiss the action, claiming that because the action was derivative the Plaintiffs were required, but failed, to satisfy the rigorous “demand futility” requirement of Court of Chancery Rule 23.1. Plaintiffs argued that demand was futile because each of the Defendants faced a substantial likelihood of liability. Id. at *40–49.

On December 22, 2022, Vice Chancellor Laster issued an opinion dismissing the action. While there is a plethora of cases addressing demand futility, the Court’s opinion in this case is notable because of the high-profile nature of the allegations, and the fact that the Court dismissed the case notwithstanding its finding that the allegations would ordinarily be sufficient to survive a motion to dismiss.

Plaintiffs’ first argument was that the Defendants breached their fiduciary duty of care by ignoring several red flags that demonstrated the Company was not in compliance with federal regulations that required pharmaceutical distributors to maintain effective controls against the diversion of opioids to improper channels (known as “Anti-Diversion Policies”). Id. at *3.

The Court considered each of the red flags (which included the Company’s receipt of subpoenas and information requests from the attorneys general of forty-one states and numerous United States Attorneys’ offices; internal audit reports that raised questions about the Company’s compliance structure; congressional investigations and conclusions that found the Company failed to meet its reporting obligations; and the Company’s involvement in [and settlement of] several lawsuits regarding its compliance practices) and concluded that they would ordinarily be sufficient to overcome a motion to dismiss. Id. at *40–49. In fact, the Court held that the allegations demonstrated that the Defendants “did not just see red flags; they were wrapped in them.” Id. at *48.

That holding, however, did not end the Court’s analysis. The Court then looked to the United States District Court for the Southern District of West Virginia’s decision in City of Huntington v. AmerisourceBergen Corp. (2022 U.S. Dist. LEXIS 117322 [S.D. WV, 2022]), which held that the Company’s Anti-Diversion Policies were appropriate. Based on that holding, the Court found that the Defendants did not face a substantial likelihood of liability because it was impossible to infer that the Company failed to comply with its anti-diversion obligations. Id. at *50–51.

Plaintiffs’ second argument was that the Defendants caused the Company to put profitability over its compliance obligations by: (i) revising its oversight policy to make it harder for a sale to be deemed suspicious, and providing less oversight to sales to smaller and more profitable pharmacies; and (ii) entering into agreements with a large pharmacy chain that was under investigation by the DEA. The Court again concluded that the allegations in the complaint were sufficient to overcome the motion, however; because the West Virginia Court determined that the Company’s Anti-Diversion Policies were adequate, and therefore did not violate the law, the Court could not infer that the Defendants faced a substantial threat of liability for their conduct. Id. at *56.

While Vice Chancellor Laster’s decision provides helpful recitations of law, perhaps the most important theme is one that has been echoed by the Delaware Chancery Court for years—that equity is not a plug-and-play concept, and the Court may be required to consider the larger picture.

Providing the correct debtor name on a financing statement is a critical part of the process of perfecting security interests under Article 9 of the Uniform Commercial Code (“UCC”). This article will review fundamental debtor name concepts and special debtor name concerns, and identify a number of traps for the unwary attorney.

The purpose of filing financing statements is to provide notice of the claimed security interests. The ability of a UCC financing statement to serve its notice function depends on whether an interested party can locate the record. This is where the debtor name becomes particularly important.

Filing office search systems are designed to retrieve UCC records by debtor name. These systems generally report only exact matches to the name searched after the filing office has applied its standard search logic. With the way these systems are designed to operate, any error, omission, or variation in the debtor name, no matter how small, can prevent a search of the correct debtor name from locating the record.

The UCC recognizes the importance of accurate debtor names in this process by providing specific rules for different types of debtors in UCC Section 9-503(a). The code also provides harsh consequences for the secured party when a financing statement does not comply with the debtor name rules. With one exception, a financing statement that fails to sufficiently provide the debtor name in accordance with Section 9-503(a) will render the financing statement seriously misleading and not effective under Section 9-506(b).

The exception occurs when a search of the filing office records on the correct name of the debtor, using the jurisdiction’s standard search logic, if any, would disclose the record. In such cases, the insufficient debtor name does not render the financing statement seriously misleading. Unfortunately, the search logic test provides little protection. The search logic used by most jurisdictions will only disregard minor variations in punctuation, ending noise words, a leading “the”, and spacing. Even these general search logic steps differ somewhat from state to state.

Debtor Names for Organizations and Series of Entities

With so much riding on correct debtor names, one might expect that those who file UCC records would strictly comply with the Section 9-503(a) name rules. Many filers do so, but such compliance can be a challenge. To arrive at the correct debtor name, the filer must often disregard distractions that could lead them astray. If the debtor is a registered organization, for example, the financing statement must provide the name stated to be the name of the organization in the public organic record. “Public organic record” is a defined term in Article 9 and generally refers to the formation documents that state the name of the entity. However, other public records, including tax returns, certificates of good standing, and other official sources, often contain multiple variations of an entity’s name. Unless the filer understands what constitutes the public organic record and resists the temptation offered by other potential name sources, there is a substantial risk of error.

Another challenge for filers is what name to provide on the financing statement for an increasingly popular type of debtor: the series of an entity. In recent years several states have enacted legislation that permits limited liability companies and other entities to create series. A series has no existence apart from the entity under which it was formed. However, a series can have its own members, assets, and liabilities. A series can also contract, sue or be sued, and have a liability shield from the obligations of other series or the parent company.

There continues to be uncertainty regarding what name to provide for the debtor when the security interest is granted by the series of an entity. Much depends on the particular state law under which the series was formed. Filers must take care to determine what debtor name could be correct for a series debtor and list that name or any potentially correct names as separate debtors on the financing statement.

Names for Individual Debtors

Since the 2010 Amendments to UCC Article 9 were enacted across the country, determining the correct name of an individual debtor has been easier. Generally, the financing statement must provide the name indicated on the debtor’s driver’s license or, if permitted by applicable state law, the non-driver’s identification card. Nevertheless, there are still plenty of traps for the unwary, such as how to extract an unusual name from the driver’s license or what to do if the debtor lacks the designated identification documents.

Final Thoughts

The foregoing discussion represents the greatest concerns for attorneys who file UCC records, but there are other types of debtors as well. The debtor name requirements when the collateral is held in a trust or administered by a decedent’s personal representative, for example, are not always intuitive, leading to a number of common errors. Likewise, filers often struggle when the debtor doesn’t have a name, such as with an unnamed, as might be the case with an unnamed general partnership or similar entity.

In summary, strict compliance with the UCC Article 9 debtor name rules is always important. Those who file UCC records should provide the name required by UCC Section 9-503(a) exactly as it appears on the designated source document, including matching the spelling, spacing, and punctuation. If there is any doubt as to what Section 9-503(a) requires for the correct name, the filer should provide one or more name variations to ensure that whatever a court later decides was correct is contained on the financing statement.

This article is based on a CLE program that took place during the ABA Business Law Section’s 2022 Hybrid Annual Meeting. To learn more about this topic, view the program as on-demand CLE, free for members.

A lawsuit filed by the U.S. Securities Exchange Commission (“SEC”) against Ripple Labs, Inc. (“Ripple Labs”), creator of the popular cryptocurrency token known as XRP, represents a turning point for the cryptocurrency and wider blockchain-technology industries in their relationship with regulators. As a significant part of the SEC’s cryptocurrency enforcement campaign, the agency’s case against Ripple could have substantial implications for the SEC’s authority over digital assets in general, with important impacts on U.S. blockchain network operations.

Absent clear legislative measures by Congress, the SEC has stepped into the regulatory void as the blockchain industry has roiled with a series of bankruptcies and controversies in recent months. In November, the prominent cryptocurrency exchange FTX filed for bankruptcy after reports suggested liquidity and solvency questions for the firm. Later in the month, crypto lender BlockFi—for which FTX was a substantial creditor—initiated its own bankruptcy proceedings, citing liquidity concerns stemming from the FTX matter. Amidst such crypto asset market mayhem, the SEC recently warned U.S. companies that they may have disclosure obligations regarding the impacts the crypto market downturn has had or may have had on their business.^[1]

In SEC v. Ripple, the parties have now completed briefing on summary judgment in the case, which lies at the convergence of cryptocurrency, blockchain technology, and the scope of the SEC’s regulatory authority—namely, whether digital asset tokens, in a variety of market conditions and circumstances, can be considered “investment contracts” subject to federal securities laws. That dry, legalistic question lies at the heart of the SEC’s authority here: If so, such assets arguably fall under the SEC’s regulatory authority; if not, they do not. With closing briefs due before Christmas 2022, a resolution is expected sometime in the first quarter of 2023.

Without a federal law adequately addressing blockchain regulation, regulators and market participants have had to consult the history books to determine when a crypto asset may be a security. In the landmark case SEC v. W.J. Howey Co., 328 U.S. 293 (1946), the U.S. Supreme Court devised a test to determine when an investment contract is present in any contract, scheme, or transaction. Under the “Howey Test,” the following characteristics must be present for an investment contract to be evidenced: (1) an investment of money (2) in a common enterprise (3) with a reasonable expectation of profits (4) derived from the efforts of others. While subsequent case law has refined the Howey Test and its application, the essence remains the same.

Of course, the Ripple matter is not the SEC’s first attempt at regulating blockchain products, and one recent win for the agency—in SEC v. LBRY—could bolster its arguments on summary judgment. Still, the agency’s grasp on the blockchain industry is far from secure, as Congress continues to weigh legislation that could clarify the government’s approach to these products.

The three sections of this article examine these aspects of the Howey–digital asset issue in turn. In the first section of this article, we briefly discuss the facts and outcome of the SEC’s win against LBRY Inc. and how that ruling implicates the same issue in the SEC’s battle against Ripple. From there, we dive into SEC v. Ripple by outlining each side’s arguments with respect to the Howey test. Finally, we discuss the extent the whole issue could be annulled if Congress passes legislation clarifying the regulatory boundaries surrounding cryptocurrency and blockchain technologies, even after a ruling in Ripple.

SEC v. LBRY Inc.: A Potential Roadmap for the SEC

In November, the Howey–digital asset issue received attention in a now-resolved matter—SEC v. LBRY, Inc.

LBRY, Inc. runs a popular “open-source” and “community-driven” digital content marketplace (the “LBRY Network”) that offers a blockchain-based alternative to platforms such as YouTube, Spotify, and Instagram.^[2] Part of the LBRY Network’s advertised appeal as an alternative content-creation platform was that content creators are never at risk for demonetization or de-platforming since the LBRY protocol is decentralized. Central to this scheme was the LBRY Credit or “LBC,” which was created as a means to incentivize network transaction validation (also known as “mining”).^[3] The token could be spent on the LBRY Network to publish content, tip content creators, purchase paywalled content, or purchase advertisement boosts.^[4]

In March 2021, the SEC brought an enforcement action in New Hampshire federal court alleging that LBRY Inc. had sold LBC to U.S. investors to fund LBRY’s business and build its product—a violation of the same federal securities registration requirements at issue in SEC v. Ripple.

LBRY Inc. had two responses. First, it argued that LBC functions as a digital currency that is an essential component of the LBRY Network, which was already fully developed and launched prior to any offer or sale of LBC. Second, LBRY Inc. asserted that the SEC’s attempt to treat LBC as a security violated its right to due process because the SEC did not give LBRY Inc. fair notice that its LBC offerings were subject to the securities laws.^[5] To support its positions, LBRY Inc. indicated that the SEC’s prior enforcement actions focused only on digital assets offered in Initial Coin Offerings, or “ICOs,” and never against a fully developed product like the LBRY Network.

On November 7, 2022, Judge Peter Barbadoro of the U.S. District Court for the District of New Hampshire granted the SEC’s motion for summary judgment against LBRY Inc., holding that the company had offered and sold LBC as a security in violation of the registration provisions of the federal securities laws. The judge further noted that LBRY Inc. was in “no position” to claim that it lacked fair notice of the application of those laws, concluding that LBRY did not offer “any persuasive reading of Howey that would cause a reasonable issuer to conclude that only ICOs are subject to the registration requirement.”^[6]

The ruling could have important implications for Ripple because it lends theoretical support to the SEC’s position, although the SEC v. LBRY Inc. ruling is limited to a single district court with fact-specific holdings. Consistent with LBRY Inc.’s arguments, the ruling in that case marked a departure for the SEC, as every prior enforcement action had focused on issuers of digital tokens who had conducted ICOs. Like LBC, the XRP tokens at issue in Ripple were not issued through an ICO.

Similarities also exist in the conduct of the LBRY and Ripple Labs executive teams. In a Reddit post, LBRY Inc. had stated that the company “reserved 10% of all LBRY Credits to fund continued development and provide profit for the founders. Since Credits only gain value as the use of the protocol grows, the company has an incentive to continue developing this open-source project.”^[7] Judge Barbadoro’s summary judgment decision noted that because LBRY Inc. retained its own tokens, reasonable purchasers could understand that decision as a signal that “[the purchaser] too would profit from holding LBC as a result of LBRY’s assiduous efforts.” Furthermore, “by intertwining LBRY’s financial fate with the commercial success of LBC, LBRY made it obvious to its investors that it would work diligently to develop the [LBRY] Network so that LBC would increase in value.”^[8]

Similarly, the SEC has asserted in its action against Ripple Labs that the company’s co-founder and current chair Christian Larsen and CEO Bradley Garlinghouse—both named defendants in the matter—structured and promoted XRP sales to finance the company’s business and “also effected personal unregistered sales of XRP totaling approximately $600 million.”^[9]

While the SEC v. LBRY Inc. ruling is limited to a single district court, the SEC’s victory in Ripple may be a harbinger of a looming regulatory crackdown against the broader cryptocurrency industry that would be given the go-ahead if the SEC wins its case versus Ripple Labs. And the implications for market actors can, of course, be dramatic: In a Twitter thread posted weeks after the summary judgment decision, LBRY wrote, “LBRY Inc. will likely be dead in the near future…the company itself has been killed by legal and SEC debts…[although] the LBRY protocol and blockchain will continue.”^[10]

Ripple’s Battle with the SEC

Ripple Labs is a software company that dubs itself the “leading provider of crypto-enabled solutions for businesses,” the strategy for which includes use of its own XRP blockchain and native cryptocurrency token under the same name to facilitate cross-border payments, cryptocurrency liquidity, and the implementation of central bank digital currencies.^[11] Ripple first launched its XRP blockchain and native cryptocurrency token in June 2012. At one point, XRP was the third largest cryptocurrency in terms of market capitalization, although since then it has fallen to sixth, at around $17.6 billion as of January 4.^[12]

In December 2020, the SEC filed a complaint in the Southern District of New York arguing that Ripple Labs, along with its Chairman and CEO, had violated Sections 5(a) and 5(c) of the Securities Act of 1933 by engaging in the unlawful offer and sale of securities.^[13] In September 2022, both sides filed for summary judgment, asking the court to decide whether XRP qualifies as a security and thus needs to be regulated pursuant to the Securities Act.

The SEC’s complaint alleges that, beginning in 2013, Ripple Labs, Larsen, and Garlinghouse raised funds through the sale of XRP in an unregistered securities offering. The agency also alleges that Ripple Labs distributed billions of XRP in exchange for non-cash considerations, like labor and market-making services.^[14]

The SEC posits that Ripple Labs’ offering and sale of XRP straightforwardly qualify as an investment contract under the Howey Test. While the SEC deems numerous features of Ripple’s offering significant, the primary features of the agency’s argument are as follows. The SEC argues that the first prong of the Howey Test is met because purchasers obtained XRP through cash and non-cash considerations (and so made an investment of money). The SEC argues that the second prong is met—that the investment is in a common enterprise—because Ripple Labs pooled funds obtained from purchases of XRP to fund and build its operation, which includes financing the development of XRP use cases. As to this factor, the SEC also cites the fact that XRP’s price rises and falls for all investors together equally. In effect, the SEC is attempting to establish the presence of vertical and horizontal commonality, which, in Howey case law, has been a manner to distinguish when a common enterprise is present. Vertical commonality is evinced either strictly by the fortunes of the investor being interwoven with and dependent upon the efforts and success of those seeking the investment or broadly by the success of an investor depending on a promoter’s expertise. Alternatively, horizontal commonality focuses on the relationship between investors in which their funds are pooled into a common enterprise.

In regards to the third and fourth prongs of the Howey Test, wherein investors are led to a reasonable expectation of profits derived from the efforts of others, the SEC contends that Ripple openly touted the token as an investment and took publicly advertised measures to ensure rising demand for XRP. According to the agency, Ripple Labs “gave specific details of the efforts it would undertake to find ‘uses’ for XRP, to attract others to the ‘ecosystem,’ to manage the supply of XRP, to get platforms to list XRP, and to develop uses for the ledger.”^[15] Further, the SEC focuses on the fact that XRP lacked a notable use, beyond mere speculative investment, well past its 2013 launch date. Ripple Labs originally announced that XRP would be a “universal digital asset” that would allow banks to transfer money, a promise which never actualized. Yet only five years after XRP’s launch, in 2018, did XRP have a product that permitted its use, Ripple Labs’ own On-Demand Liquidity Product (“ODL”), which targeted “money transmitter” businesses rather than individuals as potential users. Between October 2018 and June 2020, only 15 money transmitters were signed up to use ODL, and ODL transactions never amounted to more than 1.6% of XRP’s quarterly trading volume.

Whereas LBRY Inc. challenged the SEC as to only part of the Howey Test—the matter of whether purchasers were led to a reasonable expectation of profits derived from the efforts of others—the Ripple Defendants challenge the SEC on all four prongs of the Test.

When it comes to the first prong, Ripple Labs, Larsen, and Garlinghouse (“Ripple Defendants”) contend that, in many cases, there was no investment of money because Ripple Labs gave away more than two billion XRP tokens to charities and various grant recipients. Further, the Ripple Defendants argue that the second prong is not met—that there is no common enterprise—because Ripple Labs is not engaged in a profit-seeking business venture of which, according to Howey, must be present for the second prong to be met.^[16] The XRP Ledger, the Ripple Defendants point out, is decentralized and thus incapable of being controlled or managed by Ripple Labs. The Ripple Defendants also deny that horizontal and vertical commonality are present along similar lines (in addition to other circumstances), while also maintaining that vertical commonality is insufficient as a criterion for the second prong to be met even if established. The Ripple Defendants’ point regarding the company’s own control or lack thereof over the XRP Ledger dovetails well not only with the second prong but with the third and fourth: The decentralized nature of XRP, Defendants argue, prevents its purchasers from relying on Ripple Labs’ efforts for profit.

However, the Ripple Defendants’ main argument on the third and fourth prongs relies on the fact that Ripple Labs was never under any contractual obligation to promote XRP. In essence, Defendants claim that an investment contract cannot be present if there is no contract at all. Expanding on this point, the Ripple Defendants broadly argue that XRP lacks the “essential ingredients” of an investment contract, as interpreted by the courts since Howey, which the Ripple Defendants argue (1) involve an actual contract, (2) impose post-sale obligations on the promoter, and (3) entitle the purchaser to receive a profit, and that XRP lacks all of these characteristics.

In response, the SEC asserts that Defendants are relying on a “made up” test that ignores federal securities laws:

[T]hese common law contract terms are not required to satisfy Howey’s ‘expectation of profits’ inquiry. This part of the test is about expectations, not about commitments, a point supported by far more than just ‘out-of-circuit cases.’^[17]

Could It All Be for Nothing?

In LBRY and the still-pending Ripple case, the SEC is attempting to clarify its authority over blockchain matters. But a federal proposal could eradicate the issue entirely in the near future. In June, Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) introduced the Responsible Financial Innovation Act^[18] (“RFIA”) in the Senate, which, among other things, aims to establish a comprehensive regulatory framework for digital assets in order to address the Howey–digital asset issue.^[19]

The RFIA introduces a new category of digital assets called “ancillary assets” to the Securities Exchange Act that would encompass “investment contracts.” The new category would be treated as “commodities” under the Commodity Exchange Act (“CEA”), rather than securities, and thus be subject to the regulatory authority of the Commodity Futures Trading Commission, or CFTC. Title III of the RFIA defines an “ancillary asset” as:

an intangible, fungible asset that is offered, sold, or otherwise provided to a person in connection with the purchase and sale of a security through an arrangement or scheme that constitutes an investment contract, as that term is used in section 2(a)(1) of the Securities Act of 1933 (15 U.S.C. 77b(a)(1)).^[20]

While unlikely to become law before the congressional session adjourns on January 3, 2023, the RFIA represents a potential yet long-anticipated legislative answer to problems created by regulatory gaps pertaining to the cryptocurrency and broader blockchain technology industries. And the bill—or another like it—could solidify the regulatory landscape in place of the SEC’s ad hoc approach thus far.

1. Hamilton, Jesse, and Nikhilesh De, “SEC Tells US-Listed Companies They’d Better Disclose Crypto Damage.” Coindesk, December 8, 2022, available at: https://www.coindesk.com/policy/2022/12/08/sec-tells-us-listed-companies-theyd-better-disclose-crypto-damage/. ↑

2. Lbry.com Frequently Asked Questions. Last accessed December 29, 2022, available at: https://lbry.com/faq/what-is-lbry. ↑

3. Securities and Exchange Commission Litigation Release No. 25573, “SEC Granted Summary Judgment Against New Hampshire Issuer of Crypto Asset Securities for Registration Violations.” SEC, November 7, 2022, available at: https://www.sec.gov/litigation/litreleases/2022/lr25573.htm. ↑

4. SEC v. LBRY, Inc., 21-cv-260-PB. Opinion issued November 7, 2022, available at: https://www.nhd.uscourts.gov/sites/default/files/Opinions/2022/22NH138.pdf. ↑

5. Ibid. ↑

6. SEC Litigation Release No. 25573, supra note 3. ↑

7. SEC v. LBRY, Inc., supra note 4. ↑

8. Ibid. ↑

9. Securities and Exchange Commission Press Release 2020-338, “SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering.” SEC, December 22, 2020, available at: https://www.sec.gov/news/press-release/2020-338. ↑

10. LBRY Inc. [@LBRYcom]. Tweet. November 29, 2022, available at: https://twitter.com/LBRYcom/status/1597723017626681344?s=20&t=91wTz6nXR7L9R3rC0Rf1Dw. ↑

11. Ripple.com Frequently Asked Questions. Last accessed December 28, 2022, available at: https://ripple.com/faq/. ↑

12. Source: CoinMarketCap, “All Cryptocurrencies.” Last accessed January 3, 2023, available at: https://coinmarketcap.com/all/views/all/. ↑

13. SEC Press Release 2020-338, supra note 9. ↑

14. Ibid. ↑

15. SEC v. Ripple Labs, Inc., et al. 1:20-cv-10832-AT-SN. Plaintiff SEC’s Reply Memorandum of Law in Further Support of its Motion for Summary Judgment. December 2, 2022, available at: https://fingfx.thomsonreuters.com/gfx/legaldocs/myvmoneblvr/SECURITIES%20CRYPTO%20RIPPLE%20sec%20brief.pdf. ↑

16. SEC v. Ripple Labs, Inc., et al. 1:20-cv-10832-AT-SN. Defendants’ Reply in Support of Motion for Summary Judgment. December 2, 2022, available at: https://fingfx.thomsonreuters.com/gfx/legaldocs/gkvlwgobopb/SECURITIES%20CRYPTO%20RIPPLE%20brief.pdf. See Howey; this claim is a reference to the following (emphasis added): “A common enterprise managed by respondents or third parties with adequate personnel and equipment is therefore essential if the investors are to achieve their paramount aim of a return on their investments. Their respective shares in this enterprise are evidenced by land sales contracts and warranty deeds, which serve as a convenient method of determining the investors’ allocable shares of the profits. The resulting transfer of rights in land is purely incidental. Thus all the elements of a profit-seeking business venture are present here. The investors provide the capital and share in the earnings and profits; the promoters manage, control and operate the enterprise. It follows that the arrangements whereby the investors’ interests are made manifest involve investment contracts, regardless of the legal terminology in which such contracts are clothed.” ↑

17. SEC v. Ripple, Inc., et al. SEC’s Reply Memorandum in Support of Motion for Summary Judgment, supra note 15. ↑

18. Senate Bill 4356 (2022), available at: https://www.congress.gov/bill/117th-congress/senate-bill/4356/all-info. ↑

19. Gray, Jake. “Responsible Financial Innovation Act Proposal to Bolster CFTC Authority Over Crypto-Industry.” Ifrah Law, July 8, 2022, available at: https://www.ifrahlaw.com/ifrah-on-igaming/responsible-financial-innovation-act-proposal-to-bolster-cftc-authority-over-crypto-industry/. ↑

20. §301; Proposed § 41(a)(1)(A). ↑