Massachusetts: Expansion of Oversight Authority — New Notice of Material Change Form for Health Care Transactions
The Massachusetts Health Policy Commission (the HPC), an independent state agency that works to improve affordability of health care for residents of the Commonwealth, released Advance Guidance (before finalization of new regulations) for “Providers” and “Provider Organizations” considering transactions subject to the HPC’s updated Notice of Material Change (MCN) process. This Advance Guidance was issued on March 20, 2025, in anticipation of the April 8, 2025 effective date of amendments to M.G.L. c. 6D, § 13 pursuant to Chapter 343 of the Acts of 2024. The Advance Guidance alerts providers to upcoming changes in requirements for certain types of transactions, including an expanded regulatory definition of “Material Change”, an increased authority to issue requests for information, and certain logistics to the form required when filing an MCN.
Background
As discussed in our prior blog, “Massachusetts: New Year, New Law — Governor Signs “An Act enhancing the market review process” (House Bill No. 5159),” Governor Maura Healey signed into law Chapter 343 of the Acts of 2024 on January 8, 2025. The legislation aims to increase oversight and regulation over a variety of health care transactions taking place in the Commonwealth. This includes enhancing scrutiny by entities such as the HPC, the Center for Health Information and Analysis (CHIA), the Office of the Attorney General, and the Division of Insurance, specifically regarding private equity investors and management service organizations (MSOs). Additionally, the new law mandates licensing for Urgent Care Centers and introduces licensing requirements for a newly established category known as Office-Based Surgical Centers.
To that end, the law strengthens the HPC’s market oversight authority to review “Material Changes” to “Providers” or “Provider Organizations” as required by Mass. Gen. Laws ch. 6D, § 13, which include companies:
in the business of health care delivery or management, […] that represents one or more health care Providers in contracting with Carriers or third-party administrators for the payments of Health Care Services; provided, that a Provider Organization shall include, but not be limited to, physician organizations, physician-hospital organizations, independent practice associations, Provider networks, accountable care organizations and any other organization that contracts with Carriers for payment for Health Care Services.
The Advance Guidance issued by the HPC provides requirements for the new triggering events and MCN process in advance of regulatory amendments to the current regulations, found at 958 CMR 7.02. “Providers” or “Provider Organizations” are still required to submit an MCN to the HPC 60 days in advance of the effective date of a “Material Change.” Information on these additional triggering events will allow the HPC to monitor the health care market and the ability of the Commonwealth’s health care system to deliver high quality, cost-effective care for all residents.
Advance Guidance
Beginning April 8, 2025, the definition of a “Material Change” that triggers the filing requirement for an MCN will be expanded to include:
Significant expansions in a “Provider or “Provider Organization’s” capacity, which includes any increase to a “Provider” or “Provider Organization’s” capacity that requires an Application for Substantial Capital Expenditure (defined at 105 CMR 100 as generally being in excess of the then-current Expenditure Minimum) to be submitted to the Massachusetts Department of Public Health’s Determination of Need Program;
Transactions involving a significant equity investor which result in a change of ownership or control of a “Provider” or “Provider Organization,” which includes any investment by an equity investor that will change the ownership of a “Provider” or “Provider Organization” or any investment in excess of US$10M that results in an equity investor having significant control over a “Provider” or “Provider Organization,” e.g., the potential to appoint a board member(s), make key business decisions (e.g., hiring or terminating staff);
Significant acquisitions, sales, or transfer of assets including, but not limited to, real estate sale lease-back arrangements as well as the sale of any licensed facility or the sale of real property assets where Health Care Services are delivered for the purposes of a real estate lease-back arrangement; and
Conversion of a “Provider” or “Provider Organization” from a nonprofit entity to a for-profit entity.
Additionally, the Advance Guidance describes the expansion of authority to request information from other “Providers,” “Provider Organizations,” or “Payors” to be provided within 21 days of such request from the HPC. Effective April 8, 2025, the HPC will have expanded authority to request information from significant equity investors and other parties involved in a given transaction.
Under Mass. Gen. L. ch. 6D, § 13(c)(2), as updated by Section 24 of Chapter 343 of the Acts of 2024, when a Material Change involves a “significant equity investor,” the HPC can identify specific information required to accompany the MCN submission. This may include details such as the significant equity investor’s capital structure, overall financial condition, ownership, and management structures, and audited financial statements, among other relevant items. Currently, the HPC does not mandate that such information be publicly disclosed as part of the MCN form; however, it reserves the right to request this information confidentially during its review process. The HPC will maintain the confidentiality of all nonpublic information and documentation received in connection with an MCN or cost and market impact review, as requested by the involved parties.
Finally, as previewed by the HPC Advance Guidance, the HPC has posted a revised MCN Form that “Providers” and “Provider Organizations” should use beginning on April 8, 2025.
Conclusion
The Advance Guidance issued by the HPC provides insights for “Providers” and “Provider Organizations” preparing for organizational changes subject to the MCN process. Released ahead of amendments to M.G.L. c. 6D, § 13 pursuant to Chapter 343 of the Acts of 2024 — which take effect on April 8, 2025 — this guidance outlines important updates including an expanded definition of “Material Change,” associated clarifying terms, broader authority for the HPC to request information related to such changes, and specific logistical adjustments in the required MCN Form. As this Advance Guidance has not gone through the proper rulemaking process, affected individuals should provide comments to the HPC about areas of disagreement or concern via email ([email protected]).
For more information, please join us at our upcoming webinar with the Healthcare Financial Management Association on April 30, “Private Equity and Health Care – A Policy Discussion.” The registration link is available here.
Blockchain+ Bi-Weekly; Highlights of the Last Two Weeks in Web3 Law: March 27, 2025
The past two weeks brought some notable progress for the industry, though it still often feels like “regulation by lack of enforcement” rather than a truly proactive approach. The SEC clarified that most proof-of-work mining activities do not amount to securities transactions—a welcomed statement for miners but limited in scope. Meanwhile, Ripple announced a potential settlement that would end the SEC’s appeal, continuing a trend of non-fraud crypto cases winding down without generating long-term clarity. On Capitol Hill, the Senate’s markup of its own stablecoin act signals a significant step forward yet also highlights a lack of consensus necessary for any final bill. Finally, in a notable display of bipartisan alignment, both chambers of Congress overwhelmingly passed legislation overturning the IRS’s crypto broker reporting rules, demonstrating the possibility of constructive actions in areas where consensus can be reached.
These developments and a few other brief notes are discussed below.
SEC Clarifies That Most Proof-of-Work Mining Activities Are Not Securities Transactions: March 20, 2025
Background: The SEC’s Division of Corporation Finance released a statement clarifying its view that most proof-of-work (“PoW”) mining activities do not qualify as securities transactions under federal securities laws. The statement applies specifically to “Protocol Mining” activities involving “Covered Crypto Assets”, which are defined as crypto assets tied to the functioning of a public, permissionless PoW network. According to the release, whether through self-mining or pooled mining, miners perform the essential “work” themselves. Under the Howey test, one crucial element for a transaction to be deemed a security is that profits must flow primarily from the “managerial or entrepreneurial efforts of others.” Because PoW miners generate rewards by contributing their own computational power, the SEC concluded that these returns are not derived from someone else’s management. Thus, PoW mining generally fails this aspect of the Howey test, placing it outside the scope of federal securities laws.
Analysis: It’s important to note that releases like these do not create binding law and each set of facts can differ and may yield different legal results, which may make certain PoW mining fall outside of this safe-harbor-like guidance. Still, the statement signals that, under typical PoW mining arrangements, participants who merely contribute computational power to validate transactions and receive rewards likely do not cross into securities territory, including through pooling arrangements. This may allow more risk-averse entities to contribute compute to mining or provide services to mining pools, which only serves to strengthen network resilience and efficiency.
Ripple CEO Announces Pending Settlement With SEC: March 19, 2025
Background: Ripple has announced that the SEC will drop its appeal of the portion of the ruling against it in Ripple. This will bring an end to at least part of the case originally brought in 2020 during Jay Clayton’s term as Chairman of the SEC. This will still need to be approved at the next meeting of the commissioners, and it is unclear what this dismissal will entail. Representatives of Ripple have stated that they are evaluating what to do with their own cross-appeal relating to institutional investor sales. Still, there wouldn’t be an announcement like this if a deal was not in place, so now it is just a waiting game to see the details.
Analysis: Ripple was one of the few digital asset issuers from the ICO boom that had the resources to fully litigate against the SEC, and it has been doing so for half a decade. And litigate they did, with over 25 filings related to the “Hinman Speech” documents alone. Combined with the dismissal of the Coinbase matter and its pending appeal, there is still no binding precedent from higher courts on the applicability of the Howey test to digital assets.
Stablecoin Senate Markup Developments: March 13, 2025
Background: The Senate Banking Committee had a markup of the GENIUS Act, which is the Senate’s version of a stablecoin bill. Even before the markup and vote, there were some changes made due to bipartisan efforts to reach an agreement on how stablecoins should be registered and monitored in the U.S. The bill passed through committee on an 18-6 vote, with five Democrats (Warner-VA, Kim-NJ, Gallego-AZ, Rochester-DE and Alsobrooks-MD) voting in favor, meaning the 4 most junior Democrats on the committee (along with Warner) crossed party lines to vote in favor of the GENIUS Act.
Analysis: Senator Warren predictably tried to propose amendments that would have killed the viability of the bill (to the delight of traditional banks), but all those proposals failed. It can be expected there will be closed door work on the bill to address the concerns of Democrats who want some changes to the bill to help it receive as much bipartisan support as possible. The House is also working on its own bill, holding a hearing on stablecoins and CBDCs this week, and the Senate Banking Committee also passed a bill regarding debanking that went along party lines.
House Votes to Overturn IRS Crypto Broker Reporting Rules: March 11, 2025
Background: The House voted overwhelmingly in favor of repealing the IRS broker rule change, which was adopted in the final months of President Biden’s term, which would have made all self-custodial wallet providers, DeFi protocols and even arguably internet service providers themselves reporting entities for any digital asset transaction. The vote was 292-132 in the House and 70-28 in the Senate. It will go to the Senate again before being signed by President Trump, who has stated he intends to sign as soon as it hits his desk.
Analysis: The IRS broker rule, as finalized, was overly broad and aggressive, potentially capturing industry participants like self-hosted wallet providers, automated market makers, validators and possibly even ISPs. This might be a “played yourself” moment because some classes of entities in the digital asset space could logically be included as reporting entities under broker reporting rules. If the bill goes into law as expected, any such rule will need to come from Congress now.
Briefly Noted:
SEC Likely to Abandon Reg ATS Rule Changes for Crypto: Acting Sec Chair Mark Uyeda gave a speech saying he directed staff to kick the tires on (i.e., abandon) a proposed rule change that would expand the definition of an “exchange” in a way that might have looped in certain DeFi protocols and service providers.
Geofenced Airdrop Costs to Americans: Dragonfly released its State of Airdrops report for 2025, which shows that Americans missed out on as much as $2.6 billion in potential revenue (and the U.S. missed out on taxing that revenue) by policies that resulted in Americans being disqualified from those airdrops.
Leadership Changes at Crypto Policy Leaders: Amanda Tuminelli is taking over as CEO of industry advocacy group DeFi Education Fund. Meanwhile, Cody Carbone deserves congratulations on his recent promotion to CEO of the Digital Chamber. Those organizations are in great hands under their leadership.
Come in and Register: Now that crypto firms can actually have a dialog with the SEC without fear that opening the dialog will lead to investigations and hostile actions, a record number are filing for various approvals at the agency. Crazy how that works.
CFTC Withdraws Swap Exchange Letter: The CFTC withdrew its prior Staff Advisory Swap Execution Facility Registration Requirement which arguably required DeFi participants to register with the agency and which 3 DeFi platforms were charged with disobeying in 2023. This may signal an intent to ease the prosecution of decentralized platforms for failing to register as swap execution facilities.
OFAC Removes Tornado Cash Designations: In another huge industry development, OFAC has finally removed protocol addresses from its sanctions list, which is a huge win for software developers and privacy advocates everywhere.
SEC Hosts First Crypto Roundtable: The SEC’s first crypto roundtable is available to view. Not many major takeaways, but it’s good to see these conversations occurring in public forums. This is ahead of the expected SEC Chair Atkins’ hearing before the Senate.
Stablecoin Legislation Update: Ro Khanna (D-CA) said he believes stablecoin and market structure legislation gets done this year at the Digital Assets Summit on March 18, 2025, stating there are 70 to 80 Democrats in the House who view this as an important issue to maintain American dollar dominance and influence. Bo Hines also stated stablecoin legislation will get done in the next few months.
SEC Permits Some Rule 506(c) Self-Certification: Rule 506(c), which allows for sales of securities to accredited investors while using general advertising and solicitation, historically has required independent verification of accredited investor status, such as through getting broker letters or tax returns. In a new no-action letter, the SEC clarified that issuers can rely on self-certifications of accredited investor status as long as the minimum purchase price is high enough and certain other qualifications are met.
Conclusion:
Although not legally binding, the SEC’s acknowledgment that most proof-of-work mining activities are not securities transactions remains a welcomed development for the industry. Meanwhile, the potential conclusion of the SEC’s appeal against Ripple carries both positive and negative implications. On one hand, it suggests that the SEC may follow through on ending non-fraud crypto litigations; on the other, it underscores the ongoing uncertainty in crypto rulemaking absent further regulatory clarity. As the Senate and House each work through their own crypto bills and rules, legislative activity around digital assets is likely to remain robust in the near future.
China Releases New Rules Regarding the Use of Facial Recognition Technology
On March 21, 2025, the Cyberspace Administration of China and the Ministry of Public Security jointly released the Security Management Measures for the Application of Facial Recognition Technology (the “Measures”), which will become effective on June 1, 2025. Below is a summary of the scope and certain of the key requirements of the Measures.
Scope of Application of the Measures
The Measures apply to activities using facial recognition technology to process facial information to identify an individual in China. However, the Measures do not apply to activities using facial recognition technology for research or algorithm training purposes in China.
Facial information refers to biometric information of facial features recorded electronically or by other means, relating to an identified or identifiable natural person, excluding information that has been anonymized.
Facial recognition technology refers to individual biometric recognition technology that uses facial information to identify an individual’s identity.
Specific Processing Requirements for Facial Recognition Technology
The Measures include specific processing requirements which must be complied with when activities are in scope of the Measures. These include:
Storage: The facial information should be stored in the facial recognition device and prohibited from external transmission through the Internet, unless the data handler obtains separate consent from the data subject or is otherwise permitted by applicable laws and regulations.
Privacy Impact Assessment (“PIA”): The data handler should conduct a PIA before processing the data.
Public Places: Facial recognition devices can be installed in public places, subject to the data handler establishing the necessity for maintenance of public security. The data handler shall reasonably determine the facial information collection area and display prominent warning signs.
Restriction: The data handler should not use facial recognition as the only verification method if there is any other technology that may accomplish the same purpose or meet the equivalent business requirements.
Filing Requirement: If the data handler processes facial information of more than 100,000 individuals through facial recognition technology, it should conduct a filing with the competent Cyberspace authority at the provincial level or higher within 30 business days upon reaching that threshold. The filing documents should include, amongst other things, basic information of the data handler, the purpose and method of processing facial information, the security protection measures taken, and a copy of the PIA. In cases of any substantial changes of the filed information, the filing shall be amended within 30 business days from the date of change. If the use of facial recognition technology is terminated, the data handler shall cancel the filing within 30 business days from the date of termination, and the facial information involved shall be processed in accordance with the law.
Mexico’s New Personal Data Protection Law: Considerations for Businesses
On March 20, 2025, Mexico’s new Federal Law on the Protection of Personal Data held by Private Parties (FLPPDPP) published in the Official Gazette of the Federation. Effective March 21, the new law replaces the FLPPDPP published in July 2010.
Among the key changes the decree and new FLPPDPP introduce is the dissolution of the National Institute of Transparency, Access to Information, and Protection of Personal Data (INAI). Before the decree’s publication, INAI served as an autonomous regulatory and oversight authority for matters related to transparency, information access, and personal data protection. As of March 21, 2025, these responsibilities will be transferred to the Ministry of Anticorruption and Good Governance (Ministry), a governmental body reporting directly to the executive branch. The Ministry will now supervise, oversee, and regulate personal data protection matters.
Related to personal data protection, companies may wish to consider the following points when preparing to comply with the new FLPPDPP:
The definition of “personal data” is amended to remove the previous limitation to natural persons, expanding the scope to any identifiable individual—when their identity can be determined directly or indirectly through any information.
The law now requires that the data subject give consent “freely, specifically, and in an informed manner.”
Public access sources are now limited to those the law explicitly authorizes for consultation, provided no restrictions apply, and are only subject to the payment of the applicable consultation fee.
The scope of personal data processing expands to encompass “any operation or set of operations performed through manual or automated procedures applied to personal data, including collection, use, registration, organization, preservation, processing, communication, dissemination, storage, possession, access, handling, disclosure, transfer, or disposal of personal data.”
As a general rule, the data subject’s tacit consent is deemed sufficient for data processing, unless the law expressly requires obtaining prior explicit consent.
Regarding the privacy notice, the new FLPPDPP requires data controllers to specify the purposes of processing that require the data subject’s consent. Additionally, the express obligation to disclose data transfers the controller carries out is eliminated.
Resolutions the Ministry issues may be challenged through amparo proceedings before specialized judges and courts.
Takeaways
1.
Although this amendment does not introduce substantial changes with respect to the obligations of those responsible for processing personal data, companies should review their privacy notice and, if necessary, adjust it to the provisions of the FLPPDPP including, where appropriate, replacing references to the INAI.
2.
If any data protection proceedings were initiated before the INAI while the previous law was in effect, the provisions of the prior law will continue to govern such proceedings, with the exception that the Ministry will now handle them.
3.
The executive branch will have 90 days to issue the necessary amendments to the new FLPPDPP regulations. Companies should monitor for the amendments’ publication to identify changes that may impact their compliance obligations under the new law.
Read in Spanish/Leer en español.
When “It’s Obvious” Just Isn’t Enough: Challenger’s Burden to Prove Obviousness
The US Court of Appeals for the Federal Circuit affirmed the Patent Trial & Appeal Board’s decision that a patent was not obvious because the petitioner failed to show sufficient support of obviousness based on prior art. AMP Plus, Inc. v. DMF, Inc., Case No. 23-1997 (Fed. Cir. Mar. 19, 2025) (Lourie, Bryson, Reyna, JJ.)
DMF owns a patent directed to a compact recessed lighting system designed for installation in a standard electrical junction box. In 2019, AMP, doing business as ELCO, petitioned for inter partes review of several claims of the patent on three grounds of unpatentability:
Anticipation by a prior reference
Obviousness based on a combination of two references
Further obviousness based on an additional source.
The Board found that one claim was anticipated but ruled that ELCO failed to prove unpatentability of the other claims, including the claim at issue on appeal. The claim at issue describes a system with wires connected to a driver and a first connector, coupled to a second connector that in turn is connected to the building’s electrical system. This specific connection was referred to as “Limitation M.” ELCO appealed. In that earlier appeal (2022), the Federal Circuit affirmed the Board’s ruling on all claims except the claim at issue and remanded the case back to the Board for further analysis.
On remand, the Board concluded that ELCO failed to demonstrate the unpatentability of the claim at issue because ELCO’s petition lacked a substantive analysis of Limitation M. The Board found ELCO’s argument that a prior art marine lighting system could be adapted for the claimed building use unsupported by evidence and ruled that the claim at issue was not obvious. Again, ELCO appealed.
ELCO raised two main arguments. First, it argued that the Board erred in not determining that the claim at issue was anticipated by a prior reference, as the Board had previously found another claim to be anticipated by the same reference. The Federal Circuit rejected this argument because ELCO had only challenged the claim at issue on the basis of obviousness in its original petition, not anticipation. Since the issue of anticipation was not raised in the petition, the Court determined that ELCO could not introduce this new ground of unpatentability on appeal.
Second, ELCO argued that its petition had sufficiently demonstrated the obviousness of Limitation M based on the prior references. The Federal Circuit disagreed, finding that ELCO’s petition did not adequately address the specific requirement for coupling the system to a building’s electrical infrastructure. The petition failed to discuss how the recessed lighting system would be installed in a building, and the references cited did not provide adequate support for the argument of obviousness for this particular limitation.
The Federal Circuit emphasized that it was not the Board’s responsibility to supplement the petitioner’s arguments or search for evidence to support an inadequately supported claim challenge. The Court reiterated that an obviousness analysis does not require the Board to fill gaps in the petitioner’s original filing. In this case, the Board had appropriately determined that ELCO failed to meet its burden of demonstrating the obviousness of Limitation M.
Rule 506(c) Unchained? The SEC Loosens Requirements for Advertising in Private Capital Raises
On 12 March 2025, the US Securities and Exchange Commission (SEC) staff issued a no-action letter that provides private fund sponsors with a concrete, streamlined approach to relying on Rule 506(c),1 based on minimum investment amounts and investor representations. This guidance has the potential to unlock Rule 506(c)’s advantages for private fund sponsors more than a decade after its passage.
Background on Rule 506(c)
Implemented in 2013 pursuant to the Jumpstart Our Business Startups Act, Rule 506(c) provides an alternative to the traditional prohibition on general solicitation in private offerings. Specifically, Rule 506(c) permits issuers to engage in general solicitation and advertising when selling securities, provided they take “reasonable steps” to verify that all purchasers are accredited investors. While enacted in order to give issuers the opportunity to increase their fundraising abilities through marketing to a public audience, Rule 506(c) has been only sparingly used over the last decade. This past November, SEC Commissioner Hester Peirce commented that issuers had “raised around $169 billion annually under Rule 506(c) compared to $2.7 trillion under 506(b), which does not permit general solicitation.”2
The “reasonable steps” verification requirement has presented operational challenges for many issuers. Prior methods qualifying as “reasonable steps” included reviewing tax returns, bank statements, or obtaining verification letters from professionals such as lawyers or accountants. Because of the additional administrative burdens imposed by these verification methods, Rule 506(c) has not been widely utilized, despite its potential to access a much wider audience for capital raising.
The Alternative Verification Method
The no-action letter provides a far less labor-intensive approach to satisfying Rule 506(c)’s verification requirements by streamlining the process issuers must follow to verify an investor’s accredited investor status. Specifically, the SEC mandates that an issuer relying on the no-action letter:
Impose minimum investment amounts of US$200,000 for individuals and US$1 million for legal entities;3
Receive written, self-certified representations from an investor that they are an accredited investor and that their investment is not financed by a third party for the specific purpose of making the particular investment;4 and
Have no actual knowledge of facts contrary to the two above bullets.
This test for determining whether an issuer has taken reasonable steps to verify accredited investor status is objective and depends on the specific facts and circumstances of each investor and transaction.
Practical Considerations for Private Fund Sponsors and Other Issuers
What are the practical implications for private fund sponsors now that the SEC has loosened the verification restrictions? Will private fund sponsors now jump into the fray and begin to advertise on social media, at sporting events, and elsewhere? There remain a number of considerations notwithstanding the less burdensome verification process. The SEC’s no-action letter addressed only this aspect of using Rule 506(c). The Marketing Rule (defined below), antifraud provisions, and other provisions of the Investment Advisers Act of 1940 the (Advisers Act) of course remain in full force and effect. Private fund sponsors considering an offering under Rule 506(c) will need to not only comply with the Advisers Act’s requirements, but be prepared to do so in front of a much wider investor and regulator audience.
Private fund sponsors considering Rule 506(c) offerings should note several additional considerations:
Update Policies and Procedures
Managers should adopt policies and procedures to accommodate Rule 506(c) offerings.
Marketing Rule
Registered investment advisers must continue to consider Rule 206(4)-15 under the Advisers Act the (Marketing Rule) when marketing their funds. While advisers may widely distribute marketing materials, such materials must comply with the Marketing Rule. For example, under the Marketing Rule, advisers are generally prohibited from including hypothetical performance, such as performance targets and projected returns, in advertisements to the general public.6
Switching Exemptions
Managers that want to change to a Rule 506(c) offering should file an updated Form D with the SEC and review offering materials for any necessary updates (e.g., remove representations regarding no general solicitation from subscription agreements and other documents).
What Is Next for Private Fund Sponsors and Rule 506(c)?
The easing of the investor verification process under Rule 506(c) will undoubtedly renew interest in pursuing this alternative path to capital raising. It is no secret that the fundraising environment over the last several years has been challenging, particularly for mid-market and emerging manager sponsors. For those managers, there are good reasons to explore general solicitation under Rule 506(c), bearing in mind the need to comply with the SEC’s recent guidance on verification and the requirements of the Advisers Act. Time will tell whether the SEC’s no-action letter will actually open the floodgates of advertising for private fund sponsors. Watch this space for further insights as the industry’s approach to using Rule 506(c) unfolds.
Footnotes
1 17 C.F.R. § 230.506(c) (1933).
2 https://www.sec.gov/newsroom/speeches-statements/peirce-remarks-sbcfac-111324
3 For an entity investor accredited solely through its beneficial owners, the minimum investment amount is US$1 million, or US$200,000 for each beneficial owner if the entity has fewer than five natural person owners.
4 These representations must be made for each beneficial owner for entities that are accredited solely through the accredited investor status of each beneficial owner.
5 17 C.F.R. § 275.206(4)-1 (●).
6 The Marketing Rule requires that investment advisers only present hypothetical performance to audiences if it is relevant to their likely financial situation and investment objectives, limiting an adviser’s ability to include such performance in advertisements to the public. In the Marketing Rule’s adopting release, the SEC specifically noted that advisers “generally would not be able to include hypothetical performance in advertisements directed to a mass audience or intended for general circulation.” Investment Adviser Marketing, Release No. IA-5653, SEC Dec. 22, 2020 effective May 4, 2021, at 220.
Nasdaq Amends Proposal to Modify Rule for Initial Listing Liquidity Requirements
In December 2024, the Nasdaq Stock Market LLC submitted a proposal to the US Securities and Exchange Commission (SEC) to modify its requirements for calculating the minimum Market Value of Unrestricted Publicly Held Shares in connection with an initial listing on Nasdaq.
The SEC published this proposal in the Federal Register for public comment on December 30, 2024. Subsequently, on February 5, Nasdaq submitted Amendment No. 1 to this proposed rule change. The amendment contains necessary clarifications but makes no substantive changes from the originally proposed rule change. On March 12, the SEC released an order granting approval of Amendment No. 1, which was published in the Federal Register on March 18.
Current Rule
Nasdaq Listing Rules 5405 and 5505 require companies listing in connection with an initial public offering (IPO) or an uplisting from the over-the-counter (OTC) market to satisfy applicable minimum Market Value requirements. For an initial listing, these minimums depend on whichever of the following standards the company meets the criteria for:
Income Standard: Requires an annual income from continuing operations before incomes taxes of at least $1 million in the most recently completed fiscal year or in two of the three most recently completed fiscal years, stockholders’ equity of at least $15 million, and at least three registered and active market makers.
Equity Standard: Requires stockholders’ equity of at least $30 million, a two-year operating history, and at least three registered and active market makers.
Market Value Standard: Requires a market value of listed securities of $75 million and current publicly traded companies must meet this requirement and the $4 bid price requirement for 90 consecutive trading days prior to applying for listing under this standard. This standard requires at least four registered and active market makers.
Total Assets/Total Revenue Standard: Requires a company to have total assets and total revenue of $75 million each for the most recently completed fiscal year or two of the three most recently completed fiscal years, and at least four registered and active market makers.
For an IPO listing on the Nasdaq Global Market, a company must have a minimum Market Value of $8 million under the Income Standard, a minimum of $18 million under the Equity Standard, or a minimum of $20 million under the Market Value or Total Assets/Total Revenue Standard. For an IPO listing on the Nasdaq Capital Market, a company must have a minimum of $5 million under the Income Standard or a minimum of $15 million under either the Equity Standard or Market Value or Total Assets/Total Revenue Standard. To satisfy the minimum Market Value, companies listing in conjunction with an IPO may count, in addition to the shares being sold in the offering itself, previously issued shares registered for resale not held by an officer, director, or 10% shareholder of the company.
For a company trading on the OTC market to list on Nasdaq, the company must have either a minimum daily trading volume of 2,000 shares over the past 30 trading days with trading occurring in at least 50% of those days (the ADV requirement) or list in connection with a firm commitment underwritten public offering of at least $4 million (the firm commitment requirement).
Proposed Changes
Companies listing in conjunction with an IPO must satisfy the minimum Market Value requirement only with the proceeds from the offering and can no longer include Resale Shares in their Market Value calculations under Nasdaq Listing Rules 5405(b) and 5505(b). OTC companies uplisting per the firm commitment requirement must also satisfy the applicable Market Value requirement without counting Resale Shares under Nasdaq Listing Rules 5405(a)(4) and 5505(a)(5). Additionally, the proposed changes increase the minimum public offering raise from $4 million to $5 million for Nasdaq Capital Market applicants and to $8 million for Nasdaq Global Market applicants. If the uplisting company qualifies for a standard other than the Net Income Standard, the minimum raise must satisfy those applicable standards.
Nasdaq has recommended these changes based on its observation that companies which included Resale Shares to meet their Market Value minimum experienced higher volatility on the date of listing than those companies that did not include Resale Shares to meet the requirement. In other words, Resale Shares may not contribute to liquidity to the same degree as shares sold in the public offering.
SEC’s Findings
The SEC found that the proposed rule change is consistent with the requirements of the Exchange Act of 1934, specifically Section 6(b)(5), which requires exchanges to promulgate rules designed, in part, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. Further, the proposed modifications should allow Nasdaq to better determine whether a security has adequate liquidity and is thus suitable for listing and trading on the exchange.
Takeaways
The SEC is currently soliciting comments electronically and by paper. Comments are publicly posted in the Federal Register. Submissions should be made on or before April 8. The SEC has also approved the rule change, as amended, on an accelerated basis. The SEC will approve the rule change prior to April 17. Once approved, the proposed modifications go into effect 30 days after the date of SEC approval.
Nasdaq and the SEC hope this modification ensures the exchange lists only securities with a sufficient market, adequate depth and liquidity, and sufficient investor interest to support an exchange listing. Companies considering listing on Nasdaq either through an IPO or uplisting from the OTC market should ensure they comply with the new rule once in effect and that their Market Value calculations meet applicable minimum requirements.
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Marina Phillips contributed to this article
FERC’s Co-Location Conundrum: Balancing Grid Reliability with Data Center Development as PJM’s Tariff Faces Scrutiny
Key Points
FERC’s Order Signals Transformative Change While Navigating Jurisdictional Limits: While FERC recognizes the urgent need to address co-location arrangements (particularly given the AI/data center boom), the intricate interplay of federal and state authority means any solution must carefully navigate jurisdictional boundaries. The Order reflects FERC’s attempt to maximize its impact within the framework of the Federal Power Act’s cooperative federalism.
Cost Allocation and Reliability Concerns Drive Reform: FERC’s primary concerns center on preventing cost-shifting to other ratepayers and ensuring grid reliability. The current Tariff’s lack of clear provisions for ancillary services, different co-location configurations, and sudden load shifts poses risks that FERC seeks to address through this proceeding.
Industry Response Suggests High Stakes for Multiple Stakeholders: The approximately 100 intervention motions filed indicate that stakeholders view this proceeding as potentially industry-reshaping. The outcome will likely influence how data center developers approach power supply strategies and could affect the viability of co-location as a solution to grid connection challenges.
Last year, the Federal Energy Regulatory Commission (“FERC”) convened a technical conference to discuss issues related to large loads being co-located with generating facilities (Docket No. AD24-11-000), which we summarized in the following client alert. In a related development late last year, Constellation Energy Generation, LLC (“Constellation”) filed a complaint against PJM Interconnection, LLC (“PJM”) pursuant to Section 206 of the Federal Power Act (“FPA”), arguing that PJM’s Open Access Transmission Tariff is “unjust, unreasonable and unduly discriminatory” due to the absence of guidance on co-located configurations where the generating asset is completely isolated from the grid (Docket No. EL25-20-000).
The importance of this topic is underscored by nearly daily announcements of new data center projects, such as the $500 billion proposed investment on AI infrastructure by OpenAI, SoftBank and Oracle highlighted by President Trump on the day after his inauguration. The massive power demands from both training and inference applications of AI are anticipated to place significant strains on power grids, while grid operators are contending with lengthy interconnection queues and insufficient buildout of transmission networks. In order to secure power supply for their projects, many data center developers are exploring co-location opportunities with new and existing generating facilities.
On February 20, 2025, FERC issued an order (the “Order”) consolidating the two dockets mentioned above and instituting for cause proceedings under Section 206 of the FPA, finding that PJM’s tariff appears to be unjust, unreasonable, unduly discriminatory or preferential (Docket No. EL25-49-00). FERC ordered PJM and the relevant transmission owners to either:
“show cause as to why the Open Access Transmission Tariff, the Amended and Restated Operating Agreement of PJM, and Reliability Assurance Agreement Among Load Serving Entities in the PJM Region (the “Tariff”) remains just and reasonable and not unduly discriminatory or preferential without provisions addressing with sufficient clarity or consistency the rates, terms and conditions of service that apply to co-location arrangements; or
explain what changes to the Tariff would remedy the identified concerns if [FERC] were to determine that the Tariff has in fact become unjust and unreasonable or unduly discriminatory or preferential and, therefore, proceeds to establish a replacement Tariff.”
On March 24, 2025, PJM and the transmission owners filed their responses to the Order, with both PJM and a joint answer submitted on behalf of a significant majority of the transmission owners arguing that the Tariff remains just and reasonable. The transmission owners urged FERC to clarify that co-located load served by generation interconnected to the transmission or distribution system is network load for the purposes of the Tariff. PJM presented a number of different configurations under the existing Tariff, while noting jurisdictional concerns based on federal/state shared jurisdiction and differences in regulation among the states.
Interested parties are able to respond with comments by April 23, 2025. Approximately 100 such entities have filed motions to intervene, which is indicative of the significance industry players are placing on these proceedings and FERC’s ultimate resolution.
FERC’s Analysis
Although the Order relates specifically to the complaint initiated by Constellation under Section 206 of the FPA, FERC is clearly conscious of many policy considerations that need to be addressed in the context of co-located large load configurations.
Jurisdiction. Although FERC has indicated that it is aware of the nationwide importance of co-located large load configurations, particularly with respect to the national security interests identified in facilitating the rapid buildout of AI infrastructure, it is also plainly conscious of its jurisdictional limitations. The Order highlights that the FPA only allocates jurisdiction to FERC for transmission and wholesale sales of electricity in interstate commerce, whereas retail sales, intrastate transmission and wholesaling, as well as siting authority, are all subject to state jurisdiction. Accordingly, there are jurisdictional limits to how transformative FERC’s guidance can be on this issue. The Order invites comments on when and under what circumstances co-located load should be considered as interconnected to the transmission system in interstate commerce. Specifically, FERC poses the query of whether fully isolated load should be understood as being connected to the transmission system, and if so, what characteristics would result in such a determination.1
Tariff Provisions. The Order makes a determination that the Tariff is “unjust and unreasonable or unduly discriminatory or preferential” due to its lack of clarity and consistency regarding rates and terms of use. For example, FERC comments that the Tariff does not account for costs associated with ancillary services that the co-located generator would be unable to provide, such as black start capabilities and load following services. There is also significant discussion about how the Tariff does not account for different co-location configurations, and specifically, how those differences may impact overall costs. Due to the ambiguities in the Tariff, FERC seems to be acutely concerned with the potential for parties to a co-location arrangement to shift costs to other ratepayers.
Reliability and Resource Adequacy. The concerns raised in the Order with respect to reliability and resource adequacy were identified and thoroughly discussed at the technical conference. For example, in the event a generator co-located with a large load customer temporarily goes offline, the large load customer could suddenly be drawing from the grid, thus potentially impacting overall network performance. Grid operators would be better placed if they had the ability to model such scenarios. Further, concerns relating to the removal of existing generating assets from capacity markets, and thus increasing rates of other consumers (at least in the short-term), were raised by many participants to the technical conference and restated in the Order. On the other hand, FERC notes that many of the concerns raised by serving large load customers would be present even if the customer is treated as network load rather than in a behind-the-meter configuration.
Questions. The Order stipulates that PJM and the transmission owners must include responses to a number of questions relating to: 1) transmission service, 2) ancillary or other wholesale services, 3) interconnection procedures and cost allocation, 4) the PJM capacity market, reliability and resource adequacy, and 5) general and miscellaneous questions which do not fall under any of these headings. The responses to these questions will assist FERC in framing its analysis of how revisions can be made to the Tariff to ensure it is just, reasonable and not unduly discriminatory.
Final Thoughts
Electricity infrastructure is already being built out at a rapid pace in the United States. This trend is set to continue, particularly to meet the needs of increased electrification across numerous sectors such as industry and transportation, along with the anticipated expansion of the data center fleet. Developers have pursued co-located arrangements as a potential means of reducing time frames for getting projects online. FERC’s guidance will result in greater certainty for developers on the costs and timing associated with co-location, which should clarify the role of co-location in the ongoing data center build-out.
1 Key questions about jurisdiction, cost allocation, and reliability turn on what it means for load to be isolated from the grid. For example, in the Complaint, Constellation describes “Fully Isolated Co-Located Loads” as behind the meter load with system protection facilities designed to ensure power does not flow from the grid to the load, with the PJM transmission owners refer to “fully isolated” load where both load and generator serving the co-located load are islanded from the transmission and distribution systems. PJM saw the nuance of different co-location agreements as risking to introduce regulatory gaps in federal and state jurisdiction.
How to Protect Your ESOP from Lawsuits Over Cash Holdings
At least five lawsuits have recently been filed against employee stock ownership plan (ESOP) fiduciaries alleging a failure to prudently invest cash held in the ESOP trust. While scrutiny of investments in company stock has long been common, the focus on cash holdings represents a significant and novel shift. These cases signal a potential trend, and ESOP fiduciaries should take steps to mitigate risk, as outlined below.
Why Are ESOP Cash Holdings Becoming Litigation Targets?
One recent case, Schultz v. Aerotech, sheds light on this issue. In this lawsuit, the plaintiffs argue that Aerotech’s ESOP held nearly 20% of its total assets in cash equivalents, yielding a return of less than 1.5% over five years. Aerotech counters that the cash-heavy approach was necessary to meet future repurchase obligations. The plaintiffs, however, claim the company could have pursued higher-yield investments while maintaining adequate liquidity.
The court reviewing Aerotech’s motion to dismiss pointed to the “vast disparity” between Aerotech’s cash-heavy approach and the practices of similar plans as raising plausible inference that the company, as a plan fiduciary, failed to meet its fiduciary obligations. While Aerotech may later demonstrate that its investment strategy was justified under the specific circumstances, the allegations of imprudence were sufficient for the case to survive a motion to dismiss and proceed to costly discovery.
What Actions Can ESOP Fiduciaries Take?
Although the courts have not yet fully addressed these claims, ESOP fiduciaries can take the following measures to reduce risk and align their actions with their fiduciary obligations:
1. Assess Cash Holdings and Prepare for Increased Scrutiny
Evaluate the rationale behind the ESOP’s cash holdings. For instance:
Are large cash reserves an intentional strategy to buffer repurchase obligations?
Or are they the unintended result of segregating accounts of terminated participants over extended periods (which raises other compliance issues)?
Prepare for increased scrutiny from employees, plaintiff’s lawyers, and regulators by documenting the reasoning behind your investment strategies.
2. Reevaluate Investment Strategies
Ensure the ESOP’s investment approach aligns with fiduciary duties under ERISA. Unlike investments in company stock, cash holdings and other non-stock assets do not enjoy the same protective standards. Consider whether reallocating cash into low-risk, higher-yield assets could achieve better returns without compromising liquidity. Ultimately, an ESOP is a retirement plan, and the fiduciaries responsible for investment of the plan assets need to evaluate the prudence of those investments. This is separate in certain respects to the company’s need to satisfy the repurchase obligation.
3. Engage an Investment Advisor or Investment Manager
Appointing an investment advisor or investment manager can help reduce fiduciary liability. An investment advisor could make recommendations to the plan administrator or ESOP committee on appropriate investments of cash for the ESOP. However, the ultimate fiduciary responsibility for the investment of plan assets would rest with the plan administrator or ESOP committee. The plan administrator or ESOP committee could also appoint an investment manager who would take on the primary fiduciary obligation for the management of the assets. However, the plan administrator or ESOP committee would still have to act prudently with respect to the selection and monitoring of the investment manager.
4. Invest in Fiduciary Training
Formal training on fiduciary duties, particularly on selecting and managing investments, is increasingly common for 401(k) plans and can be equally beneficial for ESOP fiduciaries. This is especially important if an investment manager is not engaged.
5. Evaluate Transferring Cash to a 401(k) Plan
One way to mitigate liability for investing cash allocated to the account of a terminated participant who no longer holds any stock is to transfer the cash out of the ESOP and into the employer’s 401(k) plan. This option is most useful when the accounts of terminated participants are segregated (i.e., the stock is exchanged for cash to maximize the investments in stock for active participants) and immediate distributions are not permitted. While there are complex pros and cons to this approach, reducing the fiduciary obligations on the ESOP fiduciaries is a clear benefit.
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New SEC Guidance May Increase Use of Generally Solicited Rule 506(c) Offerings
Highlights
The SEC issued new guidance on how an issuer wishing to engage in general solicitation under Rule 506(c) may satisfy the rule’s accredited investor verification requirement
The guidance clarifies that in appropriate circumstances, a minimum investment amount coupled with the receipt of investor representations may constitute reasonable verification steps
Corporate issuers and private fund sponsors now have a clearer path to engage in broad outreach to prospective investors without imperiling an offering’s exemption from Securities Act registration
On March 12, 2025, the staff of the Securities and Exchange Commission (SEC) Division of Corporation Finance issued new guidance on the accredited investor verification steps an issuer must take in order to make an unregistered offering in reliance on Rule 506(c) under the Securities Act. The guidance indicates that issuers may fulfill the Rule 506(c) accredited investor verification requirement by imposing relatively high minimum investment requirements and obtaining related purchaser representations.
The SEC staff thus has opened a clearer path for issuers – including both operating companies and private funds – to engage in broad outreach to prospective investors without endangering an offering’s exemption from Securities Act registration.
Background
Section 4(a)(2) of the Securities Act exempts from registration “transactions by an issuer not involving any public offering.” Regulation D is a safe harbor under Section 4(a)(2), compliance with which ensures that an offering satisfies the statutory exemption. For most private issuers, the key traditional component of Regulation D has been Rule 506(b). That rule permits unregistered offerings of any size to accredited investors (and a limited number of non-accredited investors), on the condition that, among other things, the issuer refrains from “general solicitation” in connection with the offering.
In the JOBS Act of 2012, Congress directed the SEC to expand Regulation D to permit general solicitation in certain unregistered offerings. The SEC did that by adopting Rule 506(c). Rule 506(c) states that an issuer may use general solicitation when conducting an unregistered offering of any size, provided that all purchasers in the offering are accredited investors and the issuer takes “reasonable steps to verify” each purchaser’s accredited investor status.
Since the rule’s adoption in 2013, issuers have not engaged in Rule 506(c) offerings to the extent many observers had initially predicted, primarily because issuers have viewed the accredited investor verification requirement as unwieldy in practice. While Rule 506(c)(2)(ii) sets forth a list of “non-exclusive, non-mandatory” verification methods that are deemed sufficient, issuers generally have seen these as burdensome to use and uncomfortably intrusive for investors.
At the same time, issuers have been concerned that relying on the principles-based verification approach noted in the 2013 adopting release might not provide unambiguous grounds to conclude that Rule 506(c) has been satisfied, in part because the release makes clear that a mere representation by a prospective purchaser as to its accredited investor status generally would not fulfill the verification requirement.
Private issuers, including private fund sponsors, therefore have largely foregone the allure of general solicitation and continued their traditional reliance on Rule 506(b).
New SEC Guidance
The Division of Corporation Finance staff now has issued fresh guidance concerning what can constitute “reasonable steps to verify” a purchaser’s accredited investor status for purposes of Rule 506(c). The guidance, issued on March 12, takes the form of new Compliance and Disclosure Interpretations (CDI) 256.35 and 256.36, as well as a related no-action letter addressed to Latham & Watkins LLP. The staff’s initiative has the potential to revive the appeal of Rule 506(c).
Minimum Investment Amount Is a Relevant Verification Factor
CDI 256.35 advises that if an issuer does not take any of the non-exclusive, non-mandatory accredited investor verification steps outlined in Rule 506(c)(2)(ii), it can apply a reasonableness standard directly to the specific facts and circumstances of the offering and its investors. Reprising the principles expressed in the 2013 adopting release, the guidance notes that in determining what constitute reasonable verification steps, the issuer should consider factors such as the nature of the purchaser and the type of accredited investor it claims to be; the amount and type of information that the issuer has about the purchaser; and the nature and terms of the offering, including any minimum investment amount.
High Minimum Investment Amount Plus Purchaser Representations May Equal Reasonable Steps to Verify
CDI 256.36 and the no-action letter address in more detail the possible significance of a minimum investment amount in the accredited investor verification context. The guidance here advises that, depending on the facts and circumstances, an issuer may be able to conclude that it has taken reasonable steps to verify purchasers’ accredited investor status when the offering “requires a high minimum investment amount.” In amplification of that thought, the no-action letter states that an issuer generally could conclude that it has taken reasonable steps to verify a purchaser’s accredited investor status if:
the offering requires a minimum investment of $200,000 for a natural person or $1,000,000 for an entity
the issuer obtains written representations that:
the purchaser is an accredited investor
the purchaser’s minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer
the issuer has no actual knowledge of any facts indicating that the foregoing purchaser representations are not true
The idea that a minimum investment amount can be a key factor in the analysis of reasonable verification steps is not completely new. As noted, the Rule 506(c) adopting release raised this concept in general terms. The new guidance, though, is more specific and thus may inspire more confidence on the part of issuers who decide to follow it. In particular, the staff’s position now essentially permits a form of “self-certification” of accredited investor status in Rule 506(c) offerings akin to the procedure on which issuers have long relied in traditional Rule 506(b) accredited investor offerings. This is a welcome development and should reduce uncertainty for issuers conducting or considering generally solicited offerings.
Takeaways
The SEC staff now may have reinvigorated the original promise of Rule 506(c). By providing a clear explanation of how minimum investment amounts and related investor representations may satisfy the accredited investor verification requirement, the guidance offers a means of using Rule 506(c) that is more straightforward and less intrusive than issuers previously have seen the rule to be. At least for well-established corporations and private fund sponsors (for which imposing significant minimum investment amounts is typically not a problem), new and fruitful forms of offering-related publicity now may become a practical option.
Of course, an issuer that decides to engage in general solicitation under Rule 506(c) must take care that its public statements are truthful, properly vetted, and consistent with its offering materials, in order to avoid anti-fraud issues under Rule 10b-5 or state law. In addition, where an offering also is being made outside the United States, the issuer must ensure that any public marketing done in reliance on Rule 506(c) does not conflict with relevant foreign regulations.
No APA Review of Commission Refusal to Issue Sua Sponte Show Cause Order
The US Court of Appeals for the Federal Circuit dismissed an appeal challenging a US International Trade Commission decision that upheld an administrative law judge’s (ALJ) order, ruling that such an order was within the Commission’s discretion and unreviewable. Realtek Semiconductor Corp. v. International Trade Commission, Case No. 23-1095 (Fed. Cir. Mar. 18, 2025) (Moore, C.J.; Reyna, Taranto, JJ.)
DivX filed a complaint at the Commission against Realtek alleging a violation of § 1337 of the Tarriff Act. DivX later withdrew the complaint. Realtek subsequently filed a motion for sanctions against DivX, alleging certain misconduct. The ALJ denied the motion on procedural grounds. Realtek subsequently petitioned for Commission review, asking the Commission to exercise its authority to issue a sua sponte order requiring DivX to show cause explaining why it had not engaged in sanctionable conduct. The Commission decided not to review and adopted the ALJ’s order without comment.
Realtek appealed, contending that the Commission violated the Administrative Procedure Act (APA) by not issuing a sua sponte show cause order. The Commission argued that Realtek’s appeal should be dismissed, contending that the issue raised was unreviewable.
The Federal Circuit agreed with the Commission, stating that under § 701(a)(2) of the APA, decisions made by an agency are unreviewable by the Court when they are entrusted to the agency’s discretion by law. The Court explained that the sua sponte issuance of a show cause order is a decision that “may be, not must be,” entered by the ALJ or on the Commission’s initiative. Therefore, the decision not to act sua sponte is a decision that remains wholly within the agency’s discretion.
The Federal Circuit rejected Realtek’s argument that the Commission’s refusal to act was reviewable because the Commission failed to provide reasoning, and that Commission review would have allowed the Court to determine if there were “illegal shenanigans” in exercising discretion. However, the case cited by Realtek involved the review of “shenanigans” that fell within the Court’s reviewable categories, not one related to the Commission’s refusal to issue a show cause order sua sponte. The Court found no support for Realtek’s claim that discretionary agency actions under § 701(a)(2) become reviewable under the APA simply because the agency fails to provide its reasoning.
SEC Staff Clarifies Stance on Crypto Mining
On March 20, 2025, the U.S. Securities and Exchange Commission took a step towards clarifying its position on crypto mining activities. In a recent statement, the SEC’s Division of Corporation Finance provided non-binding guidance on the application of federal securities laws to proof-of-work (PoW) mining activities, stating that such activities are beyond the SEC’s purview. This move aims to offer greater clarity to the market amidst ongoing regulatory uncertainties surrounding crypto assets.
The statement addresses crypto asset mining on public, permissionless networks using the PoW consensus mechanism. PoW mining involves using computational resources to validate transactions and add new blocks to a blockchain network. Miners are rewarded with newly minted crypto assets for their efforts.
The Division of Corporation Finance concluded that PoW mining activities do not involve the offer and sale of securities under the Securities Act or the Exchange Act, although it qualified its conclusion with footnoted statements indicating that any specific determination remains reliant on the facts and circumstances of a particular arrangement.
The statement applies the Howey test to determine whether general mining activities constitute investment contracts. The test evaluates whether there is an investment of money in an enterprise with a reasonable expectation of profits derived from others’ efforts. The SEC found that PoW mining does not meet these criteria, as miners rely on their own efforts to earn rewards. The statement further explained that combining computational resources in mining pools does not change the nature of the activity, as miners in pools still rely on their own efforts to earn rewards, not on others’ efforts. Therefore, participants in these activities do not need to register such transactions with the SEC under the Securities Act or fall within its exemptions.
Lone Democrat Commissioner Caroline Crenshaw expressed concerns about the statement, cautioning against interpreting it as a “wholesale exemption for mining.” She emphasized that the statement employs arguably circular reasoning, is non-binding, and that the SEC will continue to evaluate mining activities on a case-by-case basis. Crenshaw compared the mining statement to a previous statement on meme coins, which she believed was also misinterpreted as a broad exemption.
As the crypto industry continues to evolve, regulatory clarity remains crucial for fostering innovation while protecting investors. Crypto enthusiasts may believe the SEC’s latest statement is a step in the right direction, but market participants should remain vigilant and stay informed about ongoing regulatory developments.