Zone of Natural Expansion Is a Shield, Not a Sword
The US Court of Appeals for the Federal Circuit upheld a Trademark Trial & Appeal Board decision to partially cancel trademarks, ruling that an opposition challenger could not use the zone of natural expansion doctrine to claim priority because the doctrine is strictly defensive. Dollar Financial Group, Inc. v. Brittex Financial, Inc., Case No. 23-1375 (Fed. Cir. Mar. 19, 2025) (Prost, Taranto, Hughes, JJ.)
Dollar Financial Group (DFG) is a loan financing and check cashing business that has used the mark MONEY MART since the 1980s. In 2012, DFG expanded and started using the mark in connection with pawn brokerage and pawn shop services. DFG registered MONEY MART for these new services in 2014. Brittex petitioned to cancel the registration on several grounds, including that the registrations were improperly issued in violation of the Lanham Act, which bars registration of a mark that “so resembles . . . a mark or trade name previously used in the United States by another and not abandoned, as to be likely, when used on or in connection with the goods of the applicant, to cause confusion, or to cause mistake, or to deceive.” 15 U.S.C. § 1052(d). Brittex has operated pawn shops under the names Money Mart Pawn and Money Mart Pawn & Jewelry since the 1990s and claimed prior common law rights to the MONEY MART mark for pawn services.
The Board ruled in favor of Brittex, finding that Brittex had priority over DFG for pawn services due to its earlier use of the mark. The Board also determined that DFG could not rely on the zone of natural expansion doctrine to establish priority because this doctrine is purely defensive and does not grant a proactive right to register a mark on an expanded line of goods or services. The Board also concluded that there was a likelihood of confusion between the marks, given their high similarity and the overlapping nature of the services provided by both parties. DFG appealed.
The Federal Circuit agreed that Brittex had established priority because it was the first to use the MONEY MART mark in connection with pawn services. The Court also rejected DFG’s zone of natural expansion argument, reiterating that the doctrine is defensive and cannot be used to establish priority offensively.
The doctrine of natural expansion, as explained in Orange Bang v. Ole Mexican Foods (TTAB 2015), states that:
[T]he first user of a mark in connection with particular goods or services possesses superior rights in the mark as against subsequent users of the same or similar mark for any goods or services which purchasers might reasonably expect to emanate from it in the normal expansion of its business under the mark.
However, the doctrine does not give the senior mark user an offensive or proactive use.
The Federal Circuit also addressed DFG’s argument regarding the doctrine of tacking, which allows trademark holders to make minor modifications to their own mark while retaining the priority position of the older mark. Tacking is generally permitted to allow trademark holders to make minor adjustments to their marks to reflect changing consumer preferences, aesthetics, and marketing styles. However, the Federal Circuit determined that DFG had forfeited this argument by failing to present it during the initial cancellation proceeding before the Board. Consequently, the Court declined to consider the tacking argument on appeal.
Demystifying the Swamp: Executory Process in Louisiana
Some commentators are predicting that the declining foreclosure rates witnessed in 2024 could begin to trend upward this year. This potential upward trend underscores the importance of banking institutions and other mortgage holders understanding the foreclosure process and the costs associated therewith. This understanding is essential to making sound lending decisions.
While the foreclosure process varies state to state, Louisiana is (likely to nobody’s surprise) an outlier in this area of the law. While Louisiana requires foreclosure be accomplished through judicial means, it provides a unique and expedited procedure for doing so, known as executory process. While this unique procedure may seem intimidating to the unfamiliar, when examined and understood, it reveals itself to be a useful and cost-effective procedural tool for banks and other mortgage holders to exercise their foreclosure rights.
Executory Process vs. Ordinary Process
Unlike some other states, Louisiana does not allow nonjudicial foreclosure. As an alternative, Louisiana has the mechanism of executory process. Executory process is an accelerated summary procedure authorized under the Louisiana Code of Civil Procedure. It allows the holder of a mortgage or privilege, evidenced by an authentic act importing a confession of judgment, to effect an ex parte seizure and sale of the subject property without previous citation, contradictory hearing, or judgment.[1] This process is designed to be simple, expeditious, and inexpensive, enabling creditors to seize and sell property upon which they have a mortgage or privilege. This is in contrast to foreclosure by ordinary process, in which the general rules applicable to ordinary lawsuits are followed.
Executory process is considered a harsh remedy, requiring strict compliance with the letter of the law. Each step must be carried out precisely as outlined in the Louisiana Code of Civil Procedure and applicable jurisprudence. The Louisiana Code of Civil Procedure outlines specific requirements and protections to ensure due process for the debtor. The procedure is in rem, meaning it is directed against the property itself rather than the person, and no personal judgment is rendered against the debtor.
How It Works
The process begins with the filing of a petition supported by certain self-proving documents that are accurate and explicit in nature. The creditor must provide authentic evidence of the debt, the act of mortgage or privilege importing a confession of judgment, and any other necessary instruments to prove the right to use executory process. The trial judge must be convinced that these requirements are met before issuing an order for executory process. Following amendments in 1989, not every document submitted in support of the petition needs to be in authentic form. Under current law, certain signatures are presumed to be genuine and certain documents may be submitted in the form of a private writing.
Once the court grants the order, the property is seized and sold, with the proceeds credited against the indebtedness secured by the property. If the property was appraised prior to sale, then the creditor retains the right to pursue the debtor for any deficiency remaining after the sale. The creditor is entitled to bid at the judicial sale of the property, and if the creditor’s bid is the winning bid and is the same or lower than the indebtedness of the creditor, the creditor will only be obligated to pay the sheriff’s costs of sale. If the creditor has the winning bid on the property, the creditor obtains the property free and clear of all inferior encumbrances, but the property will remain subject to any superior encumbrances.
After the recordation of the sheriff’s sale or process verbal, a sale through executory process may only thereafter be attacked by direct action alleging procedural defects in the process of such substance that they strike at the foundation of the executory proceeding.[2]
Debtors have protections under this process. They can arrest the seizure and sale of their property by seeking an injunction if (i) the debt is extinguished, (ii) the debt is legally unenforceable, or (iii) the procedural requirements for executory process have not been followed. This petition for injunction must be filed in the court where the executory proceeding is pending. Additionally, the law provides for certain delays in the process to benefit the debtor, although these delays have normally been waived by the debtor in the act of establishing the security interest.
Executory process is designed to be a swift and cost-effective method for creditors to enforce their rights, but it is surrounded by safeguards to protect the debtor’s interests, ensuring that the process is not misapplied and that due process is maintained.
Conclusion
While executory process is a unique creature of Louisiana law, it is not as alien as it may first appear. The Louisiana executory process essentially combines elements of ordinary and summary process to create a streamlined judicial foreclosure process. While not as expedient as the nonjudicial foreclosure available in some other states, it is not as onerous as seeking foreclosure through ordinary judicial process. Banks and other mortgage holders should be comfortable in understanding that, while unique, executory process in Louisiana is not something to be feared.
[1] Louisiana Code of Civil Procedure art. 2631; see also Liberty Bank & Tr. Co. v. Dapremont, 803 So. 2d 387, 389 (La. Ct. App. 2001).
[2] Louisiana Revised Statute 13:4112; Deutsche Bank Nat’l Tr. Co. ex rel. Morgan Stanley ABS Capital I, Inc. v. Carter, 59 So.3d 1282, 1286 (La. Ct. App. 2011).
Mississippi Foreclosure Basics
Lenders facing loan defaults on residential or commercial properties in Mississippi are often forced to pursue foreclosure measures if the default is not cured. Compared with other states, Mississippi has a relatively easy and streamlined foreclosure process for situations involving routine defaults with few complications. In more complex cases, Mississippi also affords lenders the right to pursue formal legal action through the filing of a complaint for judicial foreclosure. This article will provide a basic overview of each process, including some of the pros and cons of each.
Nonjudicial Foreclosure
The vast majority of foreclosures in Mississippi are conducted through the process of nonjudicial foreclosure, also known as “straight foreclosure.” Nonjudicial foreclosure is a relatively quick and easy process whereby a lender declares a default, accelerates the loan balance, and gives the borrower an opportunity to cure, typically 30 days. At the end of the 30-day period, if the borrower has not cured the default, the lender can move forward by transmitting, posting, and publishing a notice of foreclosure sale.
Prior to doing so, the lender will need to have title work performed on the property in question to determine if there are any uncured tax sales, encroachments, unauthorized conveyances, or other issues that need to be addressed. In most cases, the lender will also need to file a “Substitution of Trustee,” to designate a new trustee of the deed of trust to perform the foreclosure. Consequently, most foreclosure notices are captioned as “Substitute Trustee’s Notice of Sale.” Notice must be sent to the borrower, posted at the courthouse in the place commonly used for posting legal notices, and published in an authorized legal publication for the county where the property is located. Publication must be made once a week for three consecutive weeks, which has been defined as 21 continuous and uninterrupted days. For that reason, in practice, most foreclosure attorneys will run their notices in the local paper once a week for four weeks to ensure continuous presence of the notice for the statutory period.
On the date set for the sale, the foreclosing attorney and a lender representative should appear at the courthouse. Sales must be conducted between 11:00 a.m. and 4:00 p.m. on days the courthouse is open. In other words, a sale should not be set on a weekend or a recognized holiday. Most sales are conducted a few minutes after 11:00 a.m. Upon arriving at the courthouse, the attorney or the lender’s representative should pull the foreclosure notice from the posting board. The attorney or lender’s representative will also need to get the proof of publication from the local newspaper before or after the sale. The proof of publication must be attached to the substitute trustee’s deed in order to effectuate proper filing of the deed and conveyance of the property. Filing fees will vary, based on the number of notations that must be made in the margins to reflect proper recordation. Payment methods can also vary, so it is always advisable to have cash on hand if recording the deed in person.
After the sale, the lender has one year to file suit against the borrower for any remaining deficiency. The deficiency is calculated as the balance of principal, interest, attorneys’ fees, and costs of sale minus the foreclosure sale price. Entitlement to a deficiency is not automatic. Borrowers have certain defenses based on the commercial reasonableness of the sale, which involves examination of the sale price based on the appraised value and other factors. Under the case law, these types of defenses are not available to guarantors, at least in theory. Nevertheless, such issues are typically raised by guarantor defendants in post-foreclosure actions seeking to collect the balance. The one-year limitation on suing the borrower is also inapplicable to guarantors — again, at least in theory.
Judicial Foreclosure
Although Mississippi does not require judicial foreclosure, Mississippi law allows lenders to proceed by court action. A property conveyance made in conjunction with a judgment of judicial foreclosure should be accorded the highest level of insurability, because of the court decree associated with a finding that the lender has the right to foreclose, the resulting judgment granting the lender permission to do so, and the subsequent deed recorded. An extra level of assurance is also provided by the requirement of a post-sale report and approval by the court. The drawback to judicial foreclosures is that they are much more expensive and time-consuming than straight foreclosures. Thus, when the facts are straightforward, a straight foreclosure is preferable.
Judicial foreclosure comes into play when title work reveals an encroachment, an uncured interest, a matured tax sale, or some other cloud or issue that cannot be remedied through nonjudicial foreclosure. In addition, the judicial foreclosure process is valuable if there are problems with a property description, or problems with the documentation surrounding a loan. For example, if there is an error in the name of a party, a discrepancy in a maturity date, or a misdescription of the property in the deed of trust, a lender is well advised to file a complaint for judicial foreclosure coupled with a count for a declaratory judgment in order to cure such problems.
Judicial foreclosure complaints must be filed in the chancery court in the county where the property is located. The borrower and anyone else appearing in the chain of title whose interest will be affected must also be named. Borrowers have a right to defend against a judicial foreclosure action just as any defendant has a right to defend any sort of lawsuit filed against it. In most cases where the lender can show that money was loaned and that the property in question was intended to be taken as security for the loan, the lender can prevail. Problems arise when there is a fundamental disagreement over the scope of collateral, the particulars of a tract of property, whether payment was made, and those types of disputes. In addition, certain problems with deeds of trust are simply not curable (e.g., the omission of the beneficiary of the deed of trust) and must be dealt with in other ways.
Even if a borrower does not aggressively defend a judicial foreclosure action, the process can still be lengthy, even where the borrower defaults and the petitioning lender is entitled to seek a default judgment. In such cases, most chancery courts still require counsel and a lender’s representative to set the matter for hearing and to appear in court to make a record of the entitlement to relief in order to get the judgment of judicial foreclosure.
Obtaining that judgment is not the final part of the process, though. The judgment simply allows the lender to publish notice and conduct a sale in the same way as it would conduct a nonjudicial foreclosure sale. The judicial foreclosure process also requires the “special commissioner” (as opposed to the substitute trustee in nonjudicial foreclosures) to file a post-sale report with the court, to seek approval of the sale. Once that final order is entered, the special commissioner can prepare a deed to transfer the property and can apply the funds received at the sale.
Summary and Conclusion
The overview of each process set forth above is not a comprehensive guide to Mississippi foreclosure practice. It is merely intended to acquaint readers with the basics of each method and the issues that will be faced. As with any legal issue presented, it will be necessary to consult with counsel to ensure proper handling.
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.
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.
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.
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.
Will Texas Become the First State to Enact a “Mini-CFIUS” Review Process?
On March 13, 2025, the Texas Legislature introduced HB 5007, which, if enacted, could establish the first US state regime tasked with screening foreign investments on national security grounds.[1]
To be sure, this is not the first attempt by Texas to regulate acquisitions by foreign buyers within the state. The Lone Star Infrastructure Protection Act[2] (LIPA), which took effect in June 2021, prohibits Texas businesses from contracting with entities owned or controlled by individuals from China, Russia, North Korea and Iran if the contracting relates to critical infrastructure.[3] In addition, many other states have passed legislation limiting certain foreign investments into agricultural land within their borders.[4] Others are debating similar legislation.
HB 5007 is wholly different. It calls for the formation of a Texas Committee on Foreign Investment (TCFI). Modeled on the federal government’s interagency Committee on Foreign Investment in the United States or CFIUS, TCFI would be comprised of representatives from various Texas state agencies and charged with overseeing the pre-closing review and regulation of foreign acquisitions effecting “critical infrastructure” in Texas, agricultural land in Texas, or the sensitive personal data of Texas residents.[5] Subject to a monetary threshold to be determined by the governor, such transactions would require notification to the Texas Attorney General at least 90 days before closing, with penalties for non-compliance of up to $50,000 per violation.
While there is still uncertainty on whether and when Texas may implement the TCFI, companies considering transactions not only in Texas, but in other states rapidly enacting similar laws, should make sure to perform the necessary due diligence to identify and comply with these regulations, and also build in adequate time for closing delays based on mandatory notification periods that may vary by state.
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[1] TX HB5007, accessible at: https://capitol.texas.gov/BillLookup/History.aspx?LegSess=89R&Bill=HB5007
[2] Lone Star Infrastructure Protection Act, 87th Leg., R.S., S.B. 2116 (codified as Tex. Bus. & Com. Code § 113.001, et seq.)
[3] LIPA defines critical infrastructure as: 1) communication infrastructure systems; 2) cybersecurity system; 3) electric grid; 4) hazardous waste treatment systems; and 5) water treatment facilities.
[4] https://nationalaglawcenter.org/state-compilations/aglandownership/
[5] “Critical infrastructure” is defined more broadly under HB 5007 than LIPA and includes, among other categories: critical manufacturing, dams, defense industrial bases, emergency services, communications facilities, energy, health care, food, financial services, information technology, transportation systems, nuclear materials, water systems, and government facilities.
HMRC Supports a UK Restructuring Plan with its Change in Approach – Good News for Future RPs?
You may have read our previous blog about the Outside Clinic Restructuring Plan (RP) which asked whether 5p was enough to cram down HMRC and thought, well surely if that’s not enough, 10p would work? The Enzen Restructuring Plans (RPs) that were sanctioned this week also sought to compromise HMRC’s secondary preferential debt proposing a payment that would see HMRC recover 10p in the £ compared to nil in the relevant alternative. The Enzen RPs were not only sanctioned but also supported by HMRC – does this signal a change in attitude by HMRC?
In 2022 and 2023 we saw a number of RPs seeking to compromise HMRC secondary preferential debt in one way or another, and HMRC opposing those. Their reasons for not supporting often centered around the fact that HMRC is an involuntary creditor and that it has preferential status (in respect of certain of its debts) in an insolvency and therefore should be treated differently to other unsecured creditors in an RP.
The risk of HMRC challenge seemed to dissuade many (at least in the mid-market) from using the RP as a tool to restructure after plans proposed by the Great Annual Savings (GAS), Nasmyth and Prezzo were all opposed by HMRC. It was following those cases that HMRC then issued guidance outlining its expectations. Other RPs that have involved HMRC debt included Fitness First where HMRC’s debt was rescheduled, rather than compromised, and Clinton Cards, where HMRC’s debt also remained intact. It is perhaps not therefore surprising we haven’t seen many “HMRC” RPs since these due to the risk (and not to mention the cost) of a potential challenge from HMRC.
The Enzen RPs therefore seem to signal a change in attitude by HMRC who, for the first time, positively supported the plans. But why the change?
There were two plans proposed by Enzen entities, (Enzen Global Limited (EGL) and Enzen Limited (EL). HMRC was owed £5,286,674 by EGL in respect of preferential debts, and £4,319,890 by EL.
The EGL plan proposed to pay HMRC £250,000 in cash, equivalent to a return of 4.2p in the £ compared to 0.1p in the relevant alternative (in this case administration). Under the EL plan HMRC was also to receive a £250,000 cash payment resulting in a return of 5.6p in the £ compared to nil in the relevant alternative – which would also be administration. Essentially HMRC would receive a payment of approximately 10p in the £ under both plans.
Certain other preferential debts (VAT, NIC and PAYE) which were being paid when they fell due, were treated as critical payments under the RPs so were not compromised.
Although HMRC made noises at the convening stage suggesting that it might oppose the RPs there was no indication as to the basis on which it would do so. At this point HMRC’s position was governed by the fact that it hadn’t had enough time to consider its stance ahead of the convening hearing, given the substantial amount of material they had to review.
Between the convening hearing and sanction, HMRC raised its concerns in correspondence with the plan companies (although there is no specific detail about those concerns) save that they highlighted:
that the court should not cram down HMRC without good reason (following Naysmyth)
HMRC has a critical public function, and its views should carry considerable weight (following GAS).
Following this HMRC negotiated an additional £100,000 payment from both EGL and EL which increased its returns under the RPs to 6.6p under the EGL plan and to 8.1p under the EL plan. On that basis HMRC voted in favour of the RPs.
At the sanction hearing HMRC made their position on the RP clear and made the following statements indicating a new approach:
HMRC told the court that they knew they had opposed plans in the past (referencing Naysmith and GAS in particular), but they wanted their stance to the Enzen plan to prove indicative of a more proactive approach in relation to RPs.
HMRC also made it clear it is looking to participate as fully as possible with RPs where it can in the future.
The main reason HMRC supported in this case was because of the increased payment EML and EL were willing to give them, which meant there was a material increase to them.
There are at least two more plans that are coming before the court for sanction soon – Outside Clinic and Capricorn – that include an element of HMRC debt. Following the Enzen RPs it will be interesting to see, in light of HMRC’s positive engagement on Enzen, whether HMRC will support those.
The Enzen RPs will no doubt spark interest from the mid-market given HMRC’s stance to date has arguably been a blocker on mid-market RPs, but the costs of tabling an RP are still likely to be a concern given the litigious nature of many. Also if it is HMRC’s policy to now participate in restructuring plan hearings (even if they support) who bears those costs?
Annabelle McKeeve also contributed to this article.
FCA Review of Private Fund Market Valuation Practices
Go-To Guide:
The United Kingdom’s Financial Conduct Authority (FCA) is increasing its scrutiny of private fund market valuation practices, highlighting the need for stronger governance, transparency, and conflict-of-interest management across fund managers.
Fund managers are expected to apply consistent valuation methodologies, maintain functional independence in valuation processes, and address gaps in ad hoc valuation procedures.
The FCA has emphasised the importance of engaging third-party valuation advisers and has reminded fund managers of the importance of ensuring the independence of valuers.
Private fund managers should consider conducting gap analyses and strengthening their valuation frameworks to align with the FCA’s expectations.
Background
The FCA has embarked on a level of engagement with the private funds sector not seen since the consultation and engagement exercises surrounding the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in 2013.
On 26 February 2025, the FCA issued a letter to the CEOs of all asset management and alternative firms, setting out its priorities for the year and informing them that it intends to:
engage with the UK fund management industry in a review of the UK’s implementation of the AIFMD, with a view to streamlining certain UK regulatory requirements (i.e. after maintaining a post-Brexit status quo, the FCA is now finally considering how UK private fund managers and their affiliated entities should be regulated); and
launch a review of conflict of interest management within UK fund managers. As part of this, the FCA will assess how firms oversee the application of their conflict of interest frameworks through their governance bodies and evaluate how investor outcomes are protected. (Note that the FCA will likely expect to see actual living processes deployed to prevent conflicts at all levels of a fund’s structure, with the efficiency of those processes tested by UK managers).
Subsequently, on 5 March 2025, the FCA published its findings from its review of private market valuation practices (the “Review’s Findings”).
Context of the FCA Review
The FCA’s review stemmed from its concern that private market assets, unlike public market assets, are not subject to frequent trading or regular price discovery. This necessitates firms to estimate values using judgment-based approaches, which can pose risks of inappropriate valuations due to conflicts of interest or insufficient expertise.
Private fund managers in the UK deploy a variety of different structures:
many of the valuation-related issues are more pronounced for open-ended funds that permit redemptions during the fund’s life, compared to closed-ended funds, where the true value and performance can only be determined at the end of the fund’s life when assets are sold.
funds that invest into a variety of assets, from relatively liquid ones (as is common with many hedge funds) to illiquid assets whose value may evolve as managers improve the asset (e.g. real estate funds and certain private equity funds).
We expect that the FCA will continue to focus on this area and will likely require all compliance teams across UK fund managers – regardless of their fund strategies – to conduct a gap analysis against the Review’s Findings.
The Review’s Findings
The FCA identified examples of good practice in firms’ valuation processes, including:
high-quality reporting to investors;
comprehensive documentation of valuations; and
use of third-party valuation advisers to enhance independence, expertise, and the consistent application of established valuation methodologies.
Overall, the FCA found that firms recognised the importance of robust valuation processes that prioritise independence, expertise, transparency and consistency.
The Review’s Findings, however, also identified areas requiring improvement, particularly in managing conflicts of interest. For example, conflicts can arise between a manager and its investors in the valuation process, such as when fees charged to investors depend on asset valuations. While firms acknowledged conflicts relating to fee structures and remuneration policies, the FCA found that other potential valuation-related conflicts were inadequately recognised or documented. These include:
conflicts in investor marketing, where unrealised performance of existing funds may be used to market new funds;
secured borrowing, where valuations may be inflated to secure higher borrowing levels; and
pricing of redemptions and subscriptions based on a fund’s net asset value.
The FCA expects firms to identify, document, and assess all potential and relevant valuation-related conflicts, determine their materiality, and take actions needed to mitigate or manage them.
The Review’s Findings also highlighted variations in firms’ approaches to independence within valuation processes. The FCA noted that functional independence within valuation functions and voting membership of valuation committees are critical for effective control and expert challenge. Additionally, the FCA found that many firms lacked clearly defined processes or consistent approaches for conducting ad hoc valuations during market or asset-specific events. Given the importance of ad hoc valuations in mitigating the risk of stale valuations, the FCA encouraged firms to consider the types of events and quantitative thresholds that could trigger such valuations and document how they are to be conducted.
The FCA flagged the following key areas for managers to consider reviewing and potentially improving:
the governance of their valuation processes;
the identification, documentation, and management of potential conflicts within valuation processes;
ensuring functional independence for their valuation process; and
incorporating defined processes for ad hoc valuations.
Breakdown of the Review’s Findings
Governance arrangements
The FCA found that while most firms had specific governance arrangements in place for valuations, including valuation committees responsible for making valuation decisions or recommendations, there were instances where committee meeting minutes lacked sufficient detail on how valuation decisions were reached. The FCA emphasised that firms must keep detailed records to enhance confidence in the effectiveness of oversight for valuation decisions.
Conflicts of interest
The FCA expects firms to identify, avoid, manage and, when relevant, disclose conflicts of interest. The Review’s Findings identified specific areas where conflicts are likely to arise, including investor fees, asset transfers, redemptions and subscriptions, investor marketing, secured borrowing, uplifts and volatility and employee remuneration. While the FCA found that conflicts around fees and remuneration were typically identified and mitigated through fee structures and remuneration policies, other potential conflicts were only partially identified and documented. Many managers had not sufficiently considered or documented these conflicts, often relying on generic descriptions.
The FCA expects firms to thoroughly assess whether valuation-related conflicts are relevant and, if so, to properly document them and the actions taken to mitigate or manage them. This may include engaging third-party valuation advisers.
Functional independence and expertise
The FCA reviewed the extent to which firms maintained independent judgment within their valuation processes, by looking at independent functions and the expertise of valuation committee members.
Only a small number of managers clearly demonstrated functional independence by maintaining a dedicated valuation function or an independent control function to lead on valuations. Such functions were responsible for developing valuation models and preparing recommendations for decisions made by valuation committees.
The FCA noted that examples of good practice to ensure independence included establishing a separate function to lead valuations and ensuring sufficient independence within the voting membership of valuation committees to guarantee effective control and expert challenge.
Policies, procedures and documentation
Unsurprisingly, the FCA emphasised that clear, consistent and appropriate policies, procedures and documentation are core components of a robust valuation process. These elements ensure a consistent approach to valuations and enable auditors and investors to verify adherence to the valuation process.
The FCA found that not all firms provided sufficient detail on their rationales for selecting methodologies and their limitations, nor did they include a description of the safeguards in place to ensure the functional independence of valuations or potential conflicts in the process. The FCA also observed examples of vague rationales for key assumption changes, such as adjustments in discount rates.
The FCA stated that it would encourage firms to engage with auditors appropriately, by inviting them to observe valuation committee meetings, raising auditor challenges at those meetings and taking proactive measures of managing conflicts of interest involving the audit service provider. It also stated that back-testing results can help firms inform their approach to valuations, by identifying insights about current market conditions and potential limitations in models, assumptions and inputs and encouraged firms to consider investing in technology to improve consistency and reduce the risk of human error in valuation processes.
Frequency and ad hoc valuations
The FCA noted that infrequent valuation cycles risk stale valuations, which may not accurately reflect the current conditions of investors’ holdings. This can lead to potential harm, such as inappropriate fees or investors redeeming at inappropriate prices.
The FCA emphasised that conducting ad hoc valuations (outside of the regular valuation schedule) can help mitigate the risk of stale valuations if material events cause significant changes in market conditions or how an asset performs.
Most firms, however, were found to lack formal processes for conducting ad hoc valuations. The FCA urged firms to incorporate a defined process for ad hoc valuations, including defining the thresholds and types of events that would trigger an ad hoc valuation (such as movement in the average multiple of the comparable set, company-specific events and fund-level triggers). It found that most firms waited for changes to flow through at the next valuation cycle instead of conducting ad hoc valuations. Only a few firms formally incorporated ad hoc valuations into their valuation processes by having defined types of events that would trigger these. The FCA stated firms should consider incorporating defined ad hoc valuation processes to mitigate the risk of stale valuations.
Transparency to investors
The FCA emphasised that transparency to investors increases confidence in their decision-making around private assets and enables them to make better informed decisions. The FCA urged full-scope UK AIFMs to provide investors with clear information about valuations and their calculations and encouraged all FCA-regulated firms to pay close attention to the information and needs of their clients.
The Review’s Findings highlighted that most firms demonstrated good practice by reporting both quantitative and qualitative information on performance at the fund and asset-levels, as well as holding regular conference calls with investors. Some firms further enhanced their reporting by including a ‘value bridge’ in their investor reports, showing the different components driving changes in asset values or net asset values, helping investors to better understand the factor influencing valuation changes. The FCA noted that some firms faced barriers limiting their ability to share information with investors. These barriers included restrictions arising from non-disclosure agreements and concerns about the commercial sensitivity of sharing valuation models.
The FCA urged firms to consider whether they can improve investor reporting and engagement by providing detail on fund-level and asset-level performance to increase transparency and investor confidence in the valuation process.
Application of valuation methodologies
The FCA stressed that valuation methodologies must be applied consistently for valuations to be appropriate and fair. In its review, the FCA observed that while firms applied valuation methodologies generally consistently by asset class, there were instances where firms employed different approaches, such as comparable sets and discount rate components for private equity assets. While firms could reasonably justify the use of different assumptions, the FCA expressed concerns that these variations might impair investors’ ability to compare valuations across firms. Firms demonstrating good practice were those that employed another established methodology as a sense check to validate their primary valuation and confirm their judgment.
The FCA expects firms to apply valuation methodologies and assumptions consistently, making valuation adjustments solely based on fair value. It also emphasized the need for valuation committees and independent functions to focus on these adjustments to ensure decisions are robust and well-documented.
Use of third-party valuation advisers
The FCA noted that it is good practice to seek further validation for internal valuations through third-party valuation advisors, particularly after identifying material conflicts of interest, such as calculating fees, pricing redemptions and subscriptions, transferring asset using valuations.
The FCA found that most managers engaged third-party valuation advisers and discussed their controls to assess the quality of service and independence provided by these advisers. Examples of good practice included conducting an annual exercise whereby the firm used a valuation from an alternative provider for the same asset and compared the quality of valuations from both providers.
Firms that adopted good practices had considered the limitations of the service provided, taken steps to ensure the independence of the third-party valuation advisers, and retained responsibility for valuation decisions.
The FCA urged firms to consider the strengths and limitations of the service provided and to disclose the nature of these services to investors, including the portfolio coverage and frequency of valuations. Additionally, firms need to be aware of potential conflicts of interest when using third-party valuation advisers and should ensure that investment professionals are kept at arm’s length to maintain the independence of third-party valuations.
Next Steps
The FCA indicated that the Review’s Findings will inform its review of the AIFMD and will be taken into consideration when updates are made to the FCA’s Handbook rules. Furthermore, the FCA indicated that the Review’s Findings will inform its contribution to the International Organization of Securities Commission’s review of global valuation standards to support the use of proportionate and consistent valuation standards globally in private markets.
In the meantime, the FCA has said that managers should assess the Review’s Findings and address any gaps in their valuation processes to ensure they are robust and are supported by a strong governance framework with a clear audit trail. Boards and valuation committees should also be provided with regular and sufficient information on valuations to ensure effective oversight.
In light of the above, fund managers and other regulated firms in the UK performing key functions related to funds should:
consider reviewing the FCA’s findings and identify any gaps in their valuation approach, taking action to address deficiencies where applicable;
ensure their governance arrangements provide accountability for valuation processes;
assess whether their valuation committees have sufficient independence and expertise to make valuation decisions; and
enhance oversight of third-party valuation advisers and consider the strengths and limitations of service providers.