How to Report Cyber, AI, and Emerging Technologies Fraud and Qualify for an SEC Whistleblower Award
SEC Forms Cyber and Emerging Technologies Unit
On February 20, 2025, the SEC announced the creation of the Cyber and Emerging Technologies Unit (CETU) to focus on combatting cyber-related misconduct and to protect retail investors from bad actors in the emerging technologies space. In announcing the formation of the CETU, Acting Chairman Mark T. Uyeda said:
The unit will not only protect investors but will also facilitate capital formation and market efficiency by clearing the way for innovation to grow. It will root out those seeking to misuse innovation to harm investors and diminish confidence in new technologies.
As detailed below, the SEC’s press release identifies CETU’s seven priority areas to combat fraud and misconduct. Whistleblowers can provide original information to the SEC about these types of violations and qualify for an award if their tip leads to a successful SEC enforcement action. The largest SEC whistleblower awards to date are:
$279 million SEC whistleblower award (May 5, 2023)
$114 million SEC whistleblower award (October 22, 2020)
$110 million SEC whistleblower award (September 15, 2021)
$104 million SEC whistleblower award (August 4, 2023)
$98 million SEC whistleblower award (August 23, 2024)
SEC Whistleblower Program
Under the SEC Whistleblower Program, the SEC will issue awards to whistleblowers who provide original information that leads to successful enforcement actions with total monetary sanctions in excess of $1 million. A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected. The SEC Whistleblower Program allows whistleblowers to submit tips anonymously if represented by an attorney in connection with their disclosure.
In its short history, the SEC Whistleblower Program has had a tremendous impact on securities enforcement and has been replicated by other domestic and foreign regulators. Since 2011, the SEC has received an increasing number of whistleblower tips in nearly every fiscal year. In fiscal year 2024, the SEC received nearly 25,000 whistleblower tips and awarded over $225 million to whistleblowers.
The uptick in received tips, paired with the sizable awards given to whistleblowers, reflects the growth and continued success of the whistleblower program. See some of the SEC whistleblower cases that have resulted in large awards.
CETU Priority Areas for SEC Enforcement
The CETU will target seven areas of fraud and misconduct for SEC enforcement:
Fraud committed using emerging technologies, such as artificial intelligence (AI) and machine learning. For example, the SEC charged QZ Asset Management for allegedly falsely claiming that it would use its proprietary AI-based technology to help generate extraordinary weekly returns while promising “100%” protection for client funds. In a separate action, the SEC settled charges against investment advisers Delphia and Global Predictions for making false and misleading statements about their purported use of AI in their investment process.
Use of social media, the dark web, or false websites to perpetrate fraud. For example, the SEC charged Abraham Shafi, the founder and former CEO of Get Together Inc., a privately held social media startup known as “IRL,” for raising approximately $170 million from investors by allegedly fraudulently portraying IRL as a viral social media platform that organically attracted the vast majority of its purported 12 million users. In reality, IRL spent millions of dollars on advertisements that offered incentives to download the IRL app. Shafi hid those expenditures with offering documents that significantly understated the company’s marketing expenses and by routing advertising platform payments through third parties.
Hacking to obtain material nonpublic information. For example, the SEC brought charges against a U.K. citizen for allegedly hacking into the computer systems of public companies to obtain material nonpublic information and using that information to make millions of dollars in illicit profits by trading in advance of the companies’ public earnings announcements.
Takeovers of retail brokerage accounts. For example, the SEC charged two affiliates of JPMorgan Chase & Co. for failures including misleading disclosures to investors, breach of fiduciary duty, prohibited joint transactions and principal trades, and failures to make recommendations in the best interest of customers. According to the SEC’s order, a JP Morgan affiliate made misleading disclosures to brokerage customers who invested in its “Conduit” private funds products, which pooled customer money and invested it in private equity or hedge funds that would later distribute to the Conduit private funds shares of companies that went public. The order finds that, contrary to the disclosures, a JP Morgan affiliate exercised complete discretion over when to sell and the number of shares to be sold. As a result, investors were subject to market risk, and the value of certain shares declined significantly as JP Morgan took months to sell the shares.
Fraud involving blockchain technology and crypto assets. For example, the SEC brought charges against Terraform Labs and its founder Do Kwon for orchestrating a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities. In a separate action, the SEC brought charges against FTX CEO Samuel Bankman-Fried for a years-long fraud to conceal from FTX’s investors (1) the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund; (2) the undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures; and (3) undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.
Regulated entities’ compliance with cybersecurity rules and regulations. For example, the SEC settled charges against transfer agent Equiniti Trust Company LLC, formerly known as American Stock Transfer & Trust Company LLC, for failures to ensure that client securities and funds were protected against theft or misuse, which led to losses of millions of dollars in client funds.
Public issuer fraudulent disclosure relating to cybersecurity. For example, the SEC settled charges against software company Blackbaud Inc. for making misleading disclosures about a 2020 ransomware attack that impacted more than 13,000 customers. Blackbaud agreed to pay a $3 million civil penalty to settle the charges. In a separate action, the SEC settled charges against The Intercontinental Exchange, Inc. and nine wholly owned subsidiaries, including the New York Stock Exchange, for failing to timely inform the SEC of a cyber intrusion as required by Regulation Systems Compliance and Integrity.
How to Report Fraud to the SEC and Qualify for an SEC Whistleblower Award
To report a fraud (or any other violations of the federal securities laws) and qualify for an award under the SEC Whistleblower Program, the SEC requires that whistleblowers or their attorneys report the tip online through the SEC’s Tip, Complaint or Referral Portal or mail/fax a Form TCR to the SEC Office of the Whistleblower. Prior to submitting a tip, whistleblowers should consult with an experienced whistleblower attorney and review the SEC whistleblower rules to, among other things, understand eligibility rules and consider the factors that can significantly increase or decrease the size of a future whistleblower award.
A New Era for Crypto Regulation & Innovation? The Crypto Executive Order, a Rebooted SEC Crypto Task Force & the Journey Ahead
Recent regulatory developments in the crypto asset and financial technology space suggest that US regulators may be shifting toward a more balanced approach — one that prioritizes clearer regulations while fostering innovation over a more enforcement-driven strategy. President Trump’s recent executive order on this topic reshapes the Biden administration’s approach to crypto assets by eliminating many of the prior administration’s policies on crypto and establishing the President’s Working Group on Digital Asset Markets (Working Group). Acting US Securities and Exchange Commission (SEC) Chairman Mark Uyeda has relaunched the SEC’s Crypto Task Force, appointing Commissioner Hester Peirce to lead its efforts and set its objectives. The SEC has also moved to roll back problematic accounting guidance and pause certain enforcement actions against major crypto companies. Other key regulators, including the Commodity Futures Trading Commission (CFTC) and the Office of the Comptroller of the Currency (OCC), have yet to take similar steps. However, the president recently nominated Brian Quintenz to lead the CFTC, and Jonathan Gould to head the OCC, both of whom have substantial crypto experience. Taken together, these developments may signal a long-awaited shift toward regulatory clarity for crypto that balances innovation and investor protection.
If these developments are received favorably by the industry, we anticipate more investment and new entrants in the crypto asset space. In particular, we can expect additional research & development and new innovations by both start-ups and existing enterprises. Past cycles have brought a race to develop valuable technology and stake out intellectual property rights to capture the value represented by those innovations.
The Trump Administration’s Executive Order on Crypto Assets
On January 23, 2025, President Trump issued an executive order titled “Strengthening American Leadership in Digital Financial Technology,” which establishes a new framework for crypto asset policy. The order revokes prior executive order 14067 and the Department of the Treasury’s “Framework for International Engagement on Digital Assets,” effectively reversing the prior administration’s approach to crypto regulation. The Trump administration’s policy suggests a preference for open public blockchain networks, opposes the creation of a US central bank digital currency (CBDC) or the recognition of CBDCs issued by other countries, and seeks to provide regulatory certainty through better-defined jurisdictional boundaries.
The executive order also created the President’s Working Group on Digital Asset Markets, chaired by David Sacks as the Special Advisor for AI and Crypto. The Working Group’s mandate is to develop a federal regulatory framework governing crypto assets, including stablecoins, and to evaluate the potential creation and maintenance of a national crypto asset stockpile. They are tasked with submitting a report to the president within 180 days recommending regulatory and legislative proposals that advance the policies established in the executive order.
Federal agencies, including the SEC and CFTC, also must now review and potentially rescind previous regulatory guidance that conflicts with this new direction. Additionally, the Working Group will evaluate the feasibility of a national crypto asset reserve derived from lawfully seized cryptocurrencies and seek to ensure that existing and future US regulatory frameworks support US leadership in blockchain and digital financial technology.
Crypto Task Force Reboot & Pause on Binance Enforcement
In a related development, the SEC re-formed a new dedicated Crypto Task Force led by Commissioner Hester Peirce (Task Force). In an announcement titled “Crypto 2.0,” Commissioner Uyeda stated that, among other things, the Task Force aims to resolve long-standing uncertainties in crypto regulation by developing clearer registration pathways, enhancing disclosure frameworks, and ensuring a more consistent enforcement strategy. Many have criticized the SEC’s prior regulatory approach for relying too heavily on enforcement actions, which created uncertainty for industry participants. The Task Force will reportedly collaborate with stakeholders across the public and private sectors, including Congress, the CFTC, and international regulators, to shape a more coherent regulatory approach. The release announcing the Task Force acknowledges the need for a clear regulatory framework that fosters both innovation and investor protection.
Shortly after announcing the Task Force, the SEC and Binance jointly requested a 60-day stay of the SEC’s lawsuit against the crypto exchange, citing the potential impact of the newly established Task Force. The SEC previously sued Binance, its US unit, and founder Changpeng Zhao in June 2023, alleging market manipulation and investor deception. The request signals a potential shift in the SEC’s enforcement strategy, with some viewing it as a step toward a more crypto-friendly stance in line with the president’s broader industry goals. A similar pause was also requested in the SEC’s ongoing action against Coinbase.
Commissioner Peirce’s Statement on the Future of Crypto Regulation
In her February 4 statement titled “The Journey Begins,” Commissioner Peirce outlined the Task Force’s objectives and highlighted several key areas of focus.
Clarifying “Security” Status. The Task Force “is working hard” to assess different types of crypto assets and determine their status under securities laws. Currently, market participants face uncertainty regarding whether certain crypto assets qualify as securities, which affects compliance obligations, trading, and broader market adoption. To date, the SEC has largely relied on enforcement actions to define its stance, leaving investors and other market participants without clear regulatory guidance. Establishing a clear framework to help determine the security status of crypto assets has the potential to provide much-needed regulatory certainty, support responsible innovation, and facilitate greater institutional participation in the crypto markets.
Providing a Pathway to Registration & Trading for Unregistered Offerings. The Task Force “is thinking about” recommending SEC action to grant temporary prospective and retroactive relief for coin or token offerings not registered with the SEC if an entity takes responsibility to provide specified information, updates it, and accepts SEC jurisdiction in fraud cases. Such coins or tokens would be deemed non-securities, allowing trading on unregistered secondary markets if disclosures remain current. The potential success or failure of such a proposal is likely to depend on the specific disclosure requirements imposed and on whether the relief provided offers real benefits while avoiding excessive regulatory burdens.
New Crypto ETFs, Staking, and In-Kind Creations and Redemptions. The Task Force “will work” with the SEC staff to clarify the SEC’s approach to approving or denying proposed rule changes to list new types of crypto exchange-traded products. To date, the SEC has taken a cautious approach to crypto exchange-traded funds (ETFs), or investments focused on cryptocurrency assets, approving only spot Bitcoin and Ethereum ETFs, despite applications to create ETFs for other crypto assets (e.g., Ripple’s XRP). Existing crypto ETFs also cannot currently engage in staking. Staking typically involves committing crypto tokens to a blockchain network to earn rewards, sometimes requiring them to be locked for a period. ETFs also cannot engage in in-kind redemptions. Allowing staking could enable ETFs to generate additional yield for investors by participating in network validation, aligning ETF returns more closely with the underlying assets’ earning potential. Permitting in-kind creations and redemptions — where ETF shares are exchanged directly for crypto assets rather than cash — could also reduce transaction costs, improve tax efficiency, and minimize tracking errors. Clarifying the regulatory path forward on these issues has the potential to further expand investment opportunities and provide ETF investors with more cost-effective and capital-efficient access to crypto assets.
Addressing Crypto Lending and Staking Programs. The Task Force “plan[s] to work” to help address how crypto lending and staking programs can be structured consistent with applicable law. Currently, these programs face substantial regulatory uncertainty, particularly regarding whether they involve securities offerings subject to SEC registration and investor protection requirements. The SEC has pursued enforcement actions against certain crypto lending platforms, but clear guidance on compliant structures remains lacking. Establishing clear guidelines for crypto lending and staking programs could provide investors with greater confidence in accessing staking rewards while ensuring these services operate transparently and in compliance with regulatory protections.
Clarifying Custody Solutions for Investment Advisers. The Task Force “will work” with investment advisers to provide a framework within which advisers can safely, legally, and practically custody client assets themselves or with a third party. Currently, investment advisers face challenges in complying with the “Custody Rule” (Rule 206(4)-2 under the Investment Advisers Act of 1940), which requires client funds and securities to be held by a “qualified custodian.” This is because substantial ambiguity remains about whether any crypto custodians meet this standard and whether advisers can safely custody crypto assets themselves. Establishing a clear framework that provides advisers with a practical and legally compliant pathway to custody client assets has the potential to significantly reduce regulatory uncertainty for advisers to both individuals and investment funds and to help expand institutional participation in crypto-asset markets.
Updating Special Purpose Broker-Dealer Relief. The Task Force “will explore” updating its special-purpose broker-dealer framework to potentially allow broker-dealers to custody crypto asset securities alongside crypto assets that are not securities. Current securities laws effectively prohibit broker-dealers from facilitating transactions in many crypto assets, substantially limiting their ability to offer comprehensive crypto-related services. The SEC’s prior relief for special-purpose broker-dealers was very narrowly tailored and imposed operational constraints on broker-dealers, making it unworkable for most. Expanding the framework to permit custody of both security and non-security crypto assets would be a helpful first step in broadening its appeal.
If the Task Force can accomplish even half of these objectives, it bodes well for the larger crypto community.
There may also be reason to hope for such progress. As noted by Commissioner Peirce, the SEC recently rescinded “SAB 121,” which stands for Staff Accounting Bulletin No. 121. SAB 121 was issued by the SEC’s Office of the Chief Accountant and Division of Corporation Finance in March 2022, and it required financial institutions that custodied crypto assets to record them as both assets and liabilities on their balance sheets. As a result, banks and other financial institutions faced significantly higher capital requirements when holding crypto assets compared to more traditional assets, making crypto custody prohibitively expensive for many. Thus, SAB 121’s rescission simultaneously removes a major regulatory obstacle to providing crypto custody and marks a meaningful shift in the SEC’s regulatory approach.
Conclusion
While many questions remain, the regulatory developments above appear to signal a significant shift in the treatment of crypto assets by the SEC. In the crypto space, the relaxation of regulatory restrictions combined with new technological advancements often drives growth for the most innovative players, which can expand both market share and valuable intellectual property rights. Market participants should remain proactive in monitoring developments and position themselves to capitalize on the new opportunities that will emerge.
Update on U.S. Climate Disclosure Requirements
As of early 2025, the landscape of climate disclosure requirements in the United States is shifting. Unsurprisingly, the Trump Administration has signaled its intent to roll back the federal climate disclosure rule promulgated by the Securities and Exchange Commission (“SEC” or “Commission”) last year. Meanwhile, implementation of California’s suite of climate disclosure laws is moving forward, and at least two other states are considering copy-cat legislation. As companies operating in the United States continue to prepare for compliance at the state level, they should consider these developments alongside potential changes to international and voluntary reporting standards and should work to implement corporate processes that ensure consistency and accuracy in reporting across all relevant frameworks.
SEC Climate Rule
In March 2024, the SEC adopted rules to standardize climate-related disclosures by public companies and public offerings. The rules were promptly challenged by multiple stakeholders, and the cases were consolidated before the U.S. Court of Appeals for the Eighth Circuit. Not long afterwards, on April 4, 2024, the SEC stayed implementation of the regulations pending judicial review of the legal challenges.
On February 11, 2025, Acting SEC Chair Mark Uyeda issued a statement announcing that he had directed SEC staff to request that the court not schedule the case for oral argument in order to allow time for the Commission to determine next steps in light of certain changes. Specifically, Acting Chair Uyeda cited as changes (1) his views that “[t]he Rule is deeply flawed and could inflict significant harm on the capital markets and the economy” and was promulgated without statutory authority; (2) the recent change in the composition of the Commission; and (3) President Trump’s recent memorandum regarding a regulatory freeze.
While next steps on the part of the Eighth Circuit and the SEC are yet to be seen, the SEC will likely seek to roll back the 2024 rule, potentially through a new notice-and-comment rulemaking process.
California Climate Disclosure Laws
Meanwhile, implementation of California’s climate disclosure laws is moving forward. In October 2023, California Governor Gavin Newsom signed into law three different bills: (1) SB 253, requiring disclosure of greenhouse gas emissions for companies with at least a billion dollars in revenue that are doing business in California; (2) SB 261, requiring climate-related risk disclosures for companies with at least $500 million in revenue that are doing business in California; and (3) AB 1305, requiring annual substantiation of offset sales and purchases, as well as net zero and emission reduction claims, for companies operating and making claims in California. Unlike the SEC rule, all of these laws apply regardless of whether a company is public or privately held.
In September 2024, Governor Newsom signed into law a set of amendments to SB 253 that, among other things, delayed the rulemaking deadline set for the California Air Resources Board until July 1, 2025. The amendments did not, however, delay any compliance timelines for covered entities. This means that covered entities must continue to plan for the first round of reporting on Scope 1 and Scope 2 emissions in 2026, with reference to FY 2025 data, even though a host of questions remain about the scope and mechanics of required reporting. In recognition of this uncertainty, on December 5, 2025, CARB issued an Enforcement Notice indicating that it would not pursue enforcement against entities working in “good faith” toward compliance, and that, for the first reporting year, it would be sufficient to rely on data already in a reporting entity’s possession as of the date of the notice. Not long after, CARB announced a public comment period to seek input from stakeholders on a range of implementation-related issues, including how CARB should define “doing business in California” for purposes of defining the universe of entities subject to compliance obligations under SB 253 and SB 261.
Implementation of the California laws seems unlikely to be stopped in court. On February 3, 2025, the U.S. District Court for the Central District of California substantially narrowed an ongoing judicial challenge to SB 253 and SB 261 by the U.S. Chamber of Commerce, California Chamber of Commerce, and other industry stakeholders. The court dismissed plaintiffs’ claims that these laws violate the Supremacy Clause of the U.S. Constitution and constitute extraterritorial regulation in violation of the Dormant Commerce Clause. The court has preserved, for now, a claim that these laws compel speech in violation of the First Amendment.
Pending Legislation in Other States
During the past several legislative sessions, New York has considered climate disclosure bills similar to California’s SB 253 and SB 261. In January 2025, these bills were once again introduced in the New York Senate as S3456 (Climate Corporate Data Accountability Act) and S3697 (Report of Climate-Related Financial Risk). While similar to SB 253, S3456 is more explicit on some points—for example, by specifying that the law’s applicability be determined with reference to consolidated revenue, including revenues received by all of the business’s subsidiaries.
Illinois and Washington also considered similar legislation in 2024 and may seek to introduce it in 2025.
Changes to International and Voluntary Frameworks
Companies that operate in the European Union (“EU”) have been preparing in earnest for compliance with the Corporate Sustainability Reporting Directive (“CSRD”) for well over a year. Nonetheless, the European Parliament is reportedly considering omnibus legislation that would potentially reduce the scope of CSRD applicability and reporting, as well as make changes to other EU sustainability laws. These changes could be relevant not only to companies with direct reporting obligations under these laws, but also to companies that report under voluntary standards, such as CDP, that have sought to align with the CSRD.
What’s Next?
Companies doing business in the United States should continue to monitor this shifting landscape at the U.S. state and international levels. As changes occur, it will be critical to reevaluate data collection and reporting processes to ensure consistency and compliance with all relevant frameworks.
How to Report “Pig Butchering” Crypto Fraud and Qualify for a Whistleblower Award
2024 Revenue from Pig Butchering Scams Increased 40% Year-over-Year
According to a Chainanlysis report, revenue from pig butchering crypto frauds, also known as relationship investment scams, grew nearly 40% year-over-year (YoY). Additionally, the number of deposits to these scams increased by nearly 210% YoY.
Pig butchering scams exploit dating apps, social media platforms, messaging apps, and even random “wrong number” text messages to target possible victims. Once a fraudster establishes and builds a relationship with their target, they pitch fraudulent investment opportunities in cryptocurrencies, precious metals, or foreign currencies. Victims are then directed to deceptive trading platforms–operated by the same organized criminal gangs–where they convert their funds into cryptocurrency and then send the crypto to the fraudulent trading platforms. These platforms falsely display substantial investment gains, and victims ultimately find themselves unable to withdraw their funds. To make matters worse, the trading platforms often tell the victims that they are required to pay certain fees to access their (fake) investment gains. These “fees” are just another ploy used by the fraudsters to trick victims into sending additional crypto to their fraudulent platforms.
The Chainalysis report, titled Crypto Scam Revenue 2024: Pig Butchering Grows Nearly 40% YoY as Fraud Industry Leverages AI and Increases in Sophistication, found that cryptocurrency scams received at least $9.9 billion on-chain, an amount that may increase as Chainanalysis identifies more illicit addresses. The report noted that “crypto fraud and scams have continued to increase in sophistication, as the fraud ecosystem becomes more professionalized.” It also highlighted that “crypto drainers continued to proliferate and grew across the board — nearly 170% YoY revenue growth, almost 55% YoY increase in deposit size, and 75% YoY growth in number of deposits.”
Whistleblowers Can Help Combat Pig Butchering Crypto Frauds
Whistleblowers can assist the Commodity Futures Trading Commission (CFTC) in combatting these frauds by reporting original information about pig butchering crypto scams to the CFTC Whistleblower Office. The CFTC Whistleblower Reward Program offers monetary awards to whistleblowers whose original information leads to enforcement actions resulting in civil penalties in excess of $1 million. Whistleblowers reporting pig butchering crypto scams can receive CFTC whistleblower awards between 10% and 30% of the total monetary sanctions collected in successful enforcement actions. The largest CFTC whistleblower award to date is $200 million.
How to Report Pig Butchering Scams to the CFTC and Qualify for a Whistleblower Award
A whistleblower providing original information to the CFTC about an investment romance scam may qualify for an award if:
Their original information caused the CFTC to open an investigation, reopen an investigation, or inquire into different conduct as part of a current investigation, and the CFTC brought a successful enforcement action based in whole or in part on conduct that was the subject of the original information; or
The conduct (i.e., the pig butchering crypto scam) was already under examination or investigation, and the whistleblower provided original information to the CFTC that significantly contributed to the success of the enforcement action.
In determining an award percentage of between 10% and 30%, the CFTC considers the particular facts and circumstances of each case. For example, positive factors may include the significance of the information, the level of assistance provided by the whistleblower and the whistleblower’s attorney, and the law enforcement interests at stake.
If represented by counsel, a whistleblower may submit a tip anonymously to the CFTC. In certain circumstances, a whistleblower may remain anonymous, even to the CFTC, until an award determination. However, even at the time of a reward, a whistleblower’s identity is not made available to the public.
To report a pig butchering crypto fraud and qualify for an award under the CFTC Whistleblower Program, the CFTC requires that whistleblowers or their attorneys report the tip online through the CFTC’s Tip, Complaint or Referral Portal or mail/fax a Form TCR to the CFTC Whistleblower Office. Prior to submitting a tip, whistleblowers should consult with an experienced whistleblower attorney and review the CFTC whistleblower rules to, among other things, understand eligibility rules and consider the factors that can significantly increase or decrease the size of a future whistleblower award.
CFTC Partners with Federal Agencies and NGOs to Combat Pig Butchering
The CFTC’s Office of Customer Outreach and Education is partnering with other federal agencies and non-governmental organizations (NGOs) to raise awareness about relationship investment scams targeting Americans through “wrong number” text messages, dating apps, and social media. This effort includes an infographic that identifies the warning signs of pig butchering:
Additionally, the interagency Dating or Defrauding? social media awareness campaign warns Americans to be skeptical of any request from online friends for cryptocurrency, gift cards, wire transfers, or other forms of payment. The campaign provides information about how to recognize relationship investment scams, what to do if you are affected, and why to share the information to warn others.
A Clearly Rattled Delaware Contemplates Significant Changes To Its Corporations Code
On Monday, Delaware State Senator Bryan Townsend introduced Senate Bill 21 which would, among other things, statutorily define “controlling stockholder” and substantially change the rules governing the “cleansing” of controlling stockholder transactions. Professor Ann Lipton provides a summary of these changes here and Professor Stephen Bainbridge provides his own take on the amendments here. Among other things, Professor Lipton observes:
Collectively, the changes represent a wholesale repudiation of Delaware’s common law approach to lawmaking; instead, they most closely resemble the MBCA’s rule-bound approach.
Actually, I believe that Delaware is moving in the direction of Nevada’s statutory based approach whereby the rules of the road are established primarily by the legislature and not the courts. In fact, this is often cited as a reason to reincorporate in Nevada:
After considering various alternatives, the evaluation committee concluded that Nevada’s statute-focused approach would likely foster more predictability than Delaware’s less predictable common law approach, and that that predictability could be a competitive advantage for the Company in a time of rapid business transformation.
Information Statement filed by Dropbox, Inc. on February 10, 2025.
I do disagree with both Professor Lipton and Dropbox insofar as they characterize Delaware as having a “common law approach”. A distinctive feature of the Court of Chancery is that it is a court of equity, something relatively rare in jurisprudence. A court of equity is results oriented because it is focused on “doing equity”. In fact, this has been the historical understanding that equity (ἐπιεικές*) serves as a correction (ἐπανόρθωμα) of the law. Aristotle, Nicomachean Ethics Book V, Section 10. Thus, it has been my own view that while the Court of Chancery has been an historical draw for Delaware, the Court’s broad power to do equity is ultimately proving to undermine Delaware’s preeminence. SB 21 and the Delaware legislature’s assertion of statutory law implicitly recognize this fact.
The State of the Funding Market for AI Companies: A 2024 – 2025 Outlook
Artificial intelligence (AI) has emerged as an influential technology, driving notable investments across various industries in recent years. In 2024, venture capital (VC) funding for AI companies reached record levels, signaling ongoing interest and optimism in the sector’s potential. Looking ahead, 2025 is anticipated to bring continued innovation, with promising funding opportunities and a growing IPO market for AI-driven businesses.
VC Funding in 2024: A Year of Growth
Global VC investment in AI companies saw remarkable growth in 2024, as funding to AI-related companies exceeded $100 billion, an increase of over 80% from $55.6 billion in 2023. Nearly 33% of all global venture funding was directed to AI companies, making artificial intelligence the leading sector for investments. This marked the highest funding year for the AI sector in the past decade, surpassing even peak global funding levels in 2021. This growth also reflects the increasing adoption of AI technologies across diverse sectors, from healthcare to transportation and more, and the growing confidence of investors in AI’s transformative potential.
Industries Attracting Funding
The surge in global venture capital funding for AI companies in 2024 was driven by diverse industries adopting AI to innovate and solve complex problems. This section explores some of the industries that captured significant investments and highlights their transformative potential.
Generative AI. Generative AI, which includes technologies capable of creating text, code, images, and synthetic data, has experienced a remarkable surge in investment. In 2024, global venture capital funding for generative AI reached approximately $45 billion, nearly doubling from $24 billion in 2023. Late-stage VC deal sizes for GenAI companies have also skyrocketed from $48 million in 2023 to $327 million in 2024. The growing popularity of consumer-facing generative AI programs like Google’s Bard and OpenAI’s ChatGPT has further fueled market expansion, with Bloomberg Intelligence projecting the industry to grow from $40 billion in 2022 to $1.3 trillion over the next decade. As a result, venture capitalists are increasingly focusing on GenAI application companies—businesses that build specialized software using third-party foundation models for consumer or enterprise use. This new wave of AI identifies patterns in input data and generates realistic content that mimics the features of its training data. Models like ChatGPT generate coherent and contextually relevant text, while image-generation tools such as DALL-E create unique visuals from textual descriptions.
Healthcare and Biotechnology: The healthcare and biotechnology industries have seen a significant surge in AI integration, with startups harnessing the power of artificial intelligence for diagnostics, drug discovery, and personalized medicine. In 2024, these AI-driven companies captured a substantial share of venture capital funding. Overall, venture capital investment in healthcare rose to $23 billion, up from $20 billion in 2023, with nearly 30% of the 2024 funding directed toward AI-focused startups. Specifically, biotechnology AI attracted $5.6 billion in investment, underscoring the growing confidence in AI’s ability to revolutionize healthcare solutions. As AI continues to evolve, its impact on diagnostics and personalized treatments is expected to shape the future of patient care, driving innovation across the sector.
Financial Technology: Fintech, short for financial technology, refers to the use of innovative technologies to enhance and automate financial services. It includes areas like digital banking, payments, lending, and investment management, offering more efficient, accessible, and cost-effective solutions for consumers and businesses. In recent years, AI has become an important tool in fintech, helping to improve customer service through chatbots, enhance fraud detection with machine learning algorithms, automate trading, and personalize financial advice. While overall fintech investment in 2024 has dropped to around $118.2 billion, down from $229 billion in 2021, AI in fintech remains a high-growth area, valued at $17 billion in 2024 and projected to reach $70.1 billion by 2033. This reflects a strong and sustained interest in leveraging AI to revolutionize financial services despite broader investment slowdowns in the sector.
Trends for 2025
In 2025, VC investments in AI companies are continuing the momentum from previous years. Global venture funding totaled $26 billion in January 2025, of which AI-related companies garnered $5.7 billion, accounting for 22% of overall funding. However, despite the continued interest in AI investment, the investment strategies in 2025 may evolve from the approaches seen in 2024, as market dynamics shift and investors adapt to new challenges and opportunities.
In 2024, the investment strategy was heavily characterized by aggressive funding and rapid scaling. Investor focus appeared to be on capitalizing on the hype around AI technology, leading to substantial valuations and rapid deal cycles. The strategy was primarily characterized by pure innovation, with VCs eager to back groundbreaking technologies regardless of immediate profitability. This led to significant investments in cutting-edge research and experimental applications. However, this approach often led to inflated valuations.
On the other hand, the investment landscape in 2025 is expected to shift with VCs adopting more disciplined and strategic investment approaches. The focus now appears to be on sustainable growth and profitability. Investors are predicted to become more selective, favoring companies with solid fundamentals and proven business models to navigate economic uncertainties.
Regulatory concerns are also playing an increasingly significant role in shaping VC investment strategies in AI. Governments worldwide are ramping up efforts to regulate AI technologies to address issues such as data privacy, algorithmic bias, and security risks. For instance, in the United States, regulatory scrutiny is also intensifying, with lawmakers proposing new frameworks to ensure transparency and accountability in AI algorithms. This includes discussions about mandating audits of high-risk AI systems and potentially introducing liability rules for AI-generated content. These evolving regulatory landscapes are contributing to market unpredictability, as startups may face heightened compliance burdens and legal uncertainties. As a result, while the enthusiasm for AI investments remains high, the 2025 strategy is marked by increased due diligence and a more calculated approach, reflecting a growing emphasis on navigating complex regulatory landscapes.
Resurgence of Initial Public Offerings (IPOs):
In 2025, the IPO market for AI companies is expected to be a significant area of focus, driven by a combination of strong growth in the sector and favorable market conditions. A major window for the IPO market could be opening. Analysts attribute this rebound to factors such as markets reaching new highs, stabilized interest rates, a strong economy, and a clearer understanding of the new administration’s plans following the recent election. The favorable market environment for these companies is supported by a solid U.S. economy, which is expected to grow by 2.3% in 2025.
Several major AI players are preparing to enter the public markets. One of the most anticipated IPOs is that of Databricks, an AI-driven data analytics platform that has raised nearly $14 billion in funding, most recently at a $62 billion valuation. The company has expressed intentions to go public in 2025, indicating a favorable outlook for the sector. Additionally, companies like CoreWeave, an AI cloud platform based in New Jersey, are expected to follow with their own IPOs later in the year, further fueling the optimism around AI investments. Crunchbase News highlights that there are at least 13 other AI startups with strong IPO potential in 2025. This IPO pipeline is a reflection of the broader momentum within the AI sector.
Despite these positive indicators, economic challenges such as trade tensions, inflationary pressures, and concerns over policy decisions add a layer of complexity to the market. For example, trade tensions could contribute to rising manufacturing costs, which could put pressure on companies that rely on global supply chains. Tariffs could contribute to inflationary pressures, which could dampen consumer spending and overall economic growth. These challenges highlight the need for companies to navigate an evolving landscape where trade policies and inflationary concerns could impact their growth trajectories.
Despite these hurdles, the IPO market remains buoyed by investor confidence, particularly in AI. As AI companies continue to develop new applications across industries, the appetite for public offerings remains strong. The favorable market environment for these companies suggests that AI will be a key focus for investors seeking sustainable growth opportunities in 2025.
Conclusion
The AI funding landscape in 2024 demonstrated the technology’s transformative potential across industries. As we move into 2025, investors and companies alike will need to navigate evolving market dynamics and regulatory landscapes. The IPO market, too, holds promise, provided companies are well-prepared to meet investor expectations surrounding sustainable growth and profitability.
United States: SEC Issues New Guidance on Schedule 13G Eligibility
The SEC’s Division of Corporation Finance recently issued new guidance regarding when shareholders can file beneficial ownership reports on Schedule 13G. While the 11 February 2025 Compliance and Disclosure Interpretation (C&DI) maintains the same fundamental principles as before, it adopts a more nuanced approach to what constitutes “changing or influencing control of the issuer.”
What Hasn’t Changed
The basic framework remains intact: shareholders can still file on Schedule 13G if their securities weren’t acquired or held with the purpose of changing or influencing issuer control. The guidance continues to prohibit using Schedule 13G when advocating for clear “control” transactions, such as:
Sale of the issuer
Sale of significant assets
Restructuring
Contested director elections
What Has Changed
The new guidance takes a more detailed look at how shareholders engage with management. While simply discussing views or voting decisions remains acceptable, the C&DI now explicitly addresses pressure tactics. Specifically, shareholders might lose Schedule 13G eligibility if they:
Exert pressure on management to implement specific measures
Condition their support for director nominees on the adoption of particular policies
Link their voting decisions to management’s acceptance of their recommendations
Practical Impact
This interpretation represents more of a tone shift than a substantive change in policy. However, it may cause institutional investors to think twice about their engagement strategies. Those who currently file on Schedule 13G might become more cautious about how they communicate their voting policies, particularly if those policies include withholding support from directors at companies with inconsistent practices.
The guidance suggests that while engagement remains acceptable, the manner and context of that engagement matter more than previously emphasized. Shareholders will need to carefully consider how they frame their discussions with management to maintain their Schedule 13G eligibility.
ILPA Publishes Updated Reporting Template and New Performance Template
The Institutional Limited Partners Association (ILPA) recently released its updated ILPA reporting template (Reporting Template) and a new ILPA performance template (Performance Template), together with corresponding guidance.
The enhancements aim to promote greater standardisation, transparency and comparability in private fund reporting, reflecting the industry’s evolving dynamics. As such, the Reporting Template and the Performance Template aim to strengthen the alignment of interests and partnerships between general partners and limited partners to foster a more efficient and trustworthy investment environment.
Background
The original ILPA reporting template was introduced in 2016 to standardise disclosures related to fees, expenses and carried interest within the private fund sector. Since then, the industry has experienced transformative changes, including, among other things, shifts in fund economics, increased expectations for transparency and the emergence of advanced technological solutions to support reporting processes.
ILPA initiated the formation of the Quarterly Reporting Standards Initiative (QRSI) in 2024, in response to the US Securities and Exchange Commission’s proposed release of the Private Fund Adviser’s Rule (PFA) to ensure that the ILPA reporting framework conformed to the PFA. When the PFA was vacated by US courts, the QRSI became an “industry-driven” solution engaging a diverse group of stakeholders, including limited partners, general partners, service providers and consultants, to collaborate on updating the Reporting Template.
Key Updates to ILPA’s Reporting Template
The Reporting Template introduces several notable changes, including:
Additional Cash Flow Detail. The Reporting Template added more detail to the cash / non-cash flows section to include offering and syndication costs, placement fees and partner transfers.
Detailed internal chargebacks. The Reporting Template now requires the breakdown of internal chargebacks, enabling the identification of expenses allocated or paid to general partners or related entities.
Granular external partnership expenses. The Reporting Template provides a more detailed categorisation of external partnership expenses, aligning more closely with general ledger accounts to enhance clarity and consistency.
Uniform reporting level. The Reporting Template establishes a single uniform level of detail for all general partners, with the aim of promoting consistency with the reporting frameworks outlined in governing documents and accounting standards.
The Reporting Template replaces the 2016 version going forward for funds still in their investment period during the first quarter of 2026 and for funds commencing operations on or after 1 January 2026.
Introduction of ILPA’s Performance Template
Alongside the Reporting Template, the ILPA published the Performance Template designed to standardise return calculation methodologies in the private fund sector.
The key features of the Performance Template include, among other things:
Cash flow and portfolio-level transaction mapping. The Performance Template sets out tables to capture cash flows as well as fund- and portfolio-level transaction type mapping, intended to provide transparency into the calculation methodology for performance metrics.
Standardised performance metrics reporting. The Performance Template includes reporting for performance metrics including the internal rate of return, total value to paid-in and multiple on invested capital, with designated breakouts for the relevant gross and net figures.
Two methodology forms. The Performance Template is available in two versions to support general partners’ varying approaches to fund-level performance calculation methodology — one version is based on itemised cash flows (i.e., the granular method) and the other on grossed-up cash flows (i.e., the gross-up method).
The ILPA recommends that the Performance Template should be used for funds commencing operations on or after 1 January 2026.
The Reporting Template and Performance Template are available here and here, respectively.
Blockchain+ Bi-Weekly; Highlights of the Last Few Weeks in Web3 Law: February 14, 2025
The first weeks of February have been eventful for digital asset regulation, with major policy shifts, legal battles and legislative initiatives shaping the future of Web3. The SEC’s formation of a dedicated crypto rulemaking task force, Coinbase’s latest legal maneuvering, the CFTC’s scrutiny of sports-related prediction markets, and Senate hearings on stablecoins signal an evolving regulatory landscape. Key developments include renewed scrutiny over bank relationships with crypto firms and the SEC’s shifting stance on spot crypto ETFs. As the U.S. government reassesses its approach to digital asset oversight, key figures in Congress, and the SEC have signaled a strong desire for reforms and meaningful legislation. However, significant hurdles remain—not least of which is the relatively short window Congress has to pass legislation before the election cycle takes over.
These developments and a few other brief notes are discussed below.
SEC Forms Crypto Rulemaking Task Force: January 21, 2025
Background: On his first day as acting SEC Chair, Mark Uyeda announced that the SEC has “launched a crypto task force dedicated to developing a comprehensive and clear regulatory framework for crypto assets.” Commissioner Peirce has been tapped to lead the task force, which according to SEC press release, “will collaborate with Commission staff and the public to set the SEC on a sensible regulatory path that respects the bounds of the law.” Further, its focus will be “to help the Commission draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks and deploy enforcement resources judiciously.” The task force has since solicited comments by e-mailing [email protected] and setting up a meeting request form here.
Analysis: Commissioner Peirce’s Token Safe Harbor Proposal 2.0 from 2021 remains one of the most well-structured and thoughtful regulatory approaches to digital assets from any regulator, making her an ideal choice to lead this task force. While it is unclear how this initiative will interplay with the Third Circuit’s recent rulemaking ruling, it seems increasingly likely that some form of crypto regulation will emerge from the SEC in the coming months or years. The challenge ahead is significant—defining ‘decentralization,’ ensuring oversight to prevent fraud and abuse and fostering innovation without stifling legitimate actors is a delicate balance. If anyone is equipped to navigate this, it’s Commissioner Peirce.
Coinbase Files Petition for Permission to Appeal at Second Circuit: January 21, 2025
Background: The lower court in the SEC v. Coinbase matter previously stayed the matter and granted permission for Coinbase to ask the Second Circuit to hear its interlocutory appeal of matters decided on its Motion for Judgment on the Pleadings. The Second Circuit still has to agree to hear the matter, and in its opening brief, Coinbase implores the appellate court to weigh in on whether digital asset transactions in secondary markets are investment contract transactions.
Analysis: Amicus filed by the Blockchain Association and the Chamber of Commerce also encouraged the appellate court to take up this issue. Newly appointed Chair of the Senate Finance Services Digital Asset Subcommittee, Senator Lummis, also weighed in, asking for the Second Circuit to take up the issue. Administrations come and go, but case law is enduring, so this is still a very important case and will set legal precedent for years to come. The “ecosystem theory” provided by the SEC and endorsed by the lower court makes no sense. Bitcoin, Ether and other assets that the SEC had admitted are not securities have gigantic “ecosystems,” and it also makes no sense as to how an “ecosystem” can register with the SEC. Strong appellate case law on these issues would alleviate the need to rush into expansive legislation that could have unknown externalities (including benefitting incumbents to the detriment of new entries), even if they do provide a level of clarity.
Joint Press Conference Held on Bipartisan Roadmap to Digital Asset Legislation: February 4, 2025
Background: “Crypto and AI Czar” David Sacks held a press conference with Senate Banking Chair Tim Scott, House Financial Services Chair French Hill, House Agriculture Chair Glenn “GT” Thompson and Senate Agriculture Chair John Boozman to discuss the previously issued Executive Order titled Strengthening American Leadership in Digital Financial Technology and how the Executive and Legislative branches planned to work together in establishing a clear framework for U.S. digital assets and their issuers.
Analysis: The main takeaway seemed to be that stablecoin legislation is on the immediate horizon, which is discussed below as well as related to Senator Hagerty’s GENIUS Act being released the same day as the press conference. It also appears that FIT 21 (passed through the House last year) will be the starting point for a market structure bill, but as I have previously covered, there are still significant hurdles to overcome to make that market structure bill fit for purpose. There was recognition by all the speakers that digital assets are going to be foundational in financial services for the foreseeable future, so creating a framework to ensure U.S. dominance in the sector will be crucial in maintaining the current dominance of American financial markets.
CFTC and SEC Announce Digital Asset Agendas: February 4, 2025
Background: In a statement titled “The Journey Begins,” Commissioner Peirce put forward her plans as the leader of the newly formed SEC Crypto Task Force. While at the CFTC, Acting Chair Pham announced a plan to “Refocus on Fraud and Helping Victims, Stop Regulation by Enforcement” and various task force realignments at the agency. Both seem intent to remain focused on bringing actions against fraudsters or bad actors while removing enforcement focus from good actors who are attempting to abide within the bounds of commodities and securities laws when applied to blockchain-enabled cryptographic technologies.
Analysis: Commissioner Peirce’s statement is especially well done. “In this country, people generally have a right to make decisions for themselves, but the counterpart to that wonderful American liberty is the equally wonderful American expectation that people must decide for themselves, not look to Mama Government to tell them what to do or not to do, nor to bail them out when they do something that turns out badly.” The Digital Chamber, Blockchain Association and others have already announced organized working groups to assist the agencies in reaching sound policies that protect against fraud while preserving American freedoms and innovations. There seems to be renewed hope that a sensible and transparent framework for operating a digital asset company in the United States is feasible in the next few years.
Congress Holds Hearings on Debanking (Chokepoint 2.0): February 5-6, 2025
Background: The Senate Banking Committee held a hearing titled Investigating the Real Impacts of Debanking in America on February 5, followed shortly thereafter by a House Financial Services Committee hearing titled Operation Choke Point 2.0: The Biden Administration’s Efforts to Put Crypto in the Crosshairs on February 6. While both had an aim at determining the scope of debanking and potential solutions to legally operating individuals and companies being refused banking services, the House’s hearing focused especially on digital assets and had testimony from Coinbase head of legal Paul Grewal and NYU Professor Austin Campbell, both of whom emphasized the disproportionate impact debanking has had on digital asset participants.
Analysis: Directly before the Senate’s hearing, Senator Cramer (R-ND) reintroduced his Fair Access to Banking Act, which would require banks to provide impartial and risk-based explanations for granting or refusing lending or other banking services. The FDIC also released 175 documents related to its supervision of banks that engaged in, or sought to engage in, crypto-related activities before the hearings (previously withheld despite FOIA requests/litigation over those requests; also, read this bench slap transcript in that FOIA action if you are ever having a bad day and need a pick-me-up). This was a great section of the think pieces referenced below about the effect debanking can have on ordinary people and the need for access to DeFi for people that want more control over their own finances.
CFTC Investigates Sports-Related Prediction Market Contracts (February 9, 2025)
Background: The CFTC has opened an inquiry into the legality of sports-related prediction market contracts, reinforcing its oversight of event contracts under the Commodity Exchange Act. In a February 9 statement, the agency confirmed it is reviewing the regulatory status of these products and assessing whether they constitute unlawful gaming or derivatives trading. In response, Robinhood preemptively delisted its prediction contracts, citing regulatory uncertainty. However, Kalshi and Crypto.com kept their markets active through and past the Super Bowl, arguing they fall within existing CFTC exemptions.
Analysis: The CFTC’s scrutiny signals a potential crackdown on sports-related event contracts, an area that has long existed in a regulatory gray zone. Until last year’s case between Kalshi and the CFTC, the agency took the position that betting contracts generally are binary options that are subject to the agency’s regulation and oversight. Further, it remains unclear how these fit within the framework of the two federal statutes that explicitly address sports betting, the Wire Act and the Unlawful Internet Gambling Enforcement Act, particularly if the Department of Justice adjusts its interpretation of those laws.
Briefly Noted:
Polsinelli Releases Tech Transaction and Data Privacy Report: The Polsinelli annual Tech Transactions and Data Privacy Report is out, which breaks down the information companies should stay informed on regarding tech and data privacy legal issues for 2025, including a breakdown of Web3 topics to pay attention to.
SEC Pauses Certain Investigations and Cases. On February 11, the SEC and Binance filed a joint motion to stay the agency’s lawsuit against Binance for 60 days. The rationale was that the SEC’s joint task force is working on regulations that may “impact and facilitate the potential resolution of this case. Additionally, it appears that the SEC has sent a number of close-out letters in recent weeks, formally closing investigations into certain other crypto companies.
Senate Stablecoin Bill Introduced: Senate Banking Committee member Bill Hagerty (R-TN) has introduced a bipartisan Senate stablecoin bill (Senator Gillibrand (D-NY) is a co-sponsor) as a companion to the House bill passed through their financial services committee last year. The House also dropped a discussion draft bill. Bills like this for discrete digital asset issues combined with knowledgeable people in administrative leadership roles make total sense.
SEC Scores Win on Major Question Defense Against Kraken: The SEC successfully struck Kraken’s Major Question defense (but since there doesn’t need to be discovery on the issue, left open the ability for Kraken to assert again later) but failed to get due process and fair notice defenses tossed.
Senate Confirms Treasury Secretary: Scott Bessent has been confirmed as the new Treasury secretary, replacing Janet Yellen. He is viewed as “pro-crypto,” so one can hope for some common sense rulemaking around digital asset tax reporting and compliance during his tenure.
SAB 121 Repealed: The Controversial SEC Staff Accounting Bulletin 121 (SAB 121), which essentially foreclosed publicly traded banks from taking custody of digital assets for their customers by requiring digital assets be listed as liabilities on the banks’ balance sheets, has been withdrawn. This comes after both the House and Senate passed a bipartisan resolution to withdraw the rule, which was vetoed by President Biden.
Tornado Cash Sanctions Lifted: It looks like the U.S. government will likely not be appealing the decision that overturned the OFAC sanctions of Tornado Cash, and there is no en banc review, so it is heading back to the District Court for either a nationwide vacatur or a more limited ruling. This does not, however, eliminate sanctions against the legal persons who allegedly performed bad acts using Tornado Cash, and wallets believed to be associated with North Korea remain on OFAC’s blacklist.
KuCoin Enters Plea Deal: Kucoin agreed to pay $300 million in unlicensed money transmission penalties, and its founders entered deferred prosecution agreements related to operating a digital asset exchange without proper money transmission licenses.
Conclusion:
As regulatory and legislative efforts accelerate, 2025 is shaping up to be a pivotal year for the digital asset industry. The formation of the SEC Crypto Task Force, bipartisan movement on stablecoin and market structure legislation, and ongoing legal challenges against regulatory overreach indicate that the framework governing digital assets is evolving in ways that could significantly impact the industry’s trajectory.
SEC Renewed Action on Hedge Clauses
Hedge Clauses and the SEC’s Position
Hedge clauses are provisions in investment advisory agreements that aim to limit an adviser’s liability for certain actions or outcomes. The U.S. Securities and Exchange Commission (the “SEC”) has expressed the position that such clauses can mislead clients into thinking they cannot exercise their legal rights and improperly infer or suggest that clients have waived non-waivable causes of action. Thus, the SEC reasons, such hedge clauses may be seen as misleading statements that discourage clients from taking legal actions against an adviser when such action may be appropriate. The SEC has stated previously that:
there are few (if any) circumstances in which a hedge clause in an agreement with a retail client would be consistent with [] antifraud provisions, where the hedge clause purports to relieve the adviser from liability for conduct as to which the client has a non-waivable cause of action against the adviser provided by state or federal law. Such a hedge clause generally is likely to mislead those retail clients into not exercising their legal rights, in violation of the antifraud provisions, even where the agreement otherwise specifies that the client may continue to retain its non-waivable rights.
In the same 2019 interpretation, the SEC acknowledged briefly that facts and circumstances should determine that whether a particular hedge clause is misleading. Consistent with this approach, the SEC often distinguishes between retail clients and more sophisticated or institutional clients, both generally and, in the past, even in this specific context. However, the SEC’s 2019 interpretation went further, stating that a “contract provision purporting to waive the adviser’s federal fiduciary duty generally . . . would be inconsistent with the Advisers Act, regardless of the sophistication of the client (emphasis added).” Although the SEC’s position was not met with universal agreement, many investment advisers subsequently took steps to limit the use of hedge clauses.
ClearPath Enforcement Action and Settlement
The SEC has recently taken the opportunity to remind investment advisers of its position on hedge clauses. On September 3, 2024, the SEC entered an order accepting an Offer of Settlement from ClearPath Capital Partners LLC (“ClearPath”), a registered investment adviser to retail investors and private funds. In the order, the SEC found that ClearPath violated Section 206(2) of the Investment Advisers Act of 1940 (the “Advisers Act”) because of its improper use of liability disclaimers in both advisory agreements with retail clients and in governing documents of its private fund clients. Without admitting or denying the SEC’s findings, ClearPath agreed to a censure, to cease and desist from further violations of the charged provisions, and to pay a $65,000 civil penalty.
ClearPath’s Use with Retail Investor Clients
ClearPath used two advisory agreements containing hedge clauses with retail investors. These hedge clauses purported that ClearPath is not liable to its clients for “any action or inaction,” unless due to “gross negligence,” “willful malfeasance,” and violations of “applicable law.” The SEC reasoned that, when read in its entirety, this language may mislead ClearPath’s retail clients, causing them to not exercise their non-waivable legal rights, resulting in a violation of Section 206(2) of the Advisers Act.
ClearPath’s Use with Private Funds
ClearPath used hedge clauses in a limited partnership agreement of a private fund that ClearPath advised and served as general partner. The private fund’s provisions included a limitation on ClearPath’s liability to the private fund for “mistakes of judgment, or for action or inaction” and explicitly required investors to “waive any and all current and future claims (and right to assert such claims) against [ClearPath] and the other Indemnified Parties for any breach of fiduciary duty.” The operating agreement of another private fund for which ClearPath is the manager provided that ClearPath is not liable for “any loss or damage” unless the result of “fraud, deceit, gross negligence, willful misconduct or a wrongful taking.” These governing documents also contained other language purporting to limit fiduciary duties, a permissible concept under certain state laws but not in the context of the federal fiduciary duty of investment advisers.
The SEC found that, when read in its entirety, the language used by ClearPath is inconsistent with an adviser’s fiduciary duty and stated that the language may mislead ClearPath’s client into not exercising its non-waivable rights, thus constituting a violation of Section 206(2) of the Advisers Act.
Why Does This Matter?
The use of hedge clauses by investment advisers in the exculpation and indemnification provisions in their advisory agreements and private fund governing documents is common. Such clauses may have been considered standard and in use for some time. However, in light of the SEC’s renewed focus on the topic and enforcement actions and settlements such as ClearPath, investment managers should once again review their use of hedge clauses with informed legal counsel. Hedge clauses should be tailored to the sophistication of the clients and amended where needed (with appropriate communication to clients) to avoid an interpretation that, when an agreement is read in its entirety, such clauses waive (or appear to waive) any non-waivable rights of the client.
Business Impacts of Trump’s Executive Order Pausing FCPA Enforcement
On February 10 President Trump issued an Executive Order, Pausing Foreign Corrupt Practices Act Enforcement to Further American Economic and National Security, signaling a shift in U.S. enforcement priorities regarding foreign bribery. The directive places a temporary halt on investigations or enforcement actions related to the Foreign Corrupt Practices Act (FCPA) for a period of 180 days and orders a review of ongoing FCPA investigations.
Key Provisions of the Executive Order
The Executive Order mandates several important actions by U.S. Attorney General Pam Bondi, including:
Ceasing new FCPA investigations and enforcement actions: For the next 180 days, the Attorney General is required to refrain from initiating any new investigations or actions related to the FCPA.
Review of existing FCPA cases: The Attorney General must conduct a detailed review of all ongoing FCPA investigations and enforcement actions. This review will determine the appropriate course of action to ensure that FCPA enforcement stays within the administration’s priorities.
Issuing updated guidelines or policies: The Attorney General is tasked with issuing revised guidelines or policies concerning FCPA enforcement during this review period.
Approval for continued cases: Any FCPA investigations or enforcement actions that continue or are commenced after the new guidelines or policies are issued will require specific authorization from the Attorney General.
Potential extension: The review period may be extended by an additional 180 days at the Attorney General’s discretion.
The Executive Order also follows a memorandum issued by Bondi on February 5, 2025, which stated that the DOJ would prioritize cases relating to transnational criminal organizations and cartels. This necessarily means a much narrower focus for FCPA enforcement, which had been prioritized more broadly under prior administrations. Specifically, the Total Elimination of Cartels and Transnational Criminal Organizations Memorandum states that the FCPA unit should prioritize investigations involving foreign bribery that facilitates the operations of cartels and transnational criminal organizations, shifting away from cases without such connections.
What Does This Mean for Companies?
For businesses, this Executive Order has several implications. Keeping in mind that these developments are still unfolding, here is how we expect the situation to impact corporate clients:
A major shift in DOJ corporate enforcement: The pause in FCPA enforcement signals a significant decrease in the Department of Justice’s corporate enforcement activities, including FCPA investigations. While this might lead to a reduction in the number of FCPA cases in the near term, it is important to note that enforcement priorities remain in flux.
Anti-Bribery compliance advice remains unchanged for now: Companies should continue to maintain robust anti-corruption policies and internal controls to mitigate the risk of non-compliance with anti-bribery laws.
The FCPA is a criminal law that remains on the books: The FCPA remains the law of the land and violations are federal crimes. Enforcement priorities may shift, but businesses should not assume that the risks associated with FCPA violations have dissipated. The statute of limitations for the FCPA is five years, with the possibility of extension in cross-border cases through mutual legal assistance treaties, meaning future administrations could still pursue FCPA cases for actions taken during this period.
The SEC’s and CFTC’s role in FCPA enforcement: While the DOJ may slow down its FCPA enforcement, the U.S. Securities and Exchange Commission (SEC) retains jurisdiction over FCPA cases for public companies. As an independent agency, the SEC has not yet indicated any plans to ease its approach to FCPA enforcement. Moreover, the SEC can pursue bribery cases without relying solely on the FCPA framework, further complicating the enforcement landscape for businesses. In addition, the U.S. Commodity Futures Trading Commission (CFTC) has in more recent years taken the view that it may bring enforcement actions in cases involving foreign corrupt practices under Commodity Exchange Act provisions.
International anti-bribery laws still apply: Many other countries have their own anti-corruption laws, such as the UK Bribery Act. With the United States potentially scaling back its FCPA enforcement, there may be a rise in international enforcement actions to fill the gap. Furthermore, companies are increasingly adopting a global perspective on anti-corruption, extending their policies to cover not only the FCPA but also other anti-bribery measures, such as kickbacks and commercial bribery. As a result, businesses should remain vigilant in their anti-corruption efforts, as a broad range of laws could still impact their operations.
Reputation and public perception matter: Bribery and corruption scandals can damage a company’s reputation, even if those incidents occur outside the scope of FCPA violations. Companies should be cautious about relaxing their anti-corruption compliance measures, as the public’s increasing sensitivity to corruption-related issues can lead to negative publicity, regardless of the jurisdiction or legal framework involved.
Looking Ahead
The enforcement landscape for anti-corruption laws in the United States is evolving rapidly. Although the pause in FCPA enforcement may offer a temporary respite for companies, the full implications of these changes are yet to be seen. It is crucial for businesses to stay informed as the situation develops and to continue to maintain anticorruption compliance measures and internal controls that implement anticorruption best practices.
If your company is navigating these changes or has concerns about its compliance practices, consulting with someone experienced in anti-corruption law can provide valuable guidance. Stay tuned for further updates on this significant shift in U.S. enforcement policy.
SEC Grants Further Relief From Including Personally Identifiable Information in CAT Reporting
On February 10, the Securities and Exchange Commission (SEC) granted relief exempting industry members from reporting a natural person’s name, address, and year of birth to the Consolidated Audit Trail (CAT). Industry members must still report transformed social security numbers (SSNs) or individual taxpayer identification numbers (ITINs) for natural persons and, to the extent applicable, Larger Trader IDs (LTIDs) and Legal Entity Identifiers (LEIs). This exemptive relief builds on the SEC’s 2020 relief that exempted industry members from reporting actual SSNs/ITINs and full birth dates to CAT (but then requiring year-of-birth reporting) and developed the system for transforming SSNs/ITINs, which are then used to generate CAT Customer-ID (CCIDs).
The SEC’s relief acknowledges the ongoing concerns of industry members and trade associations that the wholesale collection of customer information created cybersecurity risks, as such sensitive customer information was vulnerable to hacking by cybercriminals. Particularly when such customer information could be paired with the full inventory of historical securities transactions effected by that customer maintained in the CAT transaction database, cybercriminals could further use compromised information to impersonate customers or regulators, take over or otherwise compromise customer accounts, or otherwise engage in fraud or other bad acts affecting customers or the markets. The SEC’s action largely tracks a recommendation from FINRA President and CEO Robert Cook last month (https://www.finra.org/media-center/blog/cat-should-be-modified-to-cease-collecting-personal-information-on-retail-investors), perhaps anticipating inevitable CAT reform by a Republican-led Commission.
Regulators will still be able to obtain customer-specific information regarding individual transactions, but they will have to do so by requesting do so by requesting such information from broker-dealers through Bluesheet and other regulatory requests. Both the SEC’s exemptive order and FINRA’s proposal highlighted reverting to such a “request-response” system.
The SEC’s exemptive order is available at https://www.sec.gov/files/rules/sro/nms/2025/34-102386.pdf.