Eighth Circuit Holds SEC Climate Rule Litigation in Abeyance
On April 24, 2025, the Eighth Circuit ordered that the litigation over the validity of the SEC’s climate disclosure rule be “held in abeyance.” This order was in response to a submission by a coalition of blue states that intervened in the case, and are the sole defenders of the SEC’s climate disclosure rule now that the Trump Administration’s SEC has abandoned its defense.
In effect, this means that the judicial challenge to the SEC’s climate disclosure rule will be stayed until the SEC informs the court about whether it “intends to review or reconsider the rules at issue in this case”–i.e., whether the SEC will engage in the lengthy administrative process necessary to revoke the climate disclosure rule promulgated by the Biden Administration’s SEC.
Perhaps most significantly, the Eighth Circuit has effectively announced that it will not permit the Trump Administration’s SEC to let the climate disclosure rule die quietly in the dark–as the court proclaimed, “if the [SEC] has determined to take no action [i.e., not engage in the administrative process of review], then the [SEC] should address whether the [SEC] will adhere to the rules if the petitions for review are denied”–in other words, if the courts uphold the climate disclosure rule, then the SEC must state whether it will enforce the climate disclosure rule or not. And “if not” then the SEC must explain “why the [SEC] will not review or reconsider the rules at this time”–i.e., why it has chosen to not engage with the administrative process. The Court is effectively signaling that the SEC should engage in the administrative process to revoke the climate disclosure rule, since it is telegraphing that the Court would not regard favorably any decision by the SEC to simply not enforce the climate disclosure rule should the courts ultimately uphold its legitimacy.
The motion of the intervenor States to hold these cases in abeyance is granted. The cases will be held in abeyance pending further order of the court. The Securities and Exchange Commission is directed to file within 90 days a status report advising whether the Commission intends to review or reconsider the rules at issue in this case. If the Commission has determined to take no action, then the status report should address whether the Commission will adhere to the rules if the petitions for review are denied and, if not, why the Commission will not review or reconsider the rules at this time.
www.bloomberglaw.com/…
EU Regulators Take Different Enforcement Paths for ESMA ESG Fund Name Guidelines
European regulators have taken different routes as to how they plan to enforce the European Securities and Markets Authority’s (“ESMA”) guidelines (the “Guidelines”) with respect to the use of sustainability‑related terms in fund names. The deadline to implement these changes for existing funds is by 21 May 2025 and has applied to new funds in scope from 21 November 2024.
The Guidelines set out minimum exclusionary criteria for funds with sustainability‑related terms in their names as well as requiring minimum asset allocation levels in line with the environmental and/or social characteristics promoted or sustainable investment objectives. For further information on the Guidelines themselves, please see our alert here.
ESMA has commented that a “temporary deviation” from the threshold and/or exclusions requirements in the Guidelines will generally be treated as a “passive breach” and should be corrected in the best interest of investors, provided that the deviation is “not due to deliberate choice” by the fund manager.
Supervisory action may be taken where there are discrepancies in quantitative thresholds that are not explicitly passive breaches or in circumstances where the fund does not demonstrate a substantively “high level” of investments to reference the sustainability‑related term(s) in its name.
As noted by the Responsible Investor (link to article attached here), EU regulators have confirmed a variety of approaches so far, as outlined below:
More stringent approaches
Austria
Austrian Financial Markets Authority
The Austrian regulator stated that any violation of the Guidelines will be committing an administrative offence and liable for a fine of up to €60,000 in line with the Investment Funds Act.
Belgium
Belgium Financial Services and Markets Authority
With respect to enforcement tools, the Belgian regulator has noted that they will look to impose administrative and remediation measures such as orders to be dealt with by a specific deadline if they suspect greenwashing.
Norway
Financial Supervisory Authority of Norway
The Norwegian regulator specified that enforcement will be aligned to possible supervisory actions taken in other areas and may include corrective orders to be determined by the severity of the violations. For more severe violations, fines may be imposed.
Croatia
Croatian Financial Services Supervisory Agency
The Croatian regulator has noted that it will apply a proportionate enforcement approach which can range from formal warnings, requests for corrective action, to administrative measures for serious or repeated breaches.
Lithuania
Bank of Lithuania
In cases of non‑compliance, the Bank will instruct management companies to rectify the situation and sanctions may be applied in accordance with existing regulation.
Liechtenstein
Liechtenstein Financial Market Authority
The regulator has noted that they will evaluate whether enforcement action will be necessary, but that any procedures will follow existing alternative investment fund manager law ranging from warnings to fines.
Spain
Spain National Securities Market Commission
The Spanish regulator has confirmed that it will set reminders to managers to adapt before the end of the transitional period. If non‑compliance is determined after this date, measures will be implemented to align with Spanish collective investment scheme regulations.
Lighter touch approaches
Luxembourg
Luxembourg regulator CSSF
The Luxembourg regulator has noted that subject to relevant circumstances, it may consider further investigation and enter into a supervisory dialogue with market participants where necessary.
Italy
Italian Companies and Stock Exchange Commission
The Italian regulator has confirmed that it will also open dialogue with any managers that might be in breach of the guidelines.
France
Autorité des Marchés Financiers
The French regulator has said that it is planning to rely on its existing enforcement tools to sanction “established” regulatory breaches.
Ireland
Central Bank of Ireland
The Irish regulator has noted that it plans to assess compliance once the implementation period has concluded but has noted that this will be multifaceted in nature.
Denmark
Danish Financial Supervisory Authority
The Danish regulator has commented that supervisory actions will depend on the circumstances, but that “significant breaches” may result in an order being issued to the fund to remedy the situation by a specific deadline.
Germany
BaFin
BaFin has flagged that it has the power to issue orders in line with the German Capital Investment Code, but that the Code does not stipulate that managers should be fined solely on the basis that the fund name is misleading.
Malta
Malta Financial Services Authority
The Maltese regulator has confirmed that they will complete gap analysis to determine fund compliance, which could subsequently lead to other supervisory engagements.
Finland
Finnish Financial Supervisory Authority
The Finnish regulator has not disclosed any current enforcement plans, but not that there are disclosure requirements with respect to ESG thresholds and exclusions present in their current regulatory regime.
Estonia
Estonia Financial Supervisory Authority
The Estonia regulator chose not to disclose any information relating to their supervisory activities due to legal and confidentiality conflicts.
BaFin Publishes Draft Guidance Note on the Influence by Investors
On 14 March 2025, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) published a draft Guidance Note on the possibility of investors taking influence on investment funds. The draft contains explanations and potential concerns regarding investor influence or input on investment decisions by third-party managers to investment funds. BaFin emphasizes the principle of third-party management, according to which the final decision rests with the management company (KVG) or a portfolio manager (in the case of outsourcing). BaFin views instructions as well as approval and veto rights of investors regarding individual transactions critically with regard to the principle of third-party management. BaFin also takes a critical view of acquisition initiatives (recommendations) essentially originating from the investors if the KVG no longer carries out its own evaluation. This may be particularly relevant in connection with institutional funds. The consultation ended on 31 March 2025.
ESMA Publishes Guidelines on the Classification of Crypto-Assets As Financial Instruments
On 19 March 2025, the European Securities and Markets Authority (ESMA) published guidelines on the conditions and criteria for the classification of crypto-assets as financial instruments. According to ESMA, crypto-assets can be classified as transferable securities, money-market instruments, units in collective investment undertakings, derivative contracts or emission allowances in accordance with the Markets in Financial Instruments Directive (MiFID II). In the guidelines, ESMA – like BaFin in the past – reaffirmed the principle of technological neutrality. This means that an asset classified as a financial instrument remains a financial instrument from a regulatory perspective and is primarily regulated by MiFID II even if it is tokenized. For example, a crypto-asset can be a transferable security within the meaning of MiFID II if it is not an instrument of payment, is fungible, and is negotiable on the capital market. A crypto-asset that conveys a proportional share in a portfolio managed according to an investment strategy, without providing investors with control options (e.g., voting rights), is generally a unit or share in an investment fund. In addition, the guidelines serve to further specify the types of crypto-assets. The guidelines apply from 18 May 2025.
EBA Consults on Regulatory Technical Standards for the EU Anti-Money Laundering Package
On 6 March 2025, the European Banking Authority (EBA) published drafts of four Regulatory Technical Standards (RTS) on the European Union’s new anti-money laundering package (AML/TF package) for consultation. The anti-money laundering package consists of four legal acts that were published in the Official Journal of the European Union on 19 June 2024 and are to be applied or implemented in stages from 1 July 2025. Essentially, a new authority will be created that will directly supervise certain financial institutions in the EU, the approaches of national supervisory authorities and Financial Intelligence Units (FIUs) within the EU will be harmonised and a uniform set of rules for the prevention of money laundering and terrorist financing will be introduced for the first time. The consultation is open for feedback until 6 June 2025 and the EBA intends to submit its final report to the European Commission on 31 October 2025.
BaFin Supplements Interpretation and Application Guidance on the German Anti-Money Laundering Act
In March 2025, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) again revised its interpretation and application guidance on the German Anti-Money Laundering Act (Auslegungs- und Anwendungshinweise (AuA) zum Geldwäschegestz), which was last updated on 29 November 2024, and added guidance on crypto-asset service providers and certain issuers of asset-referenced tokens, following the publication of the German Financial Market Digitalisation Act (Finanzmarktdigitalisierungsgesetz) on 27 December 2024. In addition, information on increased due diligence obligations for crypto-asset transfers with self-hosted addresses has been included.
ESMA Consults on Simplification of Insider Lists
On 3 April 2025, the European Securities and Markets Authority (ESMA) published a consultation paper with draft implementing technical standards to extend the simplified format for drawing up and updating insider lists for issuers admitted to trading on Small and Medium Enterprises (SME) Growth Market to all issuers. A corresponding mandate for ESMA can be found in the EU Listing Act. The implementing technical standards are to contain three different model templates for insider lists, which differ depending on whether the respective Member State has decided against limiting insider lists to those persons who, due to the nature of their function or position with the issuer, always have access to inside information. The proposals aim to reduce the burden associated with the creation of insider lists. The consultation ends on 3 June 2025.
BaFin Studies on the Certificates‘ Market
On 12 March 2025, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) published information on two market studies in which it examined the certificates’ market for retail investors, particularly with regard to distribution practices. One study explicitly dealt with interest and express certificates, the other with turbo certificates. BaFin examined both manufacturers and distributors, and also surveyed nearly 2,000 investors who had invested in the relevant products.
In the study on interest and express certificates (investment certificates) conducted from May 2024 to February 2025, BaFin initially noted that while these products had experienced increased sales since the end of the low-interest rate phase, no systematic misconduct or even serious deficiencies were found with regard to product distribution.
However, BaFin criticized the sometimes-flawed design of products with regard to the chosen target market definition and the fact that investors in express certificates often lacked an understanding of their functionality and risks. BaFin has announced, among other things, that it will focus its ongoing supervisory activities on this area.
In the study on turbo certificates covering the period from 2019 to 2023, BaFin noted a sharp increase in the market volume of such products but also came to the conclusion that almost ¾ of investors had to realize losses on their investments during the period under review, which amounted to a total of around EUR 3.4 billion. BaFin intends to publish detailed results in the second quarter of 2025; further measures to protect investors are still being examined.
ESMA Publishes Facilitation For the Provision of Research
On 8 April 2025, the European Securities and Markets Authority (ESMA) published its Technical Advice to the European Commission on the amendments to the research provisions in the MiFID II Delegated Directive. Since MiFID II, analyses (so-called “research“) are generally considered as inducements, meaning that the fees for research services must be paid by the financial service providers subject to MiFID II themselves or from a separate, client-related research payment account (so-called “unbundling regime”). Deviations from these requirements were already permitted for non-large financial service providers as part of the relief measures during the covid pandemic. Further simplifications have now become possible in connection with the EU Listing Act. ESMA therefore proposes the possibility of a joint payment of execution and research fees, regardless of the size of the financial service provider. In addition to an agreement on the part of the financial services provider, further prerequisites are that excessive payments for research and an impairment of the best possible execution of client orders are avoided.
ESMA Publishes Translations of Guidelines on the Common Classification of Crypto-Assets (MiCAR)
On 10 March 2025, the European Securities and Markets Authority (ESMA) published the official translation of the guidelines on templates for explanations and opinions, and the standardised test for the classification of crypto-assets under the MiCAR Regulation.
The guidelines contain the specific templates for:
Content and form of the explanation to be attached to the white paper that the crypto-assets are not a crypto-asset exempt from MiCAR, an e-money token or an asset-referencing token;
Content and form of the legal opinion to be submitted to the authorities for asset-referencing tokens;
A uniform test to be applied by the authorities to classify crypto-assets.
The guidelines will apply from 12 May 2025.
Blockchain+ Bi-Weekly; Highlights of the Last Two Weeks in Web3 Law: April 24, 2025
The last two weeks have seen federal agencies continue refining their approach to the digital asset industry, while state regulators are beginning to play a more prominent role—even as the overall pace of development appears to be slowed. With the SEC stepping back from non-fraud enforcement, Oregon’s lawsuit against Coinbase highlights a potential shift toward increased state-level activity.
At the federal level, the SEC issued new guidance on registering crypto-related securities, the House held hearings on digital asset market structure, and the DOJ released a memo calling on prosecutors to “end regulation by prosecution”—underscoring a growing federal priority to focus enforcement on fraud and consumer protection rather than taking a broad adversarial stance toward the industry. Other notable developments include Illinois advancing a BitLicense 2.0 proposal, OpenSea seeking SEC guidance on NFT regulations, and Ripple moving to acquire global credit network Hidden Road.
These developments and a few other brief notes are discussed below.
Oregon Sues Coinbase Over Alleged State Securities Laws Violations: April 17, 2025
Background: Oregon’s state attorney general has brought a lawsuit against Coinbase, alleging the exchange has violated Oregon state securities laws through listings of certain assets alleged to be securities under Oregon law. Coinbase has released a statement claiming, “Oregon’s holdout campaign is obstruction for the sake of obstruction. It is a desperate scheme that does nothing to move the crypto conversation forward, and in fact takes us a giant leap backwards from hard-won progress.”
Analysis: As anticipated, states and private litigants are beginning to fill the securities litigation gap left by the SEC’s decision to drop its pending and threatened cases against digital asset participants in favor of pursuing a statutory and rulemaking-based framework. Oregon’s lawsuit, which names 31 assets as “unregistered securities,” is notable—especially as other states withdrew similar actions following the SEC’s retreat in the Coinbase matter. This latest development underscores that, despite federal de-escalation, litigation against exchanges remains an ongoing issue for the industry.
SEC Issues Guidance on How to Register Securities that Involve Crypto: April 10, 2025
Background: Much of the focus at the SEC post-Gensler has been on releasing guidance on what crypto offerings are not securities (memecoins, stablecoins, etc.). The SEC Division of Corporation Finance has now put out guidance for issuers whose securities involve crypto assets on how federal securities law disclosure requirements apply. It recognizes that issuers may offer equity or debt securities as part of operations related to networks, applications, and crypto assets, and highlights the need for tailored, clear, and consistent disclosure aligned with existing rules (e.g., Regulation S-K, Forms S-1, 10, 20-F, and 1-A). Key disclosure elements include a focused description of the issuer’s business and developmental milestones, potential risks (such as technological, regulatory, and liquidity risks), a complete description of the securities (including any unique features and technical specs), and information on directors, executive officers, and significant employees (or third parties) performing policy-making functions.
Analysis: Tokenized securities are coming to traditional finance. Major actors in the traditional financial world are already preparing for that eventuality. Most digital assets are not securities, but many securities could be better handled through addendum only ledger technology rather than a seemingly endless number of middlemen all getting their cut to make sure none of the other middlemen are cheating the consumer. So, while the SEC and Congress work through determining which digital assets are securities and which are something else, this is a good step to allow innovative companies to start registering tokenized products.
Market Structure Hearings Held in House of Representatives: April 9, 2025
Background: The House Financial Services Committee’s Digital Asset Subcommittee and the House Agriculture Committee’s Digital Asset Subcommittee both held hearings on how to approach an overarching market structure for digital assets now that stablecoins seem to be on the fast track to regulatory standards. There is a broad consensus that digital assets that are securities need to be provided a way to register with the SEC and abide by SEC rules that aren’t so onerous that the registration process kills any value of the product.
Analysis: You can probably read the statements from witnesses Bill Hughes, Chris Brummer, and Rodrigo Seira to get the gist of where the focus should be for digital asset regulation. Both hearings had a noticeable focus on use cases for digital assets. We are still waiting for what the market structure bill will look like. It will be close to FIT21, previously passed through the House Financial Services Committee, but we don’t know how close it will be yet, as there were noticeable weaknesses in the bill. Draft language is expected to be public soon, though, and all expectations are for the determining factor between securities offerings and non-securities offerings to focus on “control” as opposed to “decentralization,” which was the focus of last year’s bill.
DOJ Releases Memo “Ending Regulation by Prosecution”: April 7, 2025
Background: Deputy Attorney General Todd Blanche has issued a memorandum to Department of Justice employees with the subject reading “Ending Regulation by Prosecution,” where he states, “Consistent with President Trump’s directives and the Justice Department’s priorities, the Department’s investigations and prosecutions involving digital assets shall focus on prosecuting individuals who victimize digital asset investors or those who use digital assets in furtherance of criminal offenses…” The memo clarifies that the DOJ is not going to focus efforts on exchanges or wallets for the actions of third-parties, and is not the regulator of alleged unregistered money transmission laws. It also disbands the National Cryptocurrency Enforcement Team, which was responsible for most current investigations and prosecutions in the space over the last few years.
Analysis: Note that this memorandum does not include guidance not to prosecute alleged violations of 18 U.S.C. 1960(b)(1)(C), which involves allegations of transmitting funds that are “knowingly” the product of criminal offenses and is the heart of the Roman Storm and Samuri Wallet developer cases. Interestingly, the memo calls out the issue of how digital asset losses are calculated when trying to compensate victims (a not-so-subtle reference to FTX depositors getting ~$20,000 per Bitcoin lost when Bitcoin was worth quadruple that by the time repayments happened). Not sure if there is a solution to this other than making people choose early in the process if they want in-kind or value of asset at time of theft. Unfortunately for Do Kwon, even with this DOJ pivot, his suit will remain ongoing.
Briefly Noted:
Paul Atkins Sworn in as SEC Chair: Paul Atkins has finally been sworn in as SEC Chair, marking the formal start of a new era for the Commission. The agency remained active in redefining its priorities throughout his confirmation process, and Atkins was widely understood to be in alignment with the key decisions made during that period. With his swearing-in now complete, he is positioned to implement a full regulatory agenda and set the tone for the post-Gensler SEC—potentially accelerating shifts in enforcement priorities, rulemaking, and digital asset policy.
Illinois Looking to Pass BitLicense 2.0: An Illinois bill is gaining traction and is expected to pass, which would enact similar onerous reporting and registration requirements as the New York BitLicense. With the combination of the Oregon lawsuit discussed above, this further emphasizes the need for comprehensive regulations at a federal level to prevent fractionalized and contradictory rules.
OpenSea Open Letter: OpenSea has submitted a public letter to the SEC advocating for NFT marketplaces to be carved out of broker/dealer registration requirements with the SEC. It is clear that even with NFTs decline, they are still a crucial part of the ecosystems that need regulatory guidance.
Nova Labs Lawsuit Dismissed: Nova Labs (the developer behind Helium Network) was sued in the last days before Gensler resigned, and that lawsuit has now been dismissed with prejudice. So this ordeal actually ended up good for them since the lawsuit being brought and then dismissed in this way prevents any future lawsuit over the same allegations from the agency.
Hinman Cleared by Office of Inspector General: Former Corporation Finance Director Bill Hinman has been cleared of allegations that his infamous speech was the result of insider dealings.
$1.2 Billion M&A Deal: Ripple is reportedly acquiring global credit network Hidden Road for $1.25 billion. This is reportedly an effort to give functionality to Ripple’s stablecoin, RLUSD, in traditional finance for cross-border settlements.
MEV Submission: Really great work from the team at Paradigm explaining how MEV works and what the SEC should consider in regulation in light of those technical realities. Good stuff.
DOJ Memo Confirmed Not Applicable for Fraud: As stated above, the DOJ memo regarding cutting down on criminal actions for crypto actors is not a get out of jail free card for past (alleged) frauds.
SEC Roundtable on Crypto Custody: The SEC has announced the time and speakers in its next crypto roundtable on custody. It remains great to see as many of these conversations as possible happen in public.
Phantom Wallet Lawsuit: It looks like an attorney is suing the wallet developer where he held certain memecoins he created, but which were stolen through his computer being compromised. This will be something worth following, especially if wallet developers are regulated under a market structure bill or similar legislation.
Conclusion:
The last two weeks have been relatively quiet in terms of crypto legal development. With the SEC pivoting away from prosecuting non-fraud crypto cases, state regulators have begun stepping into that role, most notably with Oregon suing Coinbase over alleged violations of state securities laws. At the federal level, the SEC provided guidance on registering securities that include crypto assets, the House of Representatives held market structure hearings, while the DOJ aimed to “end regulation by prosecution.”
If You Agree That Stock Issuance Was Not “Compensation, Salary, Or Income”, You May Want To Think Carefully Before Issuing A Form 1099
Ten years ago, Hovik Nazaryan sued Femtometrix, Inc. claiming that the company had issued shares to him than it had promised. The parties settled the lawsuit. The settlement agreement provided that the stock issued to Mr. Nazaryan “is not ‘compensation,’ ‘salary,’ or ‘income’ for services performed by [Nazaryan].” The settlement agreement further provided “The Settlement Stock, and any other stock issued by way of this Agreement, is being provided to [plaintiff] as ‘Founder’s Stock’ for his capital/equitable contributions to Femtometrix as alleged by [Nazaryan] in the Action, and the Parties will classify it as such, for all purposes to the extent permitted by law.” When Femtometrix later issued 1099 forms, Mr. Nazaryan sued. The action was removed to federal court but U.S. District Court Judge James V. Selna remanded the case to the Superior Court. Nazaryan v. FemtoMetrix, Inc., 2019 WL 3545452 (C.D. Cal. Aug. 5, 2019) based on a forum selection clause in the settlement agreement.
The trial court held that Femtometrix had breached the settlement agreement and had issued fraudulent information returns under Internal Revenue Code section 7434. Yesterday, the Court of Appeal affirmed. Notably, the Court of Appeal, while acknowledging a split of authority in the federal courts, upheld the trial court’s decision to hold Femtometrix’s chief executive and financial officers jointly and severally liable.
ESMA Releases Final Draft RTS and Guidelines on Liquidity Management
ESMA Guidelines and Final Draft RTS on Liquidity Management Tools of UCITS and Open-Ended AIFs
Pursuant to the revised Directive 2011/61/EU (AIFMD) and Directive 2009/65/EC (UCITS Directive), the European Securities and Markets Authority (ESMA) was tasked with developing guidelines on the selection and calibration of liquidity management tools (LMTs) and developing regulatory technical standards (RTS) to determine the characteristics of LMTs available to managers of alternative investment funds (AIFs) (AIFMs) and of undertakings for collective investment in transferable securities (UCITS) (UCITS ManCos). On the back of this mandate, ESMA published a consultation paper (CP) on the draft guidelines and RTS.
The consultation period closed on 8 October 2024, with ESMA receiving 33 responses. Taking into account this stakeholder feedback, on 15 April 2025, ESMA published (i) its final report on the Guidelines on LMTs of UCITS and open-ended AIFs (the Guidelines) and (ii) its final report on the draft Regulatory Technical Standards on Liquidity Management Tools under the AIFMD and UCITS Directive.
Final Report on Guidelines on LMTs of UCITS and Open-Ended AIFs
On the back of feedback received during the consultation, ESMA made a number of changes to the Guidelines, deleting several sections that were previously included in the CP and amending other sections to provide more flexibility to AIFMs and UCITS ManCos. The Guidelines were also streamlined to avoid any overlaps with the RTS and the text contained in the AIFMD and UCITS Directive. Notable deletions from the Guidelines include:
The guideline on governance principles, which previously stated that fund managers should develop an LMT policy which should document the conditions for the selection, activation and calibration of LMTs, and an LMT plan.
ESMA noted that the majority of stakeholder feedback highlighted that the LMT policy should be kept as an internal guidance document, and on the basis that the AIFMD and UCITS Directive already contain provisions mandating the implementation of policies and procedures for the activation and deactivation of LMTs and operational and administrative arrangements, ESMA deleted the sections of the Guidelines dedicated to the governance principles.
The guideline on disclosure to investors, which mandated managers to provide disclosure to investors on the selection, activation and calibration of LMTs in the fund documentation, rules or instruments of incorporation, prospectus or periodic reports.
ESMA noted that notwithstanding the fact that the majority of stakeholders supported the principle of improving transparency to investors, they stressed the importance to strike the balance between appropriate disclosure, investor protection and unintended consequences. On the back of this, ESMA decided not to retain these sections of the Guidelines, but noted that managers should nonetheless be cognisant of the LMT disclosure obligations set down in the AIFMD and UCITS Directive for example, that a description of the AIF’s liquidity risk management shall be made available to investors by the AIFM.
Certain other restrictive guidelines, including those that imposed more restrictive obligations on the selection, activation and calibration of LMTs, as it was noted that these guidelines limited the sole responsibility of the manager as prescribed by the AIFMD and UCITS Directive.
In contrast, ESMA retained certain guidelines that had previously been pushed back on by stakeholders including the guideline whereby managers should consider, where appropriate, the merit of selecting at least one quantitative LMT and at least one anti-dilution tool. While retaining this guideline, ESMA stressed that it is without prejudice to the ultimate responsibility of the manager for the selection of LMTs, including, where appropriate, redemptions in kind.
In light of the consultation feedback, ESMA noted that it has opted against a restrictive approach in the final Guidelines, instead emphasising the manager’s sole responsibility for selecting and implementing LMTs.
Draft Regulatory Technical Standards on Liquidity Management Tools Under the AIFMD and UCITS Directive
As was the case with ESMA’s final report on the Guidelines, ESMA, on the back of feedback received from stakeholders, made a number of updates to the draft RTS, in particular to make several changes and clarifications with regard to redemption gates, and also to remove the requirement to apply the same rules to all share classes.
Taking into account feedback from stakeholders, ESMA introduced flexibility in the way in which the activation threshold for redemption gates of AIFs can be expressed. The RTS for AIFs now stipulate that the thresholds can be expressed: (i) as a percentage of the net asset value (NAV) of the AIF, (ii) in a monetary value (or a combination of both), or (iii) as a percentage of liquid assets. For UCITS however, ESMA retained the existing language regarding activation thresholds in that they shall only be expressed as a percentage of the NAV of the UCITS. In addition to this, ESMA introduced an alternative method for the application of redemption gates for AIFs and UCITS under which redemption orders below or equal to a pre-determined redemption amount can be fully executed while redemption orders above this amount are subject to the redemption gate. This mechanism, ESMA explained, should serve to avoid small redemption orders being affected by large orders that drive the amount of redemptions above the activation threshold.
In addition, the draft RTS previously included provisions requiring the same level of LMTs to be applied to all share classes, however, given that the mandate of the RTS did not support the development of specific and comprehensive application of LMTs to share classes, these provisions have been removed.
Finally, stakeholder feedback alerted ESMA of the unintended consequences of the rules on redemption in kind for the functioning of the primary market of exchange-traded funds (ETFs). On the back of this, ESMA included a new provision in the UCITS RTS clarifying that the rule on pro-rata approach in the case of redemption in kind did not apply to authorised participants and market makers operating on the primary market of ETFs.
What Comes Next?
In terms of next steps, the final draft RTS have been submitted to the European Commission (the EC) for adoption and the EC have three months (which can be extended by one further month), to make a decision. The Guidelines shall start to apply on the date of entry into force of the RTS. Funds that existed before the entry into force of the RTS shall have 12 months to comply with the Guidelines.
A New Playbook: What the CFTC’s Operating Divisions Will Consider When Making Enforcement Referrals
The three operating divisions of the CFTC (Division of Market Oversight, Market Participants Division, and the Division of Clearing and Risk, together the Operating Divisions) issued an advisory on April 17, explaining the materiality criteria they will use when determining whether to make a formal referral to the agency’s Division of Enforcement (DOE) for self-reported violations, supervision violations, or other non-compliance issues (the Referral Advisory).
The Referral Advisory comes off the heels of DOE’s February 25 advisory (the DOE advisory) regarding self-reporting, cooperation and remediation by a CFTC registered entity or registrant when recommending an investigation or enforcement action to the Commission, including the factors DOE will consider when evaluating whether to reduce the proposed civil monetary penalties in enforcement actions. Under the DOE Advisory, a registered entity or registrant may receive CMP credit for self-reporting a potential violation to the appropriate CFTC Operating Division. Under older DOE staff guidance (which has since been vacated), DOE would not provide such credit when a registered entity or registrant self-reported a potential violation to the appropriate Operating Division.
Read Katten’s summary of the DOE Advisory.
The Referral Advisory notes that the Operating Divisions may refer potential violations that are material to DOE, such as those that involve:
Harm to clients, counterparties or customers, or members or participants;
Harm to market integrity; or
Significant financial losses.
In circumstances where a material violation involves fraud, manipulation or abuse, the Referral Advisory recommends making a referral directly to DOE rather than to the Operating Divisions.
The Operating Divisions will address supervision or noncompliance issues that are not material. In other words, the Operating Divisions will no longer make referrals of these nonmaterial noncompliance issues. This guidance is consistent with the Acting Chairman Caroline Pham’s push to have the Commission treat technical, noncompliance violations in the same way that exam deficiencies are addressed. While a commissioner, she commented that “enforcement actions for one-off, non-material operational or technical issues is shooting fish in a barrel.” Acting Chairman Pham also suggested that, instead, the agency should “take an approach to operational and technical issues that is consistent with the requirements and intent of CFTC rules 3.3 and 23.602.”
In determining the materiality of a supervision or noncompliance issue, the Referral Advisory provides that the appropriate Operating Division will apply a reasonableness standard to the following criteria:
Especially egregious or prolonged systematic deficiencies or material weakness of the supervisory system or controls, or program;
Knowing and willful misconduct by management, such as conduct evidencing an intent to conceal a potential violation, or supervision or noncompliance issue; or
Lack of substantial progress towards completion of a remediation plan for an unreasonably lengthy period of time, such as several years, particularly after a sustained and continuous process with the appropriate Operating Division regarding the lack of substantial progress.
The Referral Advisory makes clear, however, that the failure to meet a deadline for corrective action or remediation plan on its own will not be sufficient for a referral to DOE.
If The Shares of a Chinese Company Are Delisted, What Happens to Trading in California?
Yesterday’s Wall Street Journal includes a story about the possible delisting of shares of Chinese companies. Shares of companies that are listed, or authorized for listing, on a national securities exchange (or tier or segment thereof) are classified as “covered securities”under Section 18(b)(1) of the Securities Act of 1933. As such, state laws requiring registration or qualification are preempted. Therefore, delisting will result in covered security status. What does this mean for California?
Section 25130 of the California Corporations Code makes it unlawful for any person to offer or sell any security “in this state” (Section 25008) in any “nonissuer transaction” (Section 25011) unless it is qualified for sale or exempt from qualification. Thus, the immediate consequence of delisting will be that secondary trading of shares of the delisted companies will require either qualification or an exemption.
Following delisting, licensed broker-dealers to effect offers or sales but only if they are made pursuant to an unsolicited order or offer to buy. Cal. Corp. Code § 25104(b). For purposes of this exemption, an inquiry regarding a written bid for a security or a written solicitation of an offer to sell a security made by another broker-dealer within the previous 60 days is not considered a solicitation of an order or offer to buy. Id. A rule, 10 CCR § 260.104, establishes a presumption that an order or offer to buy is not unsolicited if the broker-dealer knows, or has reason to know, that the order or offer to buy is in response to one or more activities specified in the rule.
Bona fide owners may also offer or sell a security for their own account if the sale is (i) not accompanied by the publication (Section 25014) of any advertisement (Section 25002); and (ii) is not effected by or through a broker-dealer in a public offering.
It is also possible that other exemptions from Section 25130 will be available depending upon the particular circumstances (e.g., 10 CCR § 260.105.11).
The bottom line is that if a company is delisted from a national securities exchange, the company and those trading in the companies shares will need to consider applicable California requirements and exemptions.
Delaware Chancery Court Puts CFIUS Mitigation in Focus for M&A
What Happened
In a recent decision, the Delaware Court of Chancery (the Court) ordered Nano Dimension Ltd. (Nano) to enter into a national security agreement in the form proposed by the Committee on Foreign Investment in the United States (CFIUS), finding that Nano materially breached the CFIUS clearance provisions of a merger agreement (Merger Agreement) entered into with Desktop Metal, Inc. (Desktop) on July 2, 2024.
The Bottom Line
The Court’s decision to require Nano to execute a national security agreement proposed by CFIUS as a condition to clear the Nano-Desktop merger sets an important precedent for understanding the meaning of regulatory approval covenants generally, and CFIUS clearance covenants specifically.
The Full Story
According to the Court’s Post-Trial Memorandum Opinion, Desktop is a Massachusetts-based company that makes industrial-use 3D printers that create specialized parts for missile defense and nuclear capabilities. Nano is an Israeli firm, and sought to acquire Desktop in a $183 million all-cash transaction. Under the CFIUS rules, this is a “covered control transaction” and would therefore be subject to CFIUS review. To achieve the regulatory certainty that CFIUS would not later seek to force Nano to dispose of Desktop, the parties agreed to seek CFIUS approval on a voluntary basis as a condition to closing the merger. Given the national security implications of Desktop’s business, the parties anticipated that CFIUS approval would be complicated and would likely require that Nano enter into a national security agreement.
Desktop and Nano included in the Merger Agreement a relatively standard “reasonable best efforts” provision with respect to resolving government objections to the transaction generally. In addition, the parties specifically agreed to take “all action necessary” to receive CFIUS approval, including “entering into a mitigation agreement” in relation to Desktop’s business (a so-called “hell-or-high-water” provision). Nano included a narrow carveout that would allow it to refuse to agree to any condition imposed by CFIUS that would “effectively prohibit or limit [Nano] from exercising control” over any portion of Desktop’s business constituting 10 percent or more of its annual revenue, with clarifications that certain common mitigation requirements (e.g., US citizen-only requirements, information restrictions, continuity-of-supply assurances for US government customers, and notification/consent requirements in the event the US business exits a business line) would not impact the carve-out. In effect, the CFIUS approval condition in the Merger Agreement preserved wide latitude for conditions imposed by CFIUS in a mitigation agreement notwithstanding the control exception negotiated by Nano.
As anticipated by Desktop and Nano in the Merger Agreement, CFIUS informed the parties that it identified national security risks arising from the transaction and proposed a mitigation agreement to address those risks. Specifically, the mitigation agreement would have imposed information restrictions preventing the integration of Nano and Desktop IT infrastructure, restricted manufacturing locations for supply to US government customers, limited remote access software for products supplied to US government customers, required a US citizen board observer and appointed a third-party monitor. According to the Court’s recitation of facts, Nano’s cooperation with CFIUS in negotiating the terms of the mitigation agreement ceased following a proxy contest that resulted in a turnover on Nano’s board to a position opposed to the merger with Desktop. Desktop subsequently sued to enforce the terms of the Merger Agreement.
The Court held that Nano breached its obligations under the “reasonable best efforts” clause, noting that this language has been interpreted to require parties to take all reasonable steps and appropriate actions, which it found Nano failed to do. The Court also noted that good faith is relevant and that a “reasonable best efforts” clause does not allow parties to use regulatory approvals as a way out of a deal. Given the facts recited by the Court that Nano sought to use the CFIUS clearance condition as a way out of the deal, it is tempting to view the precedential weight of this part of the decision narrowly. However, “reasonable best efforts” provisions relating to regulatory clearances are commonplace and the Court’s discussion of this language merits attention. This is particularly true in the CFIUS context where remedies can be less predictable than those in other regulatory contexts due to the wide range of national security risks considered by CFIUS and the relative “black box” nature of CFIUS reviews.
The Court’s holding also provides important take-aways regarding the “hell-or-high-water” provision. These provisions are used to clarify “reasonable best efforts” in specific contexts and, as the Court noted, represent hard commitments in a merger agreement with respect to regulatory approval. Moreover, these firm commitments are relatively rare in CFIUS or other regulatory contexts. In this case, Desktop and Nano correctly anticipated that CFIUS would request a mitigation agreement and sought to identify a list of mitigation measures that would be acceptable. However, in the Court’s view, these mitigation measures were separate from the parties’ effort to define control with reference to the target’s financial performance. Rather, as CFIUS’s proposed mitigation concerned information restriction, supply assurances and monitoring requirements (which were specifically excluded from consideration of the loss of control exit provision), Nano’s ability to object to these requirements was quite constrained. The Court therefore rejected Nano’s argument that CFIUS’s conditions would impact Nano’s control over more than 10 percent of Desktop’s revenue-generating business lines.
The Court’s remedy of specific performance also merits consideration. The Merger Agreement stipulated to specific performance in the event of a breach. The Court’s recitation of facts explains that, in order to achieve greater deal certainty, Desktop proposed that CFUS clearance be subject to either a reverse termination fee or the “hell-or-high-water” provision backed by specific performance and that Nano opted for the latter. Transaction parties should note that generally, if a buyer needs greater flexibility to consider potential CFIUS mitigation given the unpredictability, a reverse termination fee can be used to purchase more discretion in deciding whether CFIUS’s proposed mitigation sufficiently erodes the value of the deal, provided that the parties carefully define the specific parameters of acceptable mitigation. Note, however, that the Court’s opinion with respect to the “reasonable best efforts” clause suggests that this does not simply allow a buyer to use mitigation as a pretext to refuse to go forward with the deal and transaction parties should carefully consider the degree of flexibility provided by regulatory approval conditions.
This case is a clear reminder that transaction parties should carefully consider the scope of regulatory approval conditions in negotiating merger agreements. No transaction party can predict exactly what mitigation measures CFIUS might require or even what national security risks it might identify, and parties will need to understand all possible mitigation remedies in order to successfully draft a CFIUS approval condition that effectively balances deal certainty with the flexibility necessary to turn down unacceptable mitigation requirements. To illustrate this uncertainty, the National Security Memorandum on America First Investment Policy issued by the President in February 2025 indicates some of the conditions required by CFIUS in its proposed mitigation agreement in this case (for example, indefinite monitoring conditions) may not have been required if the present administration negotiated the mitigation agreement continued. Transaction parties should consider emerging CFIUS trends and policy developments as relevant to the scope of a “reasonable best efforts” clause.
Joint SEC Whistleblowers Awarded $6 Million for Disclosure
On April 21, the U.S. Securities and Exchange Commission (SEC) announced that it had awarded $6 million to joint whistleblowers who voluntarily provided original information which led to the opening of an examination resulting in a successful enforcement action.
According to the SEC, the whistleblowers’ “tip and supplemental submissions were helpful in connection with the Commission Examination as well as Exams’ ultimate examination findings.” The award order further notes that Exams referred the matter to Enforcement staff who “found the referral from Exams to be helpful as a roadmap to the investigation that resulted in the Covered Action.”
“Today’s award illustrates that the agency can leverage whistleblower information in various ways, including by prompting an examination,” said Jonathan Carr, Acting Chief of the SEC’s Office of the Whistleblower. “If that examination ultimately results in an enforcement action, the whistleblower may be eligible for an award.”
Through the SEC Whistleblower Program, qualified whistleblowers are eligible to receive monetary awards of 10-30% of the sanctions collected in connection with their disclosure when their information contributes to an enforcement action where the SEC is set to collect at least $1 million.
The SEC weighs a number of factors in determining the exact percentage to award a whistleblower. In this case, the Commission notes that it considered the following factors: “(1) the significance of information provided; (2) the assistance provided; (3) the law enforcement interest in deterring violations by granting awards; (4) participation in internal compliance systems; (5) culpability; (6) unreasonable reporting delay; and (7) interference with internal compliance and reporting systems.”
Established in 2010 with the passage of the Dodd-Frank Act, the SEC Whistleblower Program has now awarded a total of more than $2.2 billion to 444 individuals.
In FY 2024, the SEC Whistleblower Program received a record 24,980 whistleblower tips and awarded over $255 million, the third highest annual amount. According to SEC Office of the Whistleblower’s annual report, the most common fraud areas reported by whistleblowers in FY 2024 were Manipulation (37%), Offering Fraud (21%), Initial Coin Offerings and Crypto Asset Securities (8%), and Corporate Disclosures and Financials (8%).
Digital Financial Assets – Out Of The Frying Pan And Into The Fire?
The application of the securities laws to digital financial assets has been fraught for lawyers and their clients. After taking a hard line that many of these assets were securities under the federal securities laws, the Securities and Exchange Commission with the change of Administration now appears to be taking a less hostile approach. In January, Acting Commissioner Mark Uyeda announced the formation of a Crypto Task Force. Then in February, the Staff of the Division of Corporation Finance issued a statement that certain meme coins are not securities.
A conclusion that a digital financial asset is not a security may simply transfer regulation from one regulator (the SEC) to another (the California Department of Financial Protection & Innovation), or as Bilbo Baggins exclaimed: “Escaping goblins to be caught by wolves!”*
California’s Digital Financial Assets Law will require persons engaged in “digital financial asset business activity” to be licensed by the Department. Cal. Fin. Code § 3201. The DFAL defines “digital financial asset” as “a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender, whether or not denominated in legal tender.” Cal. Fin. Code § 3102(g)(1). One exclusion from this definition is a “security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department.” Cal. Fin. Code § 3102(g)(2). Accordingly, if the SEC determines that a digital financial asset is a security, someone exchanging, transferring, or storing that asset would be subject to the DFAL, unless exempt. Conversely, a determination that a particular digital financial asset is not a security would bring persons engaged in exchanging, transferring, or storing that asset within the ambit of the DFAL. Oddly, a security that is neither registered with nor exempt from registration would not be excluded from the definition of a “digital financial asset” for purposes of the DFAL.
___________________J.R.R. Tolkien, The Hobbit, or There and Back Again.
Digital Dollars, Not Investments: SEC Staff Weighs in on Stablecoins
On April 4, the Securities and Exchange Commission’s (SEC) Division of Corporation Finance issued a statement clarifying that reserve-backed U.S. dollar stablecoins are not securities, at least under current law and circumstances. The nonbinding guidance marks the latest effort by SEC staff to articulate the boundaries of the agency’s jurisdiction in an evolving crypto regulatory landscape.
Stablecoins are blockchain-based digital assets that are typically pegged to traditional currencies like the U.S. dollar (we previously discussed the stablecoin market here). The statement addresses “Covered Stablecoins”—those pegged to the U.S. dollar and backed by sufficient low-risk, liquid assets, so as to allow a Covered Stablecoin issuer to fully honor redemptions on demand. Covered Stablecoins are designed to maintain a stable value by being fully backed by reserves equal to or greater than the total amount of that stablecoin in circulation. The issuer allows users to mint or redeem these stablecoins at a fixed rate of $1 per coin (or the corresponding fraction), at any time and in any quantity.
The SEC staff noted that these tokens are marketed for use in payments, money transmission, or storing value, not as speculative investments. SEC staff reasoned that because buyers are not motivated by profit, and the tokens do not confer ownership rights or returns, the transactions involved in minting and redeeming such stablecoins do not require registration under federal securities law.
While the staff’s position offers some comfort to stablecoin issuers, it is not a formal rule and carries no legal force.
Putting It Into Practice: This development comes as Congress considers legislation to establish a regulatory framework for stablecoins. The House Financial Services Committee recently advanced the STABLE Act with bipartisan support (previously discussed here). The SEC’s also announcement comes amid a broader trend of various federal regulators recalibrating their approach to digital assets (previously discussed here, here, and here). As stablecoin regulation begins to take shape, market participants should continue to carefully monitor this space for further developments.
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