The State of Play for Reverse Stock Splits by Nasdaq- and NYSE-Listed Issuers
Introduction
Issuers listed on the Nasdaq Stock Market and the New York Stock Exchange (NYSE) often conduct reverse stock splits to maintain compliance with each exchange’s US$1.00 minimum share price requirement. A reverse stock split typically increases the price for a share of stock by consolidating outstanding shares at a ratio selected by the issuer such that, following the reverse split, each stockholder maintains its approximate ownership percentage and overall investment value, but the issuer has fewer shares outstanding with a higher price per share. Over the past several years, Nasdaq has implemented a series of rule changes making it more difficult to use reverse stock splits to regain compliance with its minimum share price requirement and that otherwise impact the process for executing a reverse split. Recently, the NYSE proposed a new rule of its own that restricts an issuer’s ability to use a reverse split to regain compliance with its minimum share price requirement. Issuers with stock prices near or below US$1.00 per share need to understand how these rule changes may affect whether, when, and how they can implement a reverse stock split to maintain their stock exchange listings.
Nasdaq Stock Market Rules
A Nasdaq-listed issuer’s primary equity security must maintain a minimum bid price of US$1.00. If the trading price of a primary equity security closes under US$1.00 per share for 30 consecutive business days, the issuer will generally have 180 days to regain compliance with the minimum bid price requirement. At the end of the 180-day compliance period, the issuer can be granted an additional 180-day compliance period by notifying Nasdaq of its intent to cure the deficiency, including by effecting a reverse stock split. Prior to recent rule changes, if the issuer had not cured the minimum bid price deficiency by the end of the second compliance period, it could appeal delisting of its stock by requesting a review by a hearings panel. Such a request would automatically stay any suspension or delisting action, up to an additional 180 days, pending the hearing and the expiration of any additional compliance period granted by the hearings panel following the hearing. Under the prior Nasdaq rules, it was possible for a company to be out of compliance with the bid price requirement for 540 days, or approximately 18 months, if all the possible compliance periods were exhausted.
Removal of Stay Period After Second 180-Day Compliance Period
Nasdaq’s most recent rule change relating to reverse stock splits was approved by the US Securities and Exchange Commission (SEC) on 17 January 2025. Under the new Nasdaq Listing Rule 5815(a)(1)(B)(ii)d, when an issuer has been afforded a second 180-day compliance period and does not regain compliance by the bid price of its stock closing at US$1.00 per share or greater for a minimum of 10 consecutive business days prior to the end of the second 180-day period, a request for a hearing no longer stays the suspension and delisting of the security pending the Nasdaq panel’s decision. Instead, effective upon the expiration of the second 180-day compliance period, trading of the issuer’s securities on Nasdaq will be automatically suspended and move to the over-the-counter (OTC) market while any appeal is pending.
Reduced Availability of Compliance Periods for Use of Multiple Reverse Splits
An amendment to Nasdaq Listing Rule 5810(c)(3)(A)(iv) included in the 17 January 2025 rule changes provides that an issuer is not eligible for any compliance period to cure a deficiency under the minimum bid price requirement if it has effected a reverse stock split over the prior one-year period. This change follows another recent amendment to Rule 5810(c)(3)(A)(iv), effective in 2020, not allowing a compliance period in the event the issuer has effected one or more reverse stock splits with a cumulative ratio of 250 shares or more to one during the two-year period preceding noncompliance with the minimum bid price requirement. Any issuer that receives a delisting determination under these circumstances can appeal for a hearing before a Nasdaq panel (during which time the suspension of trading of its securities will be stayed).
Accelerated Delisting for Trading Price at or Below US$0.10
Rule 5810(c)(3)(A)(iii), which was included in the 2020 rule changes, provides that Nasdaq will issue a delisting determination with respect to a security that has a closing share price of US$0.10 or less for 10 consecutive business days. Under these circumstances, the issuer is ineligible for any compliance period, but suspension of trading of its securities will be stayed while any appeal is pending.
Updated Process for Effecting Reverse Stock Split
In November 2024, the SEC approved an amendment to Nasdaq Listing Rules 5250(e)(7) and IM-5250-3, advancing the deadline by which an issuer executing a reverse stock split must submit a Company Event Notification Form to Nasdaq to no later than 12:00 PM ET at least 10 calendar days prior to the proposed market effective date of the split. Previously, the rules only required the form to be submitted five business days in advance. The Company Event Notification Form is required to include, among other things, the dates of board approval and stockholder approval of the reverse stock split, the ratio for the reverse stock split, and the new CUSIP number for the post-split stock, as well as a draft of the public disclosure of the reverse stock split, which must be issued by 12:00 PM ET at least two business days prior to the effective date of the split. Nasdaq will not process a reverse stock split, and will halt trading in the stock, if an issuer does not satisfy the requirements of Rules 5250(b)(4) and (e)(7). This amendment becomes effective on 30 January 2025.
New York Stock Exchange Rules
Under Section 802.01C of the NYSE Listed Company Manual (Manual), an issuer is out of compliance if the average closing price of its listed security is less than US$1.00 per share over a consecutive 30 trading-day period (Price Criteria). The issuer can regain compliance with the Price Criteria if, on the last trading day of any calendar month during a six-month cure period, the listed security has a closing share price of at least US$1.00 and an average closing share price of at least US$1.00 over the prior 30 trading-day period. If an issuer determines to cure the Price Criteria deficiency by a reverse stock split, it must obtain shareholder approval by no later than its next annual meeting. The Price Criteria deficiency will be cured if the price remains above US$1.00 for at least 30 trading days following the split.
On 15 January 2025, the SEC approved a rule amendment proposed by the NYSE to address concerns over the excessive use of reverse stock splits to maintain minimum listing prices. Specifically, Section 802.01C of the Manual is amended to provide that an issuer that fails to meet the Price Criteria is not eligible for any compliance period if it has effected a reverse stock split over the past one-year period or has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, and in such case the NYSE will instead immediately commence suspension and delisting procedures. Additionally, the amendment precludes issuers from conducting a reverse stock split if it would result in the company’s security falling out of compliance with any of the continued listing requirements of Section 802.01A of the Manual.
Conclusion
Issuers listed on the Nasdaq or NYSE that are out of compliance with the minimum bid price rule or at risk of falling below a US$1.00 share price should be proactive in confirming that a reverse stock split will be effective to cure the deficiency in the event that their stock price does not increase organically. Additionally, these issuers should prepare a timeline for the reverse stock split prior to scheduling their shareholder meetings in order to accommodate the more complex processes and advance notice requirements under stock exchange rules.
SEC Crypto 2.0: SEC Announces New Crypto Task Force
On January 21, 2025, the SEC announced the formation of a new Crypto Task Force. Styled “Crypto 2.0” in the SEC press release, the announcement signals a shift in the agency’s approach to the digital asset sector coincident with the change in presidential administrations.
The task force will be led by Commissioner Hester Peirce and draw on staff from around the agency. Its mission is to “collaborate with Commission staff and the public to set the SEC on a sensible regulatory path that respects the bounds of the law.” The task force anticipates future roundtables and invites the submission of public comments. It will also coordinate with other state and federal agencies, including the Commodity Futures Trading Commission.
The SEC press release announcing the task force’s creation is somewhat critical of the agency’s prior approach to regulating digital assets, noting that the agency “relied primarily on enforcement actions to regulate crypto retroactively and reactively, often adopting novel and untested legal interpretations along the way.” The press release noted, “Clarity regarding who must register, and practical solutions for those seeking to register, have been elusive.” The announcement concludes, “The SEC can do better.”
The crypto industry heavily supported the candidacy of President Trump, and the President’s nominee for SEC chairman, Paul Atkins, is likely to support a reset of the SEC’s approach to regulating the sector. After the crypto winter, it appears spring is coming to the SEC.
Does President Trump’s Emergency Declarations Trigger California Price Controls?
As discussed in yesterday’s post, California’s anti-price gouging statute, Penal Code Section 396, is triggered upon the proclamation of a state of emergency by either the President of the United States or the Governor. Immediately following his second inauguration, President Donald Trump proclaimed a national emergency at the southern border and a national energy emergency.
Do either of these proclamations trigger the application of Section 396? Neither proclamation refers specifically to California. However, Section 396 is also not limited to emergencies located in California. Thus, it is seemingly possible for California’s price control statute to be triggered by a presidential declaration that is not specifically related to California.
California DOC Alumnus Is New Acting Chairman!
Over the years, several alumni of the California Department of Financial Protection & Innovation (nka the Department of Corporations) have moved on to work at the U.S. Securities & Exchange Commission. As a DOC alumnus, I was pleased to see that President Donald Trump has designated Mark T. Uyeda as acting Chairman of the SEC. Below is an excerpt from the SEC’s press release announcing the appointment:
Acting Chairman Uyeda was first sworn into office as a Commissioner on June 30, 2022, after being confirmed by the U.S. Senate. He was subsequently re-nominated and confirmed for a five-year term expiring in 2028. During President Trump’s first term, he served on detail to senior leadership at the U.S. Department of the Treasury and to Secretary Eugene Scalia at the U.S. Department of Labor. He has also served on detail to the U.S. Senate Committee on Banking, Housing, and Urban Affairs. At the SEC, he has served as Senior Advisor to Chairman Jay Clayton, Counsel to Commissioners Michael S. Piwowar and Paul S. Atkins, and Assistant Director and Senior Special Counsel in the Division of Investment Management.
Before joining the SEC, Acting Chairman Uyeda was appointed by Governor Arnold Schwarzenegger to serve as the Chief Advisor to the California Corporations Commissioner, the state’s securities regulator. Earlier in his career, he worked as a corporate and securities attorney at Kirkpatrick & Lockhart in Washington, D.C., and O’Melveny & Myers in Los Angeles.
Originally from Orange County, California, Acting Chairman Uyeda earned his bachelor’s degree in business administration from Georgetown University in 1992 and his law degree with honors from Duke University in 1995, where he was a member of the Duke Law Journal. He is a past president of the Asian Pacific Bar Association of the Greater Washington, D.C. Area and a 2023 recipient of the Daniel K. Inouye Trailblazer Award from the National Asian Pacific American Bar Association.
Chairman Uyeda has already announced formation of a new Crypto task force.
Landmark Fifth Circuit Ruling Further Limits SEC Rulemaking
What Happened
On December 11, 2024, an en banc panel of the US Court of Appeals for the Fifth Circuit vacated the US Securities and Exchange Commission’s orders approving a series of Nasdaq rules regarding board diversity.[1] Beyond the immediate impact of the decision on board diversity efforts, the opinion will have far broader consequences for future rulemaking by self-regulatory organizations and the SEC itself. This alert considers the administrative law implications of the Fifth Circuit opinion on the SEC and the myriad of self-regulatory organizations it oversees.
The Bottom Line
Over the past 20 years, a series of appellate cases vacating SEC actions has placed a growing number of limitations on the agency’s ability to issue orders and engage in rulemaking. But the Fifth Circuit’s Nasdaq case stands out because it clarifies substantial limits around several commonly-accepted assumptions underlying SEC rulemaking that have to date largely gone unchallenged.
Since the case involves Section 19(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), which lays out the procedure by which the SEC approves rules of self-regulatory organizations, the decision applies to a wide variety of SEC registrants who make use of the Section 19(b) process to issue their own rules and regulations. These entities include stock exchanges, clearing agencies, the Municipal Securities Rulemaking Board (“MSRB”), the Financial Industry Regulatory Authority (“FINRA”) and the Public Company Accounting Oversight Board (“PCAOB”). Of course, the SEC itself is also bound by the holding.
The Fifth Circuit opinion includes an exhaustive analysis of the Exchange Act from an historical, academic and textual perspective. The decision aligns with recent Supreme Court and Fifth Circuit precedent that seeks to preserve federalism, limit overreach by administrative agencies and construe statutes narrowly according to their plain meaning. Since courts typically interpret each of the SEC’s other primary statutes in a manner consistent with interpretations under the Exchange Act, the Fifth Circuit’s decision should also apply to rulemakings under the Securities Act of 1933, the Investment Advisers Act of 1940 and the Investment Company Act of 1940. This is a landmark administrative law case impacting the SEC and the self-regulatory organizations it oversees, and the case’s impact on future SEC rulemaking is significant.
The Full Story
In 2021, Nasdaq sought SEC approval under Section 19(b) of the Exchange Act of three separate listing requirements regarding board diversity. In two separate orders, the SEC approved new Nasdaq listing rules requiring most Nasdaq-listed companies to (1) publicly disclose board diversity statistics using a uniform format on an annual basis (the “Disclosure Rule”) and (2) have, or publicly disclose why they do not have, at least one self-identified female director and at least one director who self-identifies as an underrepresented minority (the “Diversity Rule”). A third SEC order approved a Nasdaq rule providing complimentary access to a board recruiting tool intended to aid Nasdaq-listed companies in complying with the first two rules (the “Recruiting Rule”).
Two groups challenged the SEC’s approval orders in separate litigation, alleging various statutory and constitutional infirmities. The petitions for review were eventually consolidated before the Fifth Circuit. In 2023, a three-judge Fifth Circuit panel denied the petitioners’ petitions for review and upheld the SEC’s approval of the Nasdaq rules.[2] But the Fifth Circuit subsequently granted en banc review, and the en banc panel reversed the panel decision by a vote of 9-8 (with one recusal). The full court’s majority vacated the Disclosure Rule and the Diversity Rule, and dismissed as moot the challenge to the Recruiting Rule since no companies had sought to use the recruiting tool. Nasdaq has stated publicly that it will not appeal the decision further, and with the change in presidential administrations, the SEC is not likely to take further action either. A summary of key portions of the opinion and key takeaways follows.
1. Disclosure for disclosure’s sake is not authorized under the Exchange Act
In its opinion, the Fifth Circuit first focused on the SEC’s assertion that any disclosure-based rule is related to the purposes of the Exchange Act, and thus within the SEC’s authority to adopt.[3] In response, the court undertook a detailed historical analysis of the underpinnings of the Exchange Act as enacted in 1934, as well as key amendments to the statute adopted in 1975 relevant to Nasdaq.
First, the court concluded that the “text and history of the original Exchange Act indicate Congress enacted it to protect investors and tackle the manipulation and speculation that Congress thought fueled the Great Depression.”[4] The Exchange Act also placed limits on solicitation of proxies to ensure fair elections for corporate boards.[5] But, according to the court, “nothing in the original Act required disclosure for disclosure’s sake.”[6] Instead, the court reasoned, the Exchange Act “was uniformly directed at preventing market abuses.”[7]
Next, the court determined that while Congress passed the original Exchange Act in 1934 “to protect investors and the American economy from speculative, manipulative and fraudulent practices,” it amended the statute in 1975 “to further these goals and . . . to remove barriers to the development of a national market system.”[8] The court conceded there may also be “other purposes buried in the Exchange Act’s voluminous text,” but that its review of the statute’s history “makes clear that disclosure of any and all information about listed companies is not among them.”[9] Thus, the court concluded that before the SEC approves an SRO rule, “it must do more than posit that the rule furthers some ‘core disclosure purpose’ that is found nowhere” in the Exchange Act.[10] Instead, the SEC must establish that the rule has “some connection to an actual, enumerated purpose of the Act.”[11] Later in the opinion, the court revisited this theme to double-down on the notion that “full disclosure” by itself is not a “core purpose” of the Exchange Act.[12]
Key Takeaways: In recent years, the subject matter of SEC disclosure requirements for public companies has expanded markedly through rulemakings involving a range of topics including cybersecurity, executive compensation, greenhouse gas emissions, climate change, and human capital, to name just a few. Among the justifications for each of these rulemakings has been the notion that the Exchange Act is a disclosure statute, and while there is a theoretical limit to the outer reaches of disclosure, the SEC has yet to reach that frontier. This case will require a fundamental rethinking of this line of reasoning and a redrawing of that outer boundary. It will, therefore, limit future SEC disclosure rules.
2. The purposes of the Exchange Act are narrowly construed
To support the rules, the SEC contended that they were designed to “promote just and equitable principles of trade” and “remove impediments to and perfect the mechanisms of a free and open market and a national market system,” each as contemplated in Section 6(b)(5) in the Exchange Act. Analyzing academic literature, SEC releases, other caselaw and even Webster’s dictionary to place these phrases in context, the court concluded that the Disclosure Rule and Diversity Rule were “far removed” from just and equitable principles of trade, and “had nothing to do with the execution of securities transactions.”[13] Notably, the court cited the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, which eliminated so-called Chevron deference, for the proposition that statutes can only be “sensibly understood . . . by reviewing text in context.”[14]
Key Takeaways: The federal securities laws are replete with aspirational and mystical-sounding terminology such as “just and equitable principles of trade” and “to protect investors and the public interest.” While there have been some prior cases attempting to assign meaning to such wording, the SEC often deploys an “I know it when I see it” approach to interpreting these and similar phrases in its authorizing statutes, and over the years few of its orders doing so have been subject to judicial review. Here the court took the SEC to task and concluded that this kind of terminology indeed has a more precise meaning.
3. To “protect investors and the public interest” is not independent grounds to act
The SEC also pointed to its mandate under the Exchange Act to “protect investors and the public interest” to justify the rules. In perhaps the most important section of the opinion, the court determined that this phrase is a “catch all” phrase that must be interpreted by references to the canons of noscitur a sociis (“a phrase is given more precise content by the neighboring words with which it is associated”) and ejusdem generis (“a general or collective term at the end of a list of specific items is typically controlled and defined by reference to the specific items that precede it”).[15] When read in the context of the other language surrounding the public interest provision in the Exchange Act, the court concluded that the Disclosure Rule and Diversity Rule were not related to that purpose. The court was also skeptical of the SEC’s rationale that simply satisfying “the demand of some important investors” was stand-alone grounds to justify rulemaking, and it rejected that argument as well.[16]
Key Takeaways: The SEC has frequently justified past rulemakings on the grounds that an action was in the public interest. For example, the agency’s controversial rulemaking on climate and greenhouse gas emissions (subject to a pending Eighth Circuit challenge) cites this provision as authority for those rules. The Fifth Circuit’s opinion here suggests that this justification, without more, may be insufficient. Likewise, in recent rulemakings the SEC has also cited investor demand as compulsion for the SEC to act, and that too may not survive future judicial scrutiny.
4. The major questions doctrine applies to the SEC
The court’s opinion also considered the application of the major questions doctrine under the Supreme Court’s 2022 decision in West Virginia v. EPA and its rapidly-expanding progeny. In brief, this doctrine generally provides that absent an express grant of authority, Congress does not impliedly grant administrative agencies the power to make decisions regarding significant political or economic issues. Parties challenging SEC rulemaking have increasingly cited the doctrine since the West Virginia decision was announced, and in this decision the Fifth Circuit provided a robust analysis of the application of the doctrine to SEC rulemaking.
Here, the court considered the significant economic and political implications of the Nasdaq rules and quickly concluded “this is a major questions case.”[17] The court was particularly concerned that the SEC appeared to be “stepping outside its ordinary regulatory domain of market manipulation and proxy voting and intruding into the province of other agencies.” The court was also troubled that the SEC appeared to be intruding on the rights of states to regulate corporate governance.[18]
Key Takeaways: The major questions doctrine as applied to the SEC will without a doubt cabin the agency’s most ambitious plans for future rulemaking when planned actions lack explicit statutory authority. This outcome will be a welcome development for those who wish the SEC to return to its roots as a market-oriented regulator that focuses its disclosure agenda on material financial information. Those who wish to see the SEC continue to expand its oversight of corporate behavior may be disappointed.
The Fifth Circuit’s deference to the states’ role as the primary regulators of corporations is also notable. Since the enactment of the Sarbanes-Oxley Act in 2002, the SEC has increasingly asserted itself into core areas of corporate governance, such as through the constant expansion of the universe of permissible shareholder proposals under Rule 14a-8 and ever-increasing “comply or explain” disclosure requirements around board and management oversight of the business. As described below, the Fifth Circuit also addressed comply-or-explain rules in its opinion. In total, the ruling may serve as an opportunity for the SEC to reconsider existing mandates regarding corporate governance couched as disclosure requirements.
5. Two wrongs don’t make a right
In defense of the rules, the SEC and Nasdaq cited another stock exchange’s listing requirement regarding board diversity. The Fifth Circuit was not persuaded that the prior rule justified the one before the court. Instead, it noted that the “SEC cannot nullify the statutory criteria governing exchange rules by repeatedly ignoring them.”[19] Said differently, an agency “cannot acquire authority forbidden by law through a process akin to adverse possession.”[20]
Key Takeaways: Another common defense of recent SEC rulemakings has been that the SEC has passed similar rules in the past without challenge, hence it is free to do so again in the future. This line of reasoning is also suspect going forward. Instead, the SEC must find independent authority and justification for each future rule and order.
6. Public-shaming rules are suspect
The SEC and Nasdaq also defended the rules by arguing that they were mere disclosure rules that did not seek to “remake the boardrooms of America’s corporations.”[21] The court found that the administrative record did not support this assertion, and noted that corporations not meeting the diversity requirements were compelled to explain themselves under the Disclosure Rule. The court seemed most troubled by this latter point, ruling that this approach was not a disclosure requirement, but rather “a public-shaming penalty” for failing to abide by the government’s preferred policy outcomes.
Key Takeaways: For decades the SEC has adopted rules under the “comply or explain” model as a way of nudging registrants to engage in the SEC’s preferred behavior even when the agency may not be authorized to compel that conduct directly. The theory is that most companies would rather not disclose a lack of alignment with the SEC’s preferred practice on a given topic (even if compliance is not mandatory), thus they will change behavior so as to avoid a potentially embarrassing disclosure. This case calls into question the “comply or explain” approach, at least when there is a shaming element to it, and may serve to limit its use going forward.
[1] Alliance for Fair Board Recruitment v. SEC, Case No. 21-60626 (5th Cir. Dec. 11, 2024) (en banc decision).
[2] Alliance for Fair Board Recruitment v. SEC, 85 F. 4th 226 (5th Cir. 2024) (panel decision).
[3] Slip Op., supra note 1, at 11.
[4] Id. at 17.
[5] Id.
[6] Id.
[7] Id.
[8] Id. at 22.
[9] Id.
[10] Id.
[11] Id.
[12] Id. at 38
[13] Id. at 25-7.
[14] Id. at 26 (internal citations omitted).
[15] Id. at 28 (internal citations omitted).
[16] See id. at 31.
[17] Id. at 34.
[18] Id. at 35.
[19] Id. at 38.
[20] Id. (citations omitted).
[21] Id.
Hong Kong’s Security Tokenization Support Initiative – A Subsidy Program
Recently, Hong Kong Monetary Authority (HKMA) initiated accepting applications for Digital Bond Grant Scheme (the Grant Scheme) to financially support digital bond issuers for the duration of three years. The Grant Scheme aims to encourage broader adoption of “tokenization technology” in capital markets and foster the development of digital securities markets in Hong Kong.
“Digital bond” is defined as a bond that utilizes distributed ledger technology (DLT) to digitally represent ownership, which may encompass legal titles and/or beneficial interests in the bond. Each eligible issuer, including its associates, may receive subsidies under the Grant Scheme for a maximum of two digital bond issuances.
The Grant Scheme subsidizes:
up to 50% of the eligible expenses for each digital bond issuances for:
Up to HK$1.25 million (Half Grant) for issuances meeting basic requirements; and
HK$2.5 million (Full Grant) for issuances meeting both basic and additional requirements, which are summarized below.
Eligibility Requirements
Half grant
It is available when the issuances meet the following basic requirements:
It must be issued in Hong Kong with at least half of the lead arrangers recognized as having substantial Hong Kong debt capital market operations; and
The DLT platform’s development and/or operations team must have a substantial Hong Kong presence or use a DLT platform operated by the Central Moneymarkets Unit (CMU).
Full grant
For a Full Grant, in addition to the basic requirements, the issuance must meet additional requirements, including:
Being issued on a DLT platform provided by an independent entity;
Having a minimum issuance size of HK$1 billion equivalent;
Being issued to five or more non-associated investors; and
Being listed on the Stock Exchange of Hong Kong (SEHK) or on licensed virtual asset trading platforms (VATP).
Eligible Expenses
The Grant Scheme subsidizes expenses related to the issuance of digital bonds, including:
Fees to non-associated DLT platform providers;
Fees to local arrangers (non-associated), legal advisors, auditors, and rating agencies;
Listing fees on the SEHK or licensed VATPs; and
CMU lodging and clearing fees.
Additionally, if the digital bond qualifies as a green, social, or sustainability bond, the following grant will be available:
Eligible general bond issuance costs: covered by either the Grant Scheme or Track I of the Green and Sustainable Finance Grant Scheme (GSF Grant Scheme), up to HK$2.5 million, and
External sustainability review costs: covered by Track II of the GSF Grant Scheme, up to HK$800,000 for all pre-issuance and post-issuance external reviews combined.
How To Apply
Potential applicants may start with an “optional pre-application consultation” with the HKMA for preliminary feedback on their eligibility.
Formal applications must be submitted within three months of the bond’s issuance.
Conclusion
As tokenization of securities is expected to be more popular this year and HKMA is providing flexible subsidiary programs with options of Half Grant or Full Grant, foreign companies as well as Hong Kong companies may wish to take advantage of the subsidy programs to issue digital bonds and save their issuance costs.
SEC Settlement Highlights Importance of Proper Disclosure Requirements for Private Fund Managers
On January 10th 2025, the Securities and Exchange Commission (SEC) settled charges against two fund managers (collectively the “Fund Managers”)[1] and their sole owner, chief executive office, chief compliance office and founder (the “Founder”)[2].
The SEC alleged the Founder and the Fund Managers had breached their fiduciary duties owed to the private equity funds managed by the Fund Managers (the “Private Funds”) and related compliance program deficiencies. Specifically, the SEC asserted the Founder and the Fund Managers: (i) impermissibly charged certain expenses to the Private Funds from January 2019 through December 2023 instead of paying such expenses themselves and in so doing failed to disclose the resulting conflicts of interest and (ii) improperly submitted vague and unsubstantiated invoices to the Private Funds without taking reasonable steps to confirm the Private Funds were the proper payees.
Improper Expenses
The SEC raised three specific improper expenses that it viewed as Fund Manager costs that were improperly charged to the Private Funds.
Prior to January 2019, the Fund Managers employed and paid the salary of a full-time, in house chief financial officer (the “CFO”), who provided services to the Fund Managers and not to the Private Funds. When to the CFO left, the Fund Managers outsourced those financial services (totaling approximately US$1.3millon from January 2019 to December 2023) to third-party financial firms and charged those services to the Private Funds. Similarly, in May 2019, a public relations provider was paid by and worked for one of the Fund Managers providing strategic communications and public relations services. However, when re-engaged in 2022, that expense (totaling approximately US$214,000) was instead charged to the Private Funds. Lastly, a legal expense (approximately US$91,000) was charged to one of the Private Funds, but the SEC asserted that more than 70% of those expense were for services performed for the Fund Manager.
In each case, the SEC noted the expenses at issue were not listed or disclosed in the applicable Private Fund governing documents or private placement memorandum as permitted fund expenses, and that when the applicable Fund Manager changed its prior practices and instead held the applicable Private Fund responsible for such expenses, it failed to fully and fairly disclose the payment and the resulting conflict of interest to the investors of the corresponding Private Fund.
Unsupported and Unspecified Expenses
The SEC also took issue with the Fund Managers’ supporting documentation and approval processesfor the improper expenses allocated to the Private Funds, noting that vague and unsubstantiated invoices for amounts to be borne by the Private Funds included generic invoices that described the expenses as “various expenses”, “expense reimbursement”, “due to management Co.” and nothing more, and generic credit card reimbursements with insufficient or no back up or further description including for the Founder’s living and business expenses as well as credit cards held by his family members.
The Settlement between the parties censured the Fund Managers and the Founder for violating the anti-fraud provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8(a)(2). Without admitting or denying the SEC’s findings, the Fund Managers, and the Founder consented to the entry of the order and agreed to pay a civil money penalty of US$250,000 in addition to disgorgement of over US$1.5 million, prejudgment interest of approximately US$272,000.
This order highlights the importance of:
Clearly drafted private fund governing document provisions outlining, in detail, the expenses to be borne by the private fund and expenses to be borne by the manager and its affiliates.
Policies and procedures that are reasonably designed to ensure that expenses are allocated in accordance with the applicable private fund governing documents and that require appropriate, clear and supporting records and documented approval processes.
Established processes to timely review expense allocation practices and related recordkeeping, in particular, in cases of changes in a manager’s favor, such as allocating ongoing expenses previously paid by the manager to a fund and considering if such changes require disclosure to the investors of the impacted private fund.
It is notable here, that the issues for the Fund Managers appear to begin with the departure of the Fund Mangers’ CFO. Fund managers must ensure that they consistently have the appropriate internal staffing and third-party professional services firms’ support to appropriately operate their businesses in accordance with the governing documents of their private funds and related law.
[1] During the periods in question through March 2024, one Fund Manager was a registered investment adviser with the SEC with the other Fund Manager electing to file as a relying adviser thereof.
[2] In the Matter of ONE THOUSAND & ONE VOICES MANAGEMENT, LLC; FAMILY LEGACY CAPITAL CREDIT MANAGEMENT, LLC and HENDRIK F. JORDAAN.
Reminder for Public Companies Granting Stock Options and Stock Appreciation Rights: Don’t Forget New Item 402(x) Disclosure
As public company issuers prepare for the 2025 reporting season, issuers should be reminded (or made aware) of the new executive compensation-related disclosure requirements. On December 14, 2022, the Securities and Exchange Commission (SEC) adopted rules setting forth new disclosure requirements for awards of stock options and stock appreciation rights (SARs) under new Item 402(x) of Regulation S-K (Item 402(x)). For a public company with a fiscal year that ended December 31, 2024, these new disclosure requirements will take effect beginning with its forthcoming annual report on Form 10-K (or, if applicable, the proxy statement for its annual meeting) to be filed in 2025.
General Instruction G(3) to Form 10-K provides, in part, that the information required by Part III (which includes the Item 402(x) disclosure) may be incorporated by reference from the reporting company’s definitive proxy statement filed pursuant to Regulation 14A for a meeting of shareholders involving the election of directors (an “annual meeting proxy statement”), if such annual meeting proxy statement is filed with the SEC not later than 120 days after the end of the fiscal year covered by the annual report on Form 10-K (for this new Item 402(x) disclosure, such date is April 30, 2025). If a reporting company’s annual meeting proxy statement is not filed with the SEC in the 120-day period, then the new Item 402(x) disclosure must be filed as part of the annual report on Form 10-K, or as an amendment to the Form 10-K, not later than the end of the 120-day period.1
Item 402(x) Purpose
Item 402(x) requires narrative and tabular disclosure on a public company’s policies and practices relating to awards of stock options and SARs that are granted close in time to the disclosure of material nonpublic information (MNPI). For these purposes, “close in time” means within a period starting four business days before and ending one business day after the filing or furnishing of a quarterly report on Form 10-Q, an annual report on Form 10-K or a current report on Form 8-K that discloses MNPI (such period, the Covered Period). Item 402(x) serves to increase transparency and protect against actual or perceived timing issues (e.g., potential insider trading concerns) surrounding awards of stock options or SARs that are granted “close in time” to the disclosure of MNPI that would boost the value of the underlying stock price shortly after grant.
Narrative Disclosure Requirement
Narrative disclosure on a public company’s policies and practices relating to the timing of awards of stock options and SARs in relation to the disclosure of MNPI is required whether or not the company has granted such awards within the Covered Period. This disclosure is not required for full-value awards, such as awards of restricted stock or restricted stock units. Specifically, the narrative disclosure must describe the following:
how the board of directors determines when to grant such awards (e.g., whether such awards are granted on a predetermined schedule);
whether and how the board of directors takes MNPI into account when determining the timing and terms of such award; and
whether the company has timed the disclosure of MNPI for the purpose of affecting the value of executive compensation.
Tabular Disclosure Requirement
If, during the last completed fiscal year, a company granted awards of stock options or SARs to one or more named executive officers during the Covered Period, the company must disclose in a tabular format, as illustrated below,2 the following with respect to each such grant: (1) the name of the named executive officer; (2) the grant date of the award; (3) the number of securities underlying the award; (4) the per-share exercise price of the award; (5) the grant date fair value of the award; and (6) the percentage change in the closing market price of the underlying securities between the trading day ending immediately prior to and the trading day beginning immediately following the disclosure of MNPI.
Inline XBRL Requirement
Consistent with other recently promulgated disclosure rules, the information required to be disclosed pursuant to Item 402(x) (i.e., both tabular and narrative disclosure) must be tagged in Inline XBRL.
Action Items
Public company issuers should consider adopting formal equity grant practices, policies or guidelines that align with the new disclosure requirements or revisiting their existing equity grant practices, policies or guidelines to address the timing of awards of stock options and SARs in relation to the disclosure of MNPI. Issuers should also consider implementing policies and procedures to prevent the granting of equity awards within the Covered Period if the additional scrutiny that might come with tabular disclosure would be undesirable.
1 The first applicable fiscal year covered by the new disclosure requirements is the first full fiscal year beginning on or after April 1, 2023. For public companies (other than smaller reporting companies) with a fiscal year [that] ended on or after March 31, 2024, the new disclosure requirements must have been satisfied (or must be satisfied) on the annual report on Form 10-K covering such fiscal year.
For smaller reporting companies, the first applicable fiscal year covered by the new disclosure requirements is the first full fiscal year beginning on or after October 1, 2023 (i.e., the new disclosure requirements must be satisfied on the annual report on Form 10-K and annual meeting proxy statement for fiscal years ending on or after September 30, 2024).
2 For smaller reporting companies, this table will only apply to the named executive officers determined under Item 402(m)(2) of Regulation S-K, which consists of the principal executive officer (PEO) and the next two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year.
Jonathan Weiner also contributed to this article.
Crypto in the Courts: Five Cases Reshaping Digital Asset Regulation in 2025
There has rarely been a larger or more widely distributed financial market that existed in a more uncertain regulatory context than cryptocurrencies and decentralized finance (DeFi) at the start of 2025. In the past several years, the regulatory status of this asset class in the United States has been at the center of a concerted effort by the US Securities Exchange Commission (SEC) to apply the regime applicable to securities to diverse crypto instruments and methods of exchange and transfer. (Although the Commodity Futures Trading Commission (CFTC) has also consistently enforced its regulations on products it deems to be commodities, that effort has not led to the widespread litigation that is likely to define the regulatory status of these products.)
The SEC’s effort is now in jeopardy. As we begin 2025, the legal landscape surrounding digital assets stands at a critical inflection point, with several watershed cases poised to reshape how these assets will be governed, traded, and regulated in the United States. The convergence of these cases — spanning securities law, administrative procedure and federalism — presents opportunities to clarify how traditional legal frameworks apply to digital assets. Further, the Trump administration has promised that it will be a “pro-crypto” administration — driving the SEC towards a friendlier stance with the cryptocurrency industry and having cryptocurrency rules and regulations “written by people who love [the] industry, not hate [the] industry”1 — and that the United States will become the “crypto capital of the world.”2 President Donald Trump has nominated Paul Atkins, a former SEC Commissioner, to become the next SEC chairperson, stating in his announcement that Mr. Atkins “recognizes that digital assets & other innovations are crucial to Making America Greater than Ever Before.”3 The Trump administration’s announced intention to change the course of cryptocurrency regulation and the selection of an SEC chairperson who is an avowed advocate for innovation through blockchain technologies raise questions about the future of the pending litigation at the center of this industry.
This article examines five cases that may define the future of digital asset regulation in the United States and sets out the issues at stake in those cases. These cases are the Second Circuit’s review of SEC v. Ripple Labs, Inc., the interlocutory appeal in SEC v. Coinbase, Inc., and three cases representing the industry’s shift toward offensive litigation against federal agencies — Blockchain Association v. IRS, Bitnomial Exchange, LLC v. SEC, and Kentucky et al. v. SEC. The purpose of this article is not to predict how those cases will progress — that determination is going to lie in the hands of the courts and policymakers — but rather to make clear what is at stake, especially in light of an anticipated shift in regulatory priorities regarding digital assets with the Trump administration, which could decide to no longer support the government’s positions in these cases.
SEC v. Ripple Labs, Inc. (2d Cir.)
The SEC’s appeal in SEC v. Ripple Labs, Inc. follows a July 2023 ruling in the Southern District of New York that began when the SEC charged Ripple Labs, Inc. (Ripple) with conducting an unregistered securities offering through sales of its XRP token. The SEC argued that the offer and sale of XRP tokens constituted an offer and sale of investment contracts under SEC v. W.J. Howey, which provides that an “investment contract” is a contract, transaction, or scheme whereby a person: (1) “invests his money” (2) “in a common enterprise” and (3) “is led to expect profits solely from the efforts of the promoter or a third party.”4 In response, Ripple advanced an “essential ingredients test,” arguing that in addition to the three-part Howey test, investment contracts must also contain “essential ingredients”: (1) “a contract between a promoter and an investor that establishe[s] the investor’s rights as to an investment,” which contract (2) “impose[s] post-sale obligations on the promoter to take specific actions for the investor’s benefit” and (3) “grant[s] the investor a right to share in profits from the promoter’s efforts to generate a return on the use of investor funds.”5
The district court, in its July 2023 ruling, rejected Ripple’s novel “essential ingredients” test, noting that “in the more than seventy-five years of securities law jurisprudence after Howey, courts have found the existence of an investment contract even in the absence of Defendants’ ‘essential ingredients,’ including in recent digital asset cases in this District.”6 Nevertheless, the district court found that, while Ripple’s institutional sales violated securities laws, the company’s programmatic sales (sales of XRP on digital asset exchanges) and other distributions (such as employee compensation and third-party development incentives) did not constitute securities offerings — marking the first major setback to the SEC’s digital asset enforcement initiative.7 Crucially, the district court distinguished between XRP sales based on their economic reality: institutional sales to sophisticated buyers under written contracts were deemed securities transactions because buyers reasonably expected profits from Ripple’s efforts, while programmatic sales on exchanges were not because buyers could not know they were purchasing from Ripple. The court also found that other distributions failed to meet the basic requirements of an “investment of money” since recipients did not provide payment to Ripple.
The SEC filed a notice of appeal on October 4, 2024, and Ripple has cross-appealed. This will likely be the first appellate court to consider how Howey applies to digital assets unless the Trump administration determines to freeze the litigation.8 The SEC filed its appellate brief on January 15, 2025, arguing that the district court erred in concluding that programmatic sales to retail investors were not offers or sales of investment contracts under Howey because “investors were led to expect profits” based on the efforts of Ripple.9 The SEC also argued that other distributions of XRP were also offers or sales of investment contracts because Ripple the “recipients provided tangible and definable consideration in return for Ripple’s XRP.”10 Ripple will likely challenge whether digital assets are ever securities under the Howey framework.
The SEC maintains that the district court’s decision “conflicts with decades of Supreme Court precedent and securities laws.”11 If the SEC persists in this appeal, it will likely be the first appellate court to consider how Howey applies to particular types of primary sales of digital assets and, more broadly, how securities laws are to be applied to the digital asset economy. The appeal’s resolution will provide important clarity on how federal securities laws apply to various types of primary sales of digital assets.
SEC v. Coinbase, Inc. (2d Cir.)
On January 7, 2025, a Southern District of New York court granted Coinbase Inc.’s motion to certify for interlocutory appeal the court’s March 2024 order denying in substantial part Coinbase’s motion for judgment on the pleadings.12 The certification permits the Second Circuit to address Howey’s reach and application to digital assets, particularly in secondary market transactions.
The case arose from the SEC’s June 2023 enforcement action, alleging that Coinbase operated as an unregistered national securities exchange, broker and clearing agency by intermediating transactions in 13 digital assets that the SEC claimed were investment contracts and, thus, securities. The district court in March 2024 rejected Coinbase’s argument that cryptoasset transactions could not be investment contracts absent post-sale contractual obligations between issuers and purchasers.13
In granting Coinbase’s motion to certify for interlocutory appeal, the court found that the case presents a “controlling question of law regarding the reach and application of Howey to cryptoassets, about which there is substantial ground for difference of opinion.”14 In particular, the court emphasized that applying Howey to cryptocurrencies “is itself a difficult legal issue of first impression for the Second Circuit” and questioned the adequacy of the SEC’s application of Howey to secondary market sales.15
The grant of interlocutory appeal is significant for several reasons. First, it creates parallel tracks of appellate review in the Second Circuit, as the SEC’s appeal in Ripple Labs will also be pending. Both cases will allow the Second Circuit to examine how Howey applies to digital assets but from different procedural postures — Ripple Labs on final judgment and Coinbase on interlocutory appeal from a motion for judgment on the pleadings.
Second, the interlocutory appeal addresses a fundamental split in the Southern District of New York regarding whether and how Howey applies to secondary market transactions of digital assets. Judge Torres in Ripple Labs drew a distinction between Ripple’s institutional sales, which satisfied Howey, and programmatic sales (i.e., blind bid-ask transactions on exchanges), which did not. In contrast, Judge Rakoff in SEC v. Terraform Labs and Judge Failla in Coinbase declined to differentiate based on the manner of sale, finding that Howey could apply equally to secondary market transactions.16 The Second Circuit’s resolution of this split will have profound implications for all regulatory disputes relating to digital asset trading platforms, as the designation as a security triggers the application of the securities laws for all participants in the industry, including issuers, traders, and trading platforms.
Third, the appeal will address the novel question of how a digital asset’s “ecosystem” factors in the Howey analysis. The district court in Coinbase found that, unlike traditional commodities, cryptoassets lack inherent value absent their digital ecosystem — a distinction that helped justify treating them as securities.17 However, the district court also recognized in its certification of its appeal that Coinbase raised “substantial ground” to dispute this view of the ecosystem, noting Coinbase’s argument that other commodities such as carbon credits, emissions allowances and expired Taylor Swift concert tickets similarly have no inherent value outside of the ecosystem in which they are issued or consumed.18 The Second Circuit’s treatment of this issue could influence how other courts analyze a wide range of digital assets.
The implications for the digital asset industry are substantial. Coinbase represents the largest US digital asset exchange, and the SEC’s theory would subject most major trading platforms to securities regulation. Resolution of the interlocutory appeal could, therefore, provide crucial guidance on whether and when trading platforms must register with the SEC.
Blockchain Association et al. v. IRS (N.D. Tex.)
On December 27, 2024, three blockchain industry organizations filed suit in the Northern District of Texas, challenging Department of the Treasury (Treasury) regulations that would impose “broker” reporting requirements on DeFi participants.19 The case represents a significant test of Treasury’s authority to regulate the digital asset industry through information reporting requirements.
The challenged regulations implement provisions of the Infrastructure Investment and Jobs Act of 2021 requiring certain digital asset brokers to report transaction information to the Internal Revenue Service (IRS) on Form 1099-DA. The plaintiffs argue that Treasury’s interpretation of who qualifies as a “broker” exceeds its statutory authority. While Congress defined brokers as persons who “effectuate transfers of digital assets” for consideration, Treasury regulations extend to anyone providing “facilitative services” who theoretically could request customer information — potentially including software developers, front-end interface providers and other technology participants who never take custody of assets or directly execute trades.
The complaint raises several significant challenges under the Administrative Procedure Act (APA) and the US Constitution. The plaintiffs argue that the regulations are arbitrary and capricious, violating the APA by failing to engage in reasoned decision-making and ignoring substantial evidence about the practical impossibility of compliance for many DeFi participants. They also contend that the rules violate the Fourth Amendment by compelling warrantless collection of private information and the Fifth Amendment’s due process requirements through unconstitutionally vague standards for determining who qualifies as a broker.
The case has significant implications for the DeFi industry’s future in the United States. According to the IRS’s calculations, compliance with the regulations would cost the industry over $260 billion annually — a potentially existential burden for many DeFi projects. The plaintiffs argue this would force US-based DeFi participants to either relocate overseas, cease operations or fundamentally alter their business models in ways that undermine decentralization.
The case is part of a recent trend of offensive litigation by the cryptocurrency industry against federal agencies, as the industry increasingly turns to the courts to challenge perceived regulatory overreach. In doing so, litigants can at least initially select the venue of these proceedings, subject to the restrictions of the Federal Rules of Civil Procedure. Venue selection can be critical as certain courts in Texas, and the Fifth Circuit itself, have recently expressed criticism of expansive agency authority. In November 2024, the Northern District of Texas vacated the SEC’s rulemaking, expanding the definition of “dealer” under the Securities Exchange Act of 1934 (Exchange Act).20 The same month, the Fifth Circuit reversed a decision wherein Treasury imposed sanctions on Tornado Cash, a cryptocurrency software protocol that conceals the origins and destinations of digital asset transfers.21 The case remains in its early stages, as the government has yet to respond to the complaint.
Bitnomial Exchange, LLC v. SEC (N. D. Ill.)
Bitnomial Exchange, LLC v. SEC marks a notable offensive litigation against the SEC, with a futures exchange regulated by the CFTC directly challenging the SEC’s authority to regulate a cryptoasset security futures product.22 Filed in October 2024 in the Northern District of Illinois, the case stems from Bitnomial’s attempt to list XRP futures contracts after completing the CFTC’s self-certification process. The complaint seeks both a declaratory judgment that XRP futures are not security futures under the Exchange Act and injunctive relief to prevent SEC oversight of these products.
Bitnomial argues that the SEC has created an impossible regulatory situation by taking the view that XRP futures constitute security futures, requiring both registration of the underlying asset (XRP) as a security and Bitnomial’s registration as a national securities exchange. The exchange contends this position is legally untenable, particularly given the court’s ruling in SEC v. Ripple Labs, Inc. that “XRP, as a digital token, is not in and of itself a ‘contract, transaction[,] or scheme’ that embodies the Howey requirements of an investment contract,” and that anonymous secondary market sales of XRP do not constitute investment contracts.23
According to the complaint, even if Bitnomial were to accept the SEC’s position that XRP futures are security futures, compliance would be impossible because XRP itself is not registered as a security with the SEC — a prerequisite for listing single stock security futures under current regulations. Moreover, Bitnomial, as a trading venue rather than the issuer, lacks the authority to register XRP as a security.
The outcome of the litigation could have far-reaching implications for how digital asset futures products are regulated and traded in the United States. A ruling in Bitnomial’s favor would reinforce the CFTC’s exclusive jurisdiction over non-security futures products and potentially clear the way for other futures exchanges to list similar products. Conversely, if the SEC prevails, it could effectively prevent the listing of futures contracts on many digital assets, as the vast majority of digital assets are not registered as a security with the SEC and cannot be registered by the exchanges seeking to list futures on them. As cases are litigated across jurisdictions, there is also the possibility of a split in how federal circuits view secondary transfers of digital assets.
Kentucky et al. v. SEC (E. D. Ky.)
In November 2024, 18 states and a blockchain industry association filed a lawsuit against the SEC in the Eastern District of Kentucky, challenging the agency’s authority to regulate digital asset trading platforms as securities exchanges. The case, which remains in its initial stages, challenges the SEC’s assertion of regulatory authority over digital asset trading platforms, arguing that the agency’s approach improperly preempts state money transmitter laws and interferes with state unclaimed property regimes that many states have specifically adapted for digital assets.
The states detail how they have developed specific regulatory frameworks for crypto businesses, including licensing requirements and consumer protection measures. Under the SEC’s interpretation that most digital asset transactions constitute securities transactions, platforms facilitating these transactions would be required to register as securities exchanges, brokers or dealers. The states argue that this interpretation would effectively nullify their respective regulatory regimes, as the Exchange Act prohibits states from imposing certain requirements — including licensing and bonding requirements — on entities that qualify as securities brokers or dealers. For example, states such as Kentucky have issued guidance stating that transmitters of digital assets are money transmitters under state law. Still, this classification would be preempted if these entities must register with the SEC as securities intermediaries.
This case could help resolve a key question underlying several ongoing SEC enforcement actions against major crypto exchanges: whether secondary market transactions in digital assets on trading platforms constitute securities transactions subject to SEC oversight. A ruling that such transactions fall outside the SEC’s authority could undermine the agency’s enforcement strategy against these platforms. On the other hand, a decision upholding the SEC’s interpretation could strengthen the agency’s positions in these enforcement actions and potentially impact other trading platforms currently operating in the United States.
The timing of the lawsuit, filed just days after the 2024 presidential election, adds another layer of complexity to the litigation.
Conclusion
The five cases examined above will help define the coming shift in digital asset litigation under the new Trump administration. While the Second Circuit’s consideration of Ripple Labs and Coinbase will determine whether the manner of sale creates meaningful distinctions under Howey, the industry-led cases signal an equally important development: the emergence of coordinated challenges to agency authority. The Blockchain Association’s challenge to Treasury’s broker regulations, Bitnomial’s challenge to the SEC’s claim of authority over CFTC-regulated futures products, and 18 states’ defense of their regulatory frameworks collectively represent sophisticated attempts to define and limit federal oversight of digital assets.
The resolution of these cases, coupled with the anticipated regulatory shifts under the new administration, could fundamentally alter the landscape for digital asset innovation in the United States. Market participants should closely monitor these developments as they may significantly impact operational strategies and regulatory obligations in the digital asset space.
1 MacKenzie Sigalos, Here’s What Trump Promised the Crypto Industry Ahead of the Election, CNBC (Nov. 6, 2024), https://www.cnbc.com/2024/11/06/trump-claims-presidential-win-here-is-what-he-promised-the-crypto-industry-ahead-of-the-election.html.
2 Mauricio Di Bartolomeo, Trump’s Top 3 Bitcoin Promises and Their Implications, Forbes (Nov. 7, 2024), https://www.forbes.com/sites/mauriciodibartolomeo/2024/11/07/trumps-top-3-bitcoin-promises-and-their-implications/.
3 Rafael Nam, Trump Picks Crypto Backer Paul Atkins as New Securities and Exchange Commission Chair, NPR (Dec. 4, 2024), https://www.npr.org/2024/12/04/g-s1-36803/trump-crypto-paul-atkins-sec-chair.
4 SEC v. W.J. Howey, 328 U.S. 293 (1946).
5 SEC. v. Ripple Labs, Inc., 682 F. Supp. 3d 308, 322 (S.D.N.Y. July 13, 2023).
6 Id.
7 Id.
8 Hanna Lang and Chris Prentice, Trump’s New SEC Leadership Poised to Kick Start Crypto Overhaul, Sources Say, Reuters (Jan. 15, 2025), https://www.reuters.com/world/us/trumps-new-sec-leadership-poised-kick-start-crypto-overhaul-sources-say-2025-01-15/ (noting top Republican official at the SEC are “reviewing some crypto enforcement cases pending in the courts.”).
9 Brief for SEC at 27-28, SEC v. Ripple, No. 24-2648 (2d Cir. Jan. 15, 2025) (“Ripple publicly promised that it would create a rising tide that would lift the price of XRP for all investors, whether having purchased from Ripple, its affiliates, or a third party.”).
10 Id. at 49-50 (citing Intl. Teamsters v. Daniel, 439 U.S. 551, 560 n. 12 (1979) for the proposition that an “investment of money” under Howey includes “goods and services” so long as the investor provides “some tangible and definable consideration.”).
11 Nikhilesh De, SEC Files Notice of Appeal in Case Against Ripple (Oct. 2, 2024), CoinDesk, https://www.coindesk.com/policy/2024/10/02/sec-files-notice-of-appeal-in-case-against-ripple.
12 SEC v. Coinbase, Inc., No. 1:23-cv-04738-KPF (S.D.N.Y. Jan. 7, 2025).
13 SEC v. Coinbase, Inc., 726 F. Supp. 3d 260 (S.D.N.Y. Mar. 27, 2024).
14 Supra note 9 at 12.
15 Id. at 26.
16 SEC v. Terraform Labs Pte. Ltd., 684 F. Supp. 3d 170, 197 (S.D.N.Y. July 31, 2023) (“It may also be mentioned that the Court declines to draw a distinction between these coins based on their manner of sale, such that coins sold directly to institutional investors are considered securities and those sold through secondary market transactions to retail investors are not.”); Coinbase, Inc., 726 F. Supp. 3d at 293 (“Contrary to Defendants’ assertion, whether a particular transaction in a crypto-asset amounts to an investment contract does not necessarily turn on whether an investor bought tokens directly from an issuer or, instead, in a secondary market transaction.”).
17 Coinbase, Inc., 726 F. Supp. 3d at 295.
18 Coinbase, Inc., No. 1:23-cv-04738-KPF at *28.
19 Blockchain Ass’n et al. v. IRS, No. 3:24-cv-03259-X (N.D. Tex. Dec. 27, 2024).
20 See Nat’l Ass’n of Private Fund Managers et al. v. SEC, No. 4:24-cv-00250 (N.D. Tex. Nov. 21, 2024); Crypto Freedom All. of Tex. et al. v. SEC, No. 4:24-cv-00361 (N.D. Tex. Nov. 21, 2024).
21 See Van Loon v. Department of the Treasury, No. 23-50669 (5th Cir. 2024).
22 Bitnomial Exch., LLC v. SEC, No. 1:24-cv-09904 (N.D. Ill. Oct. 10, 2024).
23 Ripple Labs, Inc., 682 F. Supp. 3d at 324 (S.D.N.Y. July 13, 2023).
Yawara Ng also contributed to this article.
Can Reincorporation and Share Increase Proposals Be Bundled?
In this earlier post, I commented on the preliminary proxy materials filed by P.A.M. Transportation Services, Inc. (nka PAMT Corp) At the time, my interest was the company’s proposal to reincorporate in Nevada from Delaware. On October 31 of last year (which coincidentally is the anniversary of Nevada’s admission as a state), the stockholders approved the proposal. Interestingly, the proposal had changed.
The company originally bundled the reincorporation proposal with an increase in the authorized number of shares. This caught the eyes of the staff at the Securities and Exchange Commission, which commented:
We note that Proposal Three seeks approval of redomestication of the Company from a corporation organized under the laws of the State of Delaware to a corporation organized under the laws of the State of Nevada. We also note that approval of the redomestication includes approval of an increase in the authorized shares of the common stock of the Company from 50,000,000 shares to 100,000,000 shares. Please provide your analysis as to why you are not required to unbundle this proposal and provide shareholders with separate votes regarding these changes. Please refer to Rule 14a-4(a)(3) of Regulation 14A and Question 101.02 to Exchange Act Rule 14a-4(a)(3) Questions and Answers of General Applicability (Unbundling under Rule 14a-4(a)(3) Generally), available on our website.
The company responded by unbundling the proposal and ultimately the stockholder approved both proposals. A decade ago, I pointed out a logical inconsistency in the staff’s position with respect to bundling. See What’s The Matter With The SEC’s Unbundling Interpretation? More fundamentally, the SEC staff should not be making comments on governance that are unrelated to disclosure. Whether a proposal may or may not be bundled is fundamentally a question of state law.
How Whistleblowers Can Report Ponzi Schemes and Receive SEC Whistleblower Awards [Podacst] [Video]
Fraudsters beware: The days of running decades-long Ponzi schemes are over. Whistleblowers can now report your frauds and scams to the SEC and potentially earn multimillion-dollar awards for their efforts.
Since 2011, the SEC has issued more than $2.2 billion in awards to whistleblowers who provided original information to the SEC about violations of federal securities laws, including reports of Ponzi schemes, scams, and other frauds. Under the SEC Whistleblower Program, the SEC awards eligible whistleblowers when their tips lead to successful enforcement actions with monetary sanctions in excess of $1 million. A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected. If represented by counsel, a whistleblower may submit a tip anonymously to the SEC.
Luckily for whistleblowers (and unfortunately for Bernie Madoff wannabes), there has never been a better time for whistleblowers to report Ponzi schemes to the SEC and receive whistleblower awards. As explained below, Ponzi schemes are near all-time highs and the SEC is focused on rooting out these frauds. Whistleblowers can identify these Ponzi schemes based on their common characteristics and “red flags” for fraud. Once identified, whistleblowers should take the appropriate steps to report the Ponzi schemes in accordance with the rules of the SEC Whistleblower Program to ensure their eligibility for an award and to maximize their award percentage.
Whistleblowers Needed: Ponzi Schemes Are Near All-Time Highs
In 2020, CNBC reported that Ponzi schemes hit their highest level in a decade, with authorities uncovering 60 alleged Ponzi schemes with a total of $3.25 billion in investor funds. This level of fraudulent offerings, however, was not an outlier. It was the beginning of a trend. In 2022, authorities uncovered 57 Ponzi schemes that involved over $5.3 billion of potential losses. In 2023, authorities uncovered 66 Ponzi schemes that involved nearly $2 billion in potential investor losses.
In lockstep with the increasing number of Ponzi schemes, the SEC Office of the Whistleblower has received an increasing number of whistleblower tips related to Ponzi schemes in recent years. According to the SEC Office of the Whistleblower’s Annual Reports to Congress, the percentage of whistleblower tips related to offering frauds, such as Ponzi schemes, has increased in every fiscal year (FY) since 2021:
FY 2021: 16% of whistleblower tips
FY 2022: 17% of whistleblower tips
FY 2023: 19% of whistleblower tips
FY 2024: 21% of whistleblower tips
In 2016, the former Director of the SEC’s Division of Enforcement recognized in a speech the importance of whistleblowers to the SEC in rooting out Ponzi schemes, stating:
Offering frauds and Ponzi schemes are another class of cases where whistleblowers have greatly aided us. Retail investors are frequently the largest class of victimized investors in these schemes and they also can be difficult to detect until it is too late. Whistleblowers have provided us with timely and valuable tips enabling the Commission to quickly halt these fraudulent schemes and protect investors from further harm. Whistleblowers also have helped focus us on false and misleading statements in offering memoranda or marketing materials, enabling us to act quickly and stop these investment frauds from attracting more investors.
Nearly a decade later, the same remains true. Whistleblowers are critically important to the SEC in identifying and halting Ponzi schemes.
SEC Increases Focus on Ponzi Schemes
According to a recent Bloomberg article, the SEC under the Trump administration “will turn away from more expansive or novel enforcement tools used in the Biden administration, and double down on bread-and-butter fraud cases.” This sentiment has been echoed by experts throughout the industry. The SEC’s increased focus on fraud cases bodes well for whistleblowers reporting Ponzi schemes and other fraudulent investment offerings, as the SEC will likely dedicate more of its limited resources to combatting these scams.
How Whistleblowers Can Spot a Ponzi Scheme
A new paper titled “Ponzi Schemes: A Review” by Zhe Peng and Phelim P. Boyle outlines the key features of Ponzi schemes. Whistleblowers should consider these features when attempting to identify a Ponzi scheme. The paper examines 8 key features: “(i) the promoter or founder; (ii) the plausible story; (iii) trust-building mechanisms; (iv) the investment promise; (v) withdrawal features; (vi) marketing strategies; (vii) regulations; (viii) agency issues; and (ix) how the scheme ends.”
The SEC has also published investor warnings describing red flags for Ponzi schemes. According to the SEC, investors (and whistleblowers) should consider the following underlying traits of an investment offering when seeking to identify a potential Ponzi scheme:
Promises of high investment returns with little or no risk;
Regular, positive returns regardless of market conditions;
Investments that are not registered with the SEC or an appropriate state regulator;
Unlicensed individuals or unregistered firms;
Secretive or complex strategies for which investors cannot get complete information;
Lack of paperwork or inaccessibility to information about an investment in writing;
Difficulty receiving payment; and
Promises of “rolling over” investments and higher returns in the future on the amounts rolled over.
Recently, fraudsters have begun to rely on scam promissory notes and virtual currencies to raise money for Ponzi schemes.
How to Report a Ponzi Scheme to the SEC and Receive an Award
To report a Ponzi scheme 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. If represented by counsel, a whistleblower may submit a tip anonymously to the SEC.
In FY 2024, the SEC Office of the Whistleblower received 24,980 whistleblower tips and, as noted above, the office has received an increasing number of whistleblower tips related to Ponzi schemes since FY 2021. Before submitting a tip, whistleblowers should consult with an experienced whistleblower attorney and review the SEC whistleblower rules to, among other things, understand eligibility requirements and consider the factors that can significantly increase or decrease the size of a future whistleblower award.
To date, the largest SEC whistleblower awards by amount 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)
$82 million SEC whistleblower award (August 23, 2024)
$50 million SEC whistleblower award (April 15, 2021)
$50 million SEC whistleblower award (March 19, 2018)
$50 million SEC whistleblower award (June 4, 2020)
$39 million SEC whistleblower award (September 6, 2018)
$37 million SEC whistleblower award (December 19, 2022)
$37 million SEC whistleblower award (July 26, 2024)
SEC Charges Two Sigma with Impeding Whistleblowing in Separation Agreements
On January 16, the U.S. Securities and Exchange Commission (SEC) announced settled charges against New York-based investment advisers Two Sigma Investments LP and Two Sigma Advisers LP. The settlement, which includes $90 million in civil penalties, resolves allegations that Two Sigma failed to address known vulnerabilities in its investment models and violated the SEC’s whistleblower protection rule, Rule 21F-17(a).
Rule 21F-17(a) prohibits companies from impeding the ability of individuals to blow the whistle to the SEC, including through restrictive language in non-disclosure agreements, separation agreements, and other employment agreements.
According to the SEC, “Two Sigma violated the Commission’s whistleblower protection rule by requiring departing individuals, in separation agreements, to state as fact that they had not filed a complaint with any governmental agency.”
“This requirement, in effect, could identify whistleblowers and prohibit whistleblowers from receiving post-separation payments and benefits, both of which are actions to impede departing individuals from communicating directly with Commission staff about possible securities law violations, in violation of the whistleblower protection rule,” the SEC claims.
Notably, according to the SEC order, Two Sigma did include carve-out language in the agreements which stated “Nothing in this Agreement (including without limitations Sections 5(g), 6, 7 and 8), the Company’s policies or any other agreement between you and the Company prohibits you from making a good faith reporting of possible violations of law or regulation to any governmental agency or entity or making other disclosures that are protected under whistleblower laws or regulations.”
However, the SEC determined that this carve-out language “did not remedy the impeding effect of the Employee Representation, which addressed past employee conduct (i.e., it required disclosure of already-made complaints), because the Carve Out was prospective in application (i.e., it did not prohibit departing employees from making future complaints).”
As demonstrated in this case, the SEC is taking seriously both the retaliatory potential and chilling effect of restrictive agreements, which undermine the purpose of the SEC Whistleblower Program, and is taking a hard-line stance on Rule 21F-17(a) violations.
Increased Enforcement of Rule 21F-17(a)
While the SEC instituted Rule 21F-17(a) in 2011 and first took an enforcement action over alleged violations of it in 2016, the Commission’s enforcement efforts around the rule have increased dramatically over the past year.
Notably, in January 2024, the SEC sanctioned J.P. Morgan $18 million for utilizing confidentiality agreements which impeded clients from blowing the whistle to the SEC Whistleblower Program. This was the largest penalty ever levied for Rule 21F-17(a) violations.
“Whistleblowers play a valuable role in helping to protect the U.S. financial markets by bringing the Commission information about potential securities law violations,” Creola Kelly, Chief of the Office of the Whistleblower, stated in the SEC Whistleblower Program’s annual report to Congress for the 2024 Fiscal Year. “The Commission sent a strong message that agreements and conduct that impede communication with the SEC will not be tolerated.”
“Corporations should be looking at the SEC’s recent 21F-17 rulings as a sign that the age of blocking whistleblowers from disclosing in contractual agreements is over — it is now more expensive for a corporation to try to cover up fraud and corruption by silencing whistleblowers than it is for them to do the right thing,” wrote whistleblower attorney Benjamin Calitri of Kohn, Kohn & Colapinto in an article for NYU Law’s Compliance and Enforcement blog.
Geoff Schweller also contributed to this article.
Nasdaq Board Diversity Rules Struck Down in Court
On December 11, 2024, the U.S. Court of Appeals for the Fifth Circuit, sitting en banc in Alliance for Fair Board Recruitment v. SEC, held that the approval by the U.S. Securities and Exchange Commission (SEC) of the Nasdaq Board Diversity Rules was arbitrary, capricious, and in contravention of the Securities Exchange Act of 1934, and vacated the approval of those Rules.
It is unclear if the SEC will seek to appeal the decision to the U.S. Supreme Court or if that court will grant the petition for certiorari. However, in a December 12, 2024, statement, Jeff Thomas, Nasdaq’s Global Head of Listings, confirmed that Nasdaq will not seek to appeal the ruling, and companies seeking Nasdaq listing or listed on the Nasdaq stock markets will not need to comply with the Diversity Rules.
The Diversity Rules, proposed as a securities exchange listing requirement in December 2020 and approved by the SEC under Section 19(b)(1) of the Exchange Act, went into effect in August 2021. Subject to certain transition periods and exceptions, it required each Nasdaq-listed company to publicly disclose information on the voluntary self-identified gender, racial characteristics, and LGBTQ+ status of the members of the company’s board of directors. The Exchange also required each Nasdaq-listed company, subject to certain exceptions, to have, or explain why it does not have, at least two members of its board of directors who are considered “diverse,” including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ+. In connection with the Diversity Rules, Nasdaq provided recruiting assistance for interested public companies to recruit diverse board members.