SEC Abandons Climate Disclosure Rule
As expected, the SEC under the Trump Administration has abandoned the climate disclosure rule promulgated by the Biden Administration. Specifically, as stated in a court filing today, “the Commission has determined that it wishes to withdraw its defense of the Rules.” Further, the SEC has also informed the court that “Commission counsel is no longer authorized to advance the arguments presented in the Commission’s response brief.”
This decision by the SEC was widely anticipated–and, indeed, had previously been telegraphed by the Republican appointees at the SEC. It is significant nonetheless, as this reversal by the SEC not only provides further evidence of a withdrawal from the climate policies propounded by the Biden Administration but renders the rule less likely to survive legal challenge–and even less likely to be the subject of enforcement action should the courts uphold the rule.
Still, this is not the end of the litigation over the SEC rule. A number of states had intervened in defense of the rule (AZ, CO, CT, DE, DC, HI, IL, MD, MA, MI, MN, NV, NM, NY, OR, RI, VT, WA), and these states can continue to present arguments on behalf of the climate disclosure regulation to the Eighth Circuit. However, the odds that the climate disclosure regulation survives legal challenge when the SEC itself has abandoned it appear quite low.
The SEC will stop defending corporate emissions reporting requirements in court after the agency under President Joe Biden fought for months to save the rules. Securities and Exchange Commission lawyers are “no longer authorized to advance” arguments the agency had made in support of the 2024 regulations that require companies to report their greenhouse gas emissions, the SEC said in a filing with the US Court of Appeals for the Eighth Circuit on Thursday.
news.bloomberglaw.com/…
SEC Creates New Tech-Focused Enforcement Team
On February 20, the SEC announced the creation of its Cyber and Emerging Technologies Unit (CETU) to address misconduct involving new technologies and strengthen protections for retail investors. The CETU replaces the SEC’s former Crypto Assets and Cyber Unit and will be led by SEC enforcement veteran Laura D’Allaird.
According to the SEC, the CETU will focus on rooting out fraud that leverages emerging technologies, including artificial intelligence and blockchain, and will coordinate closely with the Crypto Task Force established earlier this year (previously discussed here). The unit is comprised of approximately 30 attorneys and specialists across multiple SEC offices and will target conduct that misuses technological innovation to harm investors and undermine market confidence.
The CETU will prioritize enforcement in the following areas:
Fraud involving the use of artificial intelligence or machine learning;
Use of social media, the dark web, or deceptive websites to commit fraud;
Hacking to access material nonpublic information for unlawful trading;
Takeovers of retail investor brokerage accounts;
Fraud involving blockchain technology and crypto assets;
Regulated entities’ noncompliance with cybersecurity rules and regulations; and
Misleading disclosures by public companies related to cybersecurity risks.
In announcing the CETU, Acting Chairman Mark Uyeda emphasized that the unit is designed to align investor protection with market innovation. The move signals a recalibration of the SEC’s enforcement strategy in the cyber and fintech space, with a stronger focus on misconduct that directly affects retail investors.
Putting It Into Practice: Formation of the CETU follows Commissioner Peirce’s statement on creating a regulatory environment that fosters innovation and “excludes liars, cheaters, and scammers” (previously discussed here). The CETU is intended to reflect that approach, redirecting enforcement resources toward clearly fraudulent conduct involving emerging technologies like AI and blockchain.
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SEC Abandons Defense of Brobdingnagian Climate Change Disclosure Rule
Three years ago, the Securities and Exchange Commission issued a nearly 500 page rule proposal that would require registrants to provide certain climate-related information in their registration statements and annual reports. At the time, I argued. albeit to no avail, that the sheer prolixity of the release militated against adoption of the rule. Two years later, the SEC adopted a final rule in a nearly 900 page adopting release.
Expectedly, the rule was challenged in court. National Legal and Policy Center v. Securities and Exchange Commission (8th Cir., Case No. 24-1685). The SEC previously stayed effectiveness of the rules pending completion of that litigation. Yesterday, the SEC through in the towel, announcing that it had voted to no longer defend the rules.
Blockchain+ Bi-Weekly; Highlights of the Last Two Weeks in Web3 Law: March 27, 2025
The past two weeks brought some notable progress for the industry, though it still often feels like “regulation by lack of enforcement” rather than a truly proactive approach. The SEC clarified that most proof-of-work mining activities do not amount to securities transactions—a welcomed statement for miners but limited in scope. Meanwhile, Ripple announced a potential settlement that would end the SEC’s appeal, continuing a trend of non-fraud crypto cases winding down without generating long-term clarity. On Capitol Hill, the Senate’s markup of its own stablecoin act signals a significant step forward yet also highlights a lack of consensus necessary for any final bill. Finally, in a notable display of bipartisan alignment, both chambers of Congress overwhelmingly passed legislation overturning the IRS’s crypto broker reporting rules, demonstrating the possibility of constructive actions in areas where consensus can be reached.
These developments and a few other brief notes are discussed below.
SEC Clarifies That Most Proof-of-Work Mining Activities Are Not Securities Transactions: March 20, 2025
Background: The SEC’s Division of Corporation Finance released a statement clarifying its view that most proof-of-work (“PoW”) mining activities do not qualify as securities transactions under federal securities laws. The statement applies specifically to “Protocol Mining” activities involving “Covered Crypto Assets”, which are defined as crypto assets tied to the functioning of a public, permissionless PoW network. According to the release, whether through self-mining or pooled mining, miners perform the essential “work” themselves. Under the Howey test, one crucial element for a transaction to be deemed a security is that profits must flow primarily from the “managerial or entrepreneurial efforts of others.” Because PoW miners generate rewards by contributing their own computational power, the SEC concluded that these returns are not derived from someone else’s management. Thus, PoW mining generally fails this aspect of the Howey test, placing it outside the scope of federal securities laws.
Analysis: It’s important to note that releases like these do not create binding law and each set of facts can differ and may yield different legal results, which may make certain PoW mining fall outside of this safe-harbor-like guidance. Still, the statement signals that, under typical PoW mining arrangements, participants who merely contribute computational power to validate transactions and receive rewards likely do not cross into securities territory, including through pooling arrangements. This may allow more risk-averse entities to contribute compute to mining or provide services to mining pools, which only serves to strengthen network resilience and efficiency.
Ripple CEO Announces Pending Settlement With SEC: March 19, 2025
Background: Ripple has announced that the SEC will drop its appeal of the portion of the ruling against it in Ripple. This will bring an end to at least part of the case originally brought in 2020 during Jay Clayton’s term as Chairman of the SEC. This will still need to be approved at the next meeting of the commissioners, and it is unclear what this dismissal will entail. Representatives of Ripple have stated that they are evaluating what to do with their own cross-appeal relating to institutional investor sales. Still, there wouldn’t be an announcement like this if a deal was not in place, so now it is just a waiting game to see the details.
Analysis: Ripple was one of the few digital asset issuers from the ICO boom that had the resources to fully litigate against the SEC, and it has been doing so for half a decade. And litigate they did, with over 25 filings related to the “Hinman Speech” documents alone. Combined with the dismissal of the Coinbase matter and its pending appeal, there is still no binding precedent from higher courts on the applicability of the Howey test to digital assets.
Stablecoin Senate Markup Developments: March 13, 2025
Background: The Senate Banking Committee had a markup of the GENIUS Act, which is the Senate’s version of a stablecoin bill. Even before the markup and vote, there were some changes made due to bipartisan efforts to reach an agreement on how stablecoins should be registered and monitored in the U.S. The bill passed through committee on an 18-6 vote, with five Democrats (Warner-VA, Kim-NJ, Gallego-AZ, Rochester-DE and Alsobrooks-MD) voting in favor, meaning the 4 most junior Democrats on the committee (along with Warner) crossed party lines to vote in favor of the GENIUS Act.
Analysis: Senator Warren predictably tried to propose amendments that would have killed the viability of the bill (to the delight of traditional banks), but all those proposals failed. It can be expected there will be closed door work on the bill to address the concerns of Democrats who want some changes to the bill to help it receive as much bipartisan support as possible. The House is also working on its own bill, holding a hearing on stablecoins and CBDCs this week, and the Senate Banking Committee also passed a bill regarding debanking that went along party lines.
House Votes to Overturn IRS Crypto Broker Reporting Rules: March 11, 2025
Background: The House voted overwhelmingly in favor of repealing the IRS broker rule change, which was adopted in the final months of President Biden’s term, which would have made all self-custodial wallet providers, DeFi protocols and even arguably internet service providers themselves reporting entities for any digital asset transaction. The vote was 292-132 in the House and 70-28 in the Senate. It will go to the Senate again before being signed by President Trump, who has stated he intends to sign as soon as it hits his desk.
Analysis: The IRS broker rule, as finalized, was overly broad and aggressive, potentially capturing industry participants like self-hosted wallet providers, automated market makers, validators and possibly even ISPs. This might be a “played yourself” moment because some classes of entities in the digital asset space could logically be included as reporting entities under broker reporting rules. If the bill goes into law as expected, any such rule will need to come from Congress now.
Briefly Noted:
SEC Likely to Abandon Reg ATS Rule Changes for Crypto: Acting Sec Chair Mark Uyeda gave a speech saying he directed staff to kick the tires on (i.e., abandon) a proposed rule change that would expand the definition of an “exchange” in a way that might have looped in certain DeFi protocols and service providers.
Geofenced Airdrop Costs to Americans: Dragonfly released its State of Airdrops report for 2025, which shows that Americans missed out on as much as $2.6 billion in potential revenue (and the U.S. missed out on taxing that revenue) by policies that resulted in Americans being disqualified from those airdrops.
Leadership Changes at Crypto Policy Leaders: Amanda Tuminelli is taking over as CEO of industry advocacy group DeFi Education Fund. Meanwhile, Cody Carbone deserves congratulations on his recent promotion to CEO of the Digital Chamber. Those organizations are in great hands under their leadership.
Come in and Register: Now that crypto firms can actually have a dialog with the SEC without fear that opening the dialog will lead to investigations and hostile actions, a record number are filing for various approvals at the agency. Crazy how that works.
CFTC Withdraws Swap Exchange Letter: The CFTC withdrew its prior Staff Advisory Swap Execution Facility Registration Requirement which arguably required DeFi participants to register with the agency and which 3 DeFi platforms were charged with disobeying in 2023. This may signal an intent to ease the prosecution of decentralized platforms for failing to register as swap execution facilities.
OFAC Removes Tornado Cash Designations: In another huge industry development, OFAC has finally removed protocol addresses from its sanctions list, which is a huge win for software developers and privacy advocates everywhere.
SEC Hosts First Crypto Roundtable: The SEC’s first crypto roundtable is available to view. Not many major takeaways, but it’s good to see these conversations occurring in public forums. This is ahead of the expected SEC Chair Atkins’ hearing before the Senate.
Stablecoin Legislation Update: Ro Khanna (D-CA) said he believes stablecoin and market structure legislation gets done this year at the Digital Assets Summit on March 18, 2025, stating there are 70 to 80 Democrats in the House who view this as an important issue to maintain American dollar dominance and influence. Bo Hines also stated stablecoin legislation will get done in the next few months.
SEC Permits Some Rule 506(c) Self-Certification: Rule 506(c), which allows for sales of securities to accredited investors while using general advertising and solicitation, historically has required independent verification of accredited investor status, such as through getting broker letters or tax returns. In a new no-action letter, the SEC clarified that issuers can rely on self-certifications of accredited investor status as long as the minimum purchase price is high enough and certain other qualifications are met.
Conclusion:
Although not legally binding, the SEC’s acknowledgment that most proof-of-work mining activities are not securities transactions remains a welcomed development for the industry. Meanwhile, the potential conclusion of the SEC’s appeal against Ripple carries both positive and negative implications. On one hand, it suggests that the SEC may follow through on ending non-fraud crypto litigations; on the other, it underscores the ongoing uncertainty in crypto rulemaking absent further regulatory clarity. As the Senate and House each work through their own crypto bills and rules, legislative activity around digital assets is likely to remain robust in the near future.
Nasdaq Amends Proposal to Modify Rule for Initial Listing Liquidity Requirements
In December 2024, the Nasdaq Stock Market LLC submitted a proposal to the US Securities and Exchange Commission (SEC) to modify its requirements for calculating the minimum Market Value of Unrestricted Publicly Held Shares in connection with an initial listing on Nasdaq.
The SEC published this proposal in the Federal Register for public comment on December 30, 2024. Subsequently, on February 5, Nasdaq submitted Amendment No. 1 to this proposed rule change. The amendment contains necessary clarifications but makes no substantive changes from the originally proposed rule change. On March 12, the SEC released an order granting approval of Amendment No. 1, which was published in the Federal Register on March 18.
Current Rule
Nasdaq Listing Rules 5405 and 5505 require companies listing in connection with an initial public offering (IPO) or an uplisting from the over-the-counter (OTC) market to satisfy applicable minimum Market Value requirements. For an initial listing, these minimums depend on whichever of the following standards the company meets the criteria for:
Income Standard: Requires an annual income from continuing operations before incomes taxes of at least $1 million in the most recently completed fiscal year or in two of the three most recently completed fiscal years, stockholders’ equity of at least $15 million, and at least three registered and active market makers.
Equity Standard: Requires stockholders’ equity of at least $30 million, a two-year operating history, and at least three registered and active market makers.
Market Value Standard: Requires a market value of listed securities of $75 million and current publicly traded companies must meet this requirement and the $4 bid price requirement for 90 consecutive trading days prior to applying for listing under this standard. This standard requires at least four registered and active market makers.
Total Assets/Total Revenue Standard: Requires a company to have total assets and total revenue of $75 million each for the most recently completed fiscal year or two of the three most recently completed fiscal years, and at least four registered and active market makers.
For an IPO listing on the Nasdaq Global Market, a company must have a minimum Market Value of $8 million under the Income Standard, a minimum of $18 million under the Equity Standard, or a minimum of $20 million under the Market Value or Total Assets/Total Revenue Standard. For an IPO listing on the Nasdaq Capital Market, a company must have a minimum of $5 million under the Income Standard or a minimum of $15 million under either the Equity Standard or Market Value or Total Assets/Total Revenue Standard. To satisfy the minimum Market Value, companies listing in conjunction with an IPO may count, in addition to the shares being sold in the offering itself, previously issued shares registered for resale not held by an officer, director, or 10% shareholder of the company.
For a company trading on the OTC market to list on Nasdaq, the company must have either a minimum daily trading volume of 2,000 shares over the past 30 trading days with trading occurring in at least 50% of those days (the ADV requirement) or list in connection with a firm commitment underwritten public offering of at least $4 million (the firm commitment requirement).
Proposed Changes
Companies listing in conjunction with an IPO must satisfy the minimum Market Value requirement only with the proceeds from the offering and can no longer include Resale Shares in their Market Value calculations under Nasdaq Listing Rules 5405(b) and 5505(b). OTC companies uplisting per the firm commitment requirement must also satisfy the applicable Market Value requirement without counting Resale Shares under Nasdaq Listing Rules 5405(a)(4) and 5505(a)(5). Additionally, the proposed changes increase the minimum public offering raise from $4 million to $5 million for Nasdaq Capital Market applicants and to $8 million for Nasdaq Global Market applicants. If the uplisting company qualifies for a standard other than the Net Income Standard, the minimum raise must satisfy those applicable standards.
Nasdaq has recommended these changes based on its observation that companies which included Resale Shares to meet their Market Value minimum experienced higher volatility on the date of listing than those companies that did not include Resale Shares to meet the requirement. In other words, Resale Shares may not contribute to liquidity to the same degree as shares sold in the public offering.
SEC’s Findings
The SEC found that the proposed rule change is consistent with the requirements of the Exchange Act of 1934, specifically Section 6(b)(5), which requires exchanges to promulgate rules designed, in part, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. Further, the proposed modifications should allow Nasdaq to better determine whether a security has adequate liquidity and is thus suitable for listing and trading on the exchange.
Takeaways
The SEC is currently soliciting comments electronically and by paper. Comments are publicly posted in the Federal Register. Submissions should be made on or before April 8. The SEC has also approved the rule change, as amended, on an accelerated basis. The SEC will approve the rule change prior to April 17. Once approved, the proposed modifications go into effect 30 days after the date of SEC approval.
Nasdaq and the SEC hope this modification ensures the exchange lists only securities with a sufficient market, adequate depth and liquidity, and sufficient investor interest to support an exchange listing. Companies considering listing on Nasdaq either through an IPO or uplisting from the OTC market should ensure they comply with the new rule once in effect and that their Market Value calculations meet applicable minimum requirements.
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Marina Phillips contributed to this article
Rule 506(c) Unchained? The SEC Loosens Requirements for Advertising in Private Capital Raises
On 12 March 2025, the US Securities and Exchange Commission (SEC) staff issued a no-action letter that provides private fund sponsors with a concrete, streamlined approach to relying on Rule 506(c),1 based on minimum investment amounts and investor representations. This guidance has the potential to unlock Rule 506(c)’s advantages for private fund sponsors more than a decade after its passage.
Background on Rule 506(c)
Implemented in 2013 pursuant to the Jumpstart Our Business Startups Act, Rule 506(c) provides an alternative to the traditional prohibition on general solicitation in private offerings. Specifically, Rule 506(c) permits issuers to engage in general solicitation and advertising when selling securities, provided they take “reasonable steps” to verify that all purchasers are accredited investors. While enacted in order to give issuers the opportunity to increase their fundraising abilities through marketing to a public audience, Rule 506(c) has been only sparingly used over the last decade. This past November, SEC Commissioner Hester Peirce commented that issuers had “raised around $169 billion annually under Rule 506(c) compared to $2.7 trillion under 506(b), which does not permit general solicitation.”2
The “reasonable steps” verification requirement has presented operational challenges for many issuers. Prior methods qualifying as “reasonable steps” included reviewing tax returns, bank statements, or obtaining verification letters from professionals such as lawyers or accountants. Because of the additional administrative burdens imposed by these verification methods, Rule 506(c) has not been widely utilized, despite its potential to access a much wider audience for capital raising.
The Alternative Verification Method
The no-action letter provides a far less labor-intensive approach to satisfying Rule 506(c)’s verification requirements by streamlining the process issuers must follow to verify an investor’s accredited investor status. Specifically, the SEC mandates that an issuer relying on the no-action letter:
Impose minimum investment amounts of US$200,000 for individuals and US$1 million for legal entities;3
Receive written, self-certified representations from an investor that they are an accredited investor and that their investment is not financed by a third party for the specific purpose of making the particular investment;4 and
Have no actual knowledge of facts contrary to the two above bullets.
This test for determining whether an issuer has taken reasonable steps to verify accredited investor status is objective and depends on the specific facts and circumstances of each investor and transaction.
Practical Considerations for Private Fund Sponsors and Other Issuers
What are the practical implications for private fund sponsors now that the SEC has loosened the verification restrictions? Will private fund sponsors now jump into the fray and begin to advertise on social media, at sporting events, and elsewhere? There remain a number of considerations notwithstanding the less burdensome verification process. The SEC’s no-action letter addressed only this aspect of using Rule 506(c). The Marketing Rule (defined below), antifraud provisions, and other provisions of the Investment Advisers Act of 1940 the (Advisers Act) of course remain in full force and effect. Private fund sponsors considering an offering under Rule 506(c) will need to not only comply with the Advisers Act’s requirements, but be prepared to do so in front of a much wider investor and regulator audience.
Private fund sponsors considering Rule 506(c) offerings should note several additional considerations:
Update Policies and Procedures
Managers should adopt policies and procedures to accommodate Rule 506(c) offerings.
Marketing Rule
Registered investment advisers must continue to consider Rule 206(4)-15 under the Advisers Act the (Marketing Rule) when marketing their funds. While advisers may widely distribute marketing materials, such materials must comply with the Marketing Rule. For example, under the Marketing Rule, advisers are generally prohibited from including hypothetical performance, such as performance targets and projected returns, in advertisements to the general public.6
Switching Exemptions
Managers that want to change to a Rule 506(c) offering should file an updated Form D with the SEC and review offering materials for any necessary updates (e.g., remove representations regarding no general solicitation from subscription agreements and other documents).
What Is Next for Private Fund Sponsors and Rule 506(c)?
The easing of the investor verification process under Rule 506(c) will undoubtedly renew interest in pursuing this alternative path to capital raising. It is no secret that the fundraising environment over the last several years has been challenging, particularly for mid-market and emerging manager sponsors. For those managers, there are good reasons to explore general solicitation under Rule 506(c), bearing in mind the need to comply with the SEC’s recent guidance on verification and the requirements of the Advisers Act. Time will tell whether the SEC’s no-action letter will actually open the floodgates of advertising for private fund sponsors. Watch this space for further insights as the industry’s approach to using Rule 506(c) unfolds.
Footnotes
1 17 C.F.R. § 230.506(c) (1933).
2 https://www.sec.gov/newsroom/speeches-statements/peirce-remarks-sbcfac-111324
3 For an entity investor accredited solely through its beneficial owners, the minimum investment amount is US$1 million, or US$200,000 for each beneficial owner if the entity has fewer than five natural person owners.
4 These representations must be made for each beneficial owner for entities that are accredited solely through the accredited investor status of each beneficial owner.
5 17 C.F.R. § 275.206(4)-1 (●).
6 The Marketing Rule requires that investment advisers only present hypothetical performance to audiences if it is relevant to their likely financial situation and investment objectives, limiting an adviser’s ability to include such performance in advertisements to the public. In the Marketing Rule’s adopting release, the SEC specifically noted that advisers “generally would not be able to include hypothetical performance in advertisements directed to a mass audience or intended for general circulation.” Investment Adviser Marketing, Release No. IA-5653, SEC Dec. 22, 2020 effective May 4, 2021, at 220.
How to Protect Your ESOP from Lawsuits Over Cash Holdings
At least five lawsuits have recently been filed against employee stock ownership plan (ESOP) fiduciaries alleging a failure to prudently invest cash held in the ESOP trust. While scrutiny of investments in company stock has long been common, the focus on cash holdings represents a significant and novel shift. These cases signal a potential trend, and ESOP fiduciaries should take steps to mitigate risk, as outlined below.
Why Are ESOP Cash Holdings Becoming Litigation Targets?
One recent case, Schultz v. Aerotech, sheds light on this issue. In this lawsuit, the plaintiffs argue that Aerotech’s ESOP held nearly 20% of its total assets in cash equivalents, yielding a return of less than 1.5% over five years. Aerotech counters that the cash-heavy approach was necessary to meet future repurchase obligations. The plaintiffs, however, claim the company could have pursued higher-yield investments while maintaining adequate liquidity.
The court reviewing Aerotech’s motion to dismiss pointed to the “vast disparity” between Aerotech’s cash-heavy approach and the practices of similar plans as raising plausible inference that the company, as a plan fiduciary, failed to meet its fiduciary obligations. While Aerotech may later demonstrate that its investment strategy was justified under the specific circumstances, the allegations of imprudence were sufficient for the case to survive a motion to dismiss and proceed to costly discovery.
What Actions Can ESOP Fiduciaries Take?
Although the courts have not yet fully addressed these claims, ESOP fiduciaries can take the following measures to reduce risk and align their actions with their fiduciary obligations:
1. Assess Cash Holdings and Prepare for Increased Scrutiny
Evaluate the rationale behind the ESOP’s cash holdings. For instance:
Are large cash reserves an intentional strategy to buffer repurchase obligations?
Or are they the unintended result of segregating accounts of terminated participants over extended periods (which raises other compliance issues)?
Prepare for increased scrutiny from employees, plaintiff’s lawyers, and regulators by documenting the reasoning behind your investment strategies.
2. Reevaluate Investment Strategies
Ensure the ESOP’s investment approach aligns with fiduciary duties under ERISA. Unlike investments in company stock, cash holdings and other non-stock assets do not enjoy the same protective standards. Consider whether reallocating cash into low-risk, higher-yield assets could achieve better returns without compromising liquidity. Ultimately, an ESOP is a retirement plan, and the fiduciaries responsible for investment of the plan assets need to evaluate the prudence of those investments. This is separate in certain respects to the company’s need to satisfy the repurchase obligation.
3. Engage an Investment Advisor or Investment Manager
Appointing an investment advisor or investment manager can help reduce fiduciary liability. An investment advisor could make recommendations to the plan administrator or ESOP committee on appropriate investments of cash for the ESOP. However, the ultimate fiduciary responsibility for the investment of plan assets would rest with the plan administrator or ESOP committee. The plan administrator or ESOP committee could also appoint an investment manager who would take on the primary fiduciary obligation for the management of the assets. However, the plan administrator or ESOP committee would still have to act prudently with respect to the selection and monitoring of the investment manager.
4. Invest in Fiduciary Training
Formal training on fiduciary duties, particularly on selecting and managing investments, is increasingly common for 401(k) plans and can be equally beneficial for ESOP fiduciaries. This is especially important if an investment manager is not engaged.
5. Evaluate Transferring Cash to a 401(k) Plan
One way to mitigate liability for investing cash allocated to the account of a terminated participant who no longer holds any stock is to transfer the cash out of the ESOP and into the employer’s 401(k) plan. This option is most useful when the accounts of terminated participants are segregated (i.e., the stock is exchanged for cash to maximize the investments in stock for active participants) and immediate distributions are not permitted. While there are complex pros and cons to this approach, reducing the fiduciary obligations on the ESOP fiduciaries is a clear benefit.
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New SEC Guidance May Increase Use of Generally Solicited Rule 506(c) Offerings
Highlights
The SEC issued new guidance on how an issuer wishing to engage in general solicitation under Rule 506(c) may satisfy the rule’s accredited investor verification requirement
The guidance clarifies that in appropriate circumstances, a minimum investment amount coupled with the receipt of investor representations may constitute reasonable verification steps
Corporate issuers and private fund sponsors now have a clearer path to engage in broad outreach to prospective investors without imperiling an offering’s exemption from Securities Act registration
On March 12, 2025, the staff of the Securities and Exchange Commission (SEC) Division of Corporation Finance issued new guidance on the accredited investor verification steps an issuer must take in order to make an unregistered offering in reliance on Rule 506(c) under the Securities Act. The guidance indicates that issuers may fulfill the Rule 506(c) accredited investor verification requirement by imposing relatively high minimum investment requirements and obtaining related purchaser representations.
The SEC staff thus has opened a clearer path for issuers – including both operating companies and private funds – to engage in broad outreach to prospective investors without endangering an offering’s exemption from Securities Act registration.
Background
Section 4(a)(2) of the Securities Act exempts from registration “transactions by an issuer not involving any public offering.” Regulation D is a safe harbor under Section 4(a)(2), compliance with which ensures that an offering satisfies the statutory exemption. For most private issuers, the key traditional component of Regulation D has been Rule 506(b). That rule permits unregistered offerings of any size to accredited investors (and a limited number of non-accredited investors), on the condition that, among other things, the issuer refrains from “general solicitation” in connection with the offering.
In the JOBS Act of 2012, Congress directed the SEC to expand Regulation D to permit general solicitation in certain unregistered offerings. The SEC did that by adopting Rule 506(c). Rule 506(c) states that an issuer may use general solicitation when conducting an unregistered offering of any size, provided that all purchasers in the offering are accredited investors and the issuer takes “reasonable steps to verify” each purchaser’s accredited investor status.
Since the rule’s adoption in 2013, issuers have not engaged in Rule 506(c) offerings to the extent many observers had initially predicted, primarily because issuers have viewed the accredited investor verification requirement as unwieldy in practice. While Rule 506(c)(2)(ii) sets forth a list of “non-exclusive, non-mandatory” verification methods that are deemed sufficient, issuers generally have seen these as burdensome to use and uncomfortably intrusive for investors.
At the same time, issuers have been concerned that relying on the principles-based verification approach noted in the 2013 adopting release might not provide unambiguous grounds to conclude that Rule 506(c) has been satisfied, in part because the release makes clear that a mere representation by a prospective purchaser as to its accredited investor status generally would not fulfill the verification requirement.
Private issuers, including private fund sponsors, therefore have largely foregone the allure of general solicitation and continued their traditional reliance on Rule 506(b).
New SEC Guidance
The Division of Corporation Finance staff now has issued fresh guidance concerning what can constitute “reasonable steps to verify” a purchaser’s accredited investor status for purposes of Rule 506(c). The guidance, issued on March 12, takes the form of new Compliance and Disclosure Interpretations (CDI) 256.35 and 256.36, as well as a related no-action letter addressed to Latham & Watkins LLP. The staff’s initiative has the potential to revive the appeal of Rule 506(c).
Minimum Investment Amount Is a Relevant Verification Factor
CDI 256.35 advises that if an issuer does not take any of the non-exclusive, non-mandatory accredited investor verification steps outlined in Rule 506(c)(2)(ii), it can apply a reasonableness standard directly to the specific facts and circumstances of the offering and its investors. Reprising the principles expressed in the 2013 adopting release, the guidance notes that in determining what constitute reasonable verification steps, the issuer should consider factors such as the nature of the purchaser and the type of accredited investor it claims to be; the amount and type of information that the issuer has about the purchaser; and the nature and terms of the offering, including any minimum investment amount.
High Minimum Investment Amount Plus Purchaser Representations May Equal Reasonable Steps to Verify
CDI 256.36 and the no-action letter address in more detail the possible significance of a minimum investment amount in the accredited investor verification context. The guidance here advises that, depending on the facts and circumstances, an issuer may be able to conclude that it has taken reasonable steps to verify purchasers’ accredited investor status when the offering “requires a high minimum investment amount.” In amplification of that thought, the no-action letter states that an issuer generally could conclude that it has taken reasonable steps to verify a purchaser’s accredited investor status if:
the offering requires a minimum investment of $200,000 for a natural person or $1,000,000 for an entity
the issuer obtains written representations that:
the purchaser is an accredited investor
the purchaser’s minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer
the issuer has no actual knowledge of any facts indicating that the foregoing purchaser representations are not true
The idea that a minimum investment amount can be a key factor in the analysis of reasonable verification steps is not completely new. As noted, the Rule 506(c) adopting release raised this concept in general terms. The new guidance, though, is more specific and thus may inspire more confidence on the part of issuers who decide to follow it. In particular, the staff’s position now essentially permits a form of “self-certification” of accredited investor status in Rule 506(c) offerings akin to the procedure on which issuers have long relied in traditional Rule 506(b) accredited investor offerings. This is a welcome development and should reduce uncertainty for issuers conducting or considering generally solicited offerings.
Takeaways
The SEC staff now may have reinvigorated the original promise of Rule 506(c). By providing a clear explanation of how minimum investment amounts and related investor representations may satisfy the accredited investor verification requirement, the guidance offers a means of using Rule 506(c) that is more straightforward and less intrusive than issuers previously have seen the rule to be. At least for well-established corporations and private fund sponsors (for which imposing significant minimum investment amounts is typically not a problem), new and fruitful forms of offering-related publicity now may become a practical option.
Of course, an issuer that decides to engage in general solicitation under Rule 506(c) must take care that its public statements are truthful, properly vetted, and consistent with its offering materials, in order to avoid anti-fraud issues under Rule 10b-5 or state law. In addition, where an offering also is being made outside the United States, the issuer must ensure that any public marketing done in reliance on Rule 506(c) does not conflict with relevant foreign regulations.
SEC Staff Clarifies Stance on Crypto Mining
On March 20, 2025, the U.S. Securities and Exchange Commission took a step towards clarifying its position on crypto mining activities. In a recent statement, the SEC’s Division of Corporation Finance provided non-binding guidance on the application of federal securities laws to proof-of-work (PoW) mining activities, stating that such activities are beyond the SEC’s purview. This move aims to offer greater clarity to the market amidst ongoing regulatory uncertainties surrounding crypto assets.
The statement addresses crypto asset mining on public, permissionless networks using the PoW consensus mechanism. PoW mining involves using computational resources to validate transactions and add new blocks to a blockchain network. Miners are rewarded with newly minted crypto assets for their efforts.
The Division of Corporation Finance concluded that PoW mining activities do not involve the offer and sale of securities under the Securities Act or the Exchange Act, although it qualified its conclusion with footnoted statements indicating that any specific determination remains reliant on the facts and circumstances of a particular arrangement.
The statement applies the Howey test to determine whether general mining activities constitute investment contracts. The test evaluates whether there is an investment of money in an enterprise with a reasonable expectation of profits derived from others’ efforts. The SEC found that PoW mining does not meet these criteria, as miners rely on their own efforts to earn rewards. The statement further explained that combining computational resources in mining pools does not change the nature of the activity, as miners in pools still rely on their own efforts to earn rewards, not on others’ efforts. Therefore, participants in these activities do not need to register such transactions with the SEC under the Securities Act or fall within its exemptions.
Lone Democrat Commissioner Caroline Crenshaw expressed concerns about the statement, cautioning against interpreting it as a “wholesale exemption for mining.” She emphasized that the statement employs arguably circular reasoning, is non-binding, and that the SEC will continue to evaluate mining activities on a case-by-case basis. Crenshaw compared the mining statement to a previous statement on meme coins, which she believed was also misinterpreted as a broad exemption.
As the crypto industry continues to evolve, regulatory clarity remains crucial for fostering innovation while protecting investors. Crypto enthusiasts may believe the SEC’s latest statement is a step in the right direction, but market participants should remain vigilant and stay informed about ongoing regulatory developments.
SEC Marketing Rule Update: New Staff FAQs on Performance Presentations
On March 19th, Staff from the Securities and Exchange Commission (SEC) issued much needed (and anticipated) relief in the form of two new frequently asked questions (FAQs) related to rule 206(4)-1 under the Investment Advisers Act of 1940 (the Marketing Rule).
Key Takeaways
The Staff’s “open door” policy, in which it invites comments from industry participants on their top-of-mind concerns and regulatory “sticking points,” is underway.
Don’t skip the footnotes! The FAQs provide useful additional context. For example:
gross and net performance of the total portfolio do not need to be presented on the same page to meet the “prominent” requirement – in some cases, presenting this information prior to the extracted performance and/or portfolio characteristic may be sufficient;
while the FAQ provides some examples of typical portfolio characteristics or risk metrics (e.g., yield, coupon rate, contribution to return, volatility, sector or geographic returns, attribution analysis, Sharpe Ratio, Sortino Ratio), the Staff provides in a footnote other examples which in its view, would not be covered by the FAQ (e.g., total return, time-weighted return, return on investment, internal rate of return, multiple of invested capital, or total value to paid in capital); and
with regard to portfolio characteristics and risk metrics, the Staff is not opining on whether any such characteristics or metrics constitute “performance” under the Marketing Rule (and thus would be subject to all other aspects of the Marketing Rule).
Note that the FAQs primarily address a narrow aspect of the Marketing Rule – specifically, rule 206(4)-1(d)(1), which requires that any presentation of gross “performance” also present net performance – it does not alter other obligations when presenting “performance” or the more general obligations under the general prohibitions (rule 206(4)-1(a)) or section 206 antifraud provisions.
The Issues
The first FAQ addresses a widely-know “pain point” for investment advisers when seeking to include in marketing materials individual portfolio positions (or groups of positions from within a portfolio), which falls within the definition of “extracted performance” under the Marketing Rule and must therefore be presented on a net basis. Doing so has been challenging for advisers because such fees are typically charged at the portfolio level. This presents the adviser with a difficult decision:
developing an allocation approach that at best, serves a regulatory purpose but no business purpose and, at worst, may result in misleading investors; or
deciding not to present the information despite believing that the information is meaningful to clients and potential clients.
The second FAQ presents a different but related challenge for advisers: determining if a portfolio characteristic or risk metric falls within the meaning of “performance” (which is not defined in the Marketing Rule) and, therefore, must also be presented on a net basis. Such a result similarly restrains an adviser’s ability to present meaningful information about an adviser’s strategy and risk management processes because those metrics often do not lend themselves to net-of-fee presentation (as required under the Marketing Rule).
What the FAQs Permit
The Staff has set forth a “safe harbor” where it essentially offers a no-action position for an adviser who includes in an advertisement either “extracted performance” (which would include presenting case studies or lists of individual investments) or characteristics of a portfolio or investment, in both cases on a gross basis only, if:
the extracted performance and/or portfolio characteristic is clearly identified as being calculated “gross” (or without the deduction of fees and expenses);
the extracted performance and/or portfolio characteristic is accompanied by a presentation of the total portfolio’s gross and net performance;
the gross and net performance of the total portfolio is presented with at least equal prominence to, and in a manner designed to facilitate comparison with, the extracted performance and/or portfolio characteristic; and
the gross and net performance of the total portfolio is calculated over a period that includes the entire period over which the extracted performance and/or portfolio characteristic is calculated.
Texas Legislature Proposes Amendments to Texas Business Organizations Code
On February 27, 2025, a significant bill affecting entities organized under Texas law was filed in the Texas Legislature as Senate Bill 29 by Senator Bryan Hughes and as House Bill 15 by Representative Morgan Meyer. The Senate and House bills are currently identical and are referred to herein as the “Bill.” The Bill proposes a series of amendments to the Texas Business Organizations Code (“TBOC”) that apply to domestic Texas entities. Most of the amendments are applicable to Texas corporations, including in particular Texas corporations having shares listed on a national securities exchange. The authors of the Bill believe the amendments would reinforce corporate governance protections in Texas and reduce the risk of opportunistic shareholder litigation.
These reforms follow the commencement of operation of specialized Business Courts in Texas last fall and coincide with ongoing efforts to develop a new Texas-based stock exchange in Dallas. Together, these initiatives signal an ongoing commitment in Texas to providing a business-friendly jurisdiction that offers a stable legal environment for corporate governance and investment.
Many of the provisions of the Bill are tailored for publicly traded companies listed on a national securities exchange. The Bill would expand the definition of “national securities exchange” to include exchanges registered with the Securities and Exchange Commission as well as any stock exchange with its principal office in Texas that has received approval to operate by the Texas Securities Commissioner. [Bill Section 1; Amending TBOC Section 1.002(55-a).]
We discuss other key provisions of the Bill below.
Other states’ laws governing internal affairs and governance
The Bill provides that although a Texas entity’s managerial officials, in exercising their powers, may consider the laws and judicial decisions of other states and the practices observed by entities formed in other states, the failure to do so does not constitute or imply a breach of the TBOC or of any duty arising under Texas law. In fact, the Bill is clear that the plain meaning of the text of the TBOC “may not be supplanted, contravened, or modified by the laws or judicial decisions of any other state.” [Bill Section 2; Adding TBOC Section 1.056.]
Choice of forum and waiver of jury trial
The Bill would amend the TBOC to clarify that a domestic entity’s governing documents may require that one or more courts in Texas having jurisdiction shall serve as the exclusive forum and venue for any internal entity claims. [Bill Section 3; Amending TBOC Section 2.115(b).] For purposes of the TBOC, an “internal entity claim” means a claim of any nature, including a derivative claim in the right of an entity, that is based on, arises from or relates to the internal affairs of the entity [TBOC Sec. 2.115(a)].
The Bill would also add a new section to the TBOC to permit the governing documents of a Texas entity to contain an enforceable waiver of the right to jury trial if specified conditions are satisfied. Some commentators have questioned whether such a provision would be found to be constitutional because the Texas Constitution provides that the right to jury trial “shall remain inviolate.” In an attempt to satisfy the standards established in prior Texas case law for enforceable jury trial waivers, the Bill affirmatively states that a person’s waiver of jury trial is knowing and informed if the person (1) voted for or affirmatively ratified the governing document containing the waiver, (2) acquired an equity security in the entity when the waiver was included in the governing documents, or (3) is shown by evidence in a court proceeding to have knowingly and informedly consented or acquiesced to the waiver. [Bill Section 4; Adding TBOC Section 2.116.]
Codification of the business judgment rule
The Bill seeks to codify the business judgment rule in Texas by stating that, in the case of a Texas for-profit corporation having shares listed on a national securities exchange or affirmatively electing in its governing documents to be governed by this new provision, directors are presumed to act (1) in good faith, (2) on an informed basis, (3) in furtherance of the interests of the corporation, and (4) in a manner consistent with the law and the corporation’s governing documents. Neither the corporation nor its shareholders would have a cause of action against the corporation’s officers and directors unless one or more of the four preceding presumptions are rebutted by the claimant and the claimant proves both a breach of duty and that the breach involved fraud, intentional misconduct, an ultra vires act or a knowing violation of law. In any legal proceeding, the claimant must state with particularity the circumstances constituting the fraud, intentional misconduct, ultra vires act or knowing violation of law. The provision expressly states that it is not intended to affect any exculpation of monetary liability included in the corporation’s certificate of formation pursuant to TBOC Section 7.001. The Bill would also apply the same standards to any claims against directors or officers for breach of duty as a result of their authorization or performance of any conflict-of-interest contract or transaction with an interested director or officer under the TBOC’s interested person statute, if the corporation has shares listed on a national securities exchange or elects to be governed by the new business judgment rule provision. [Bill Sections 9 and 10; Adding TBOC Sections 21.418(f) and 21.419.]
Inspection of books and records
The Bill would amend the shareholder inspection rights provisions of the TBOC to clarify that a shareholder making a demand to inspect a Texas for-profit corporation’s books and records is not entitled to review emails, text messages or similar electronic communications, or information from social media accounts, unless the information affects an action by the corporation. Further, building on the existing statutory principle that a shareholder is not permitted to make a books and records demand for an improper purpose, the Bill would provide that, in the case of a corporation having shares listed on a national securities exchange or electing in its governing documents to be governed by the business judgment rule provisions, a written inspection demand will not be for a proper purpose if the corporation reasonably determines that the demand is in connection with a derivative proceeding that has been instituted or is expected to be instituted by the demanding holder or the holder’s affiliate, or if the demand is in connection with an active or pending civil lawsuit in which the demanding holder or the holder’s affiliate is or is expected to be an adversarial named party. [Bill Section 4, Amending TBOC Section 21.218.]
Advance determinations of independent and disinterested directors
The Bill would permit the board of directors of a Texas for-profit corporation having shares listed on a national securities exchange to adopt resolutions that authorize the formation of a committee of independent and disinterested directors to review and approve transactions, whether or not contemplated at the time of the committee’s formation, involving the corporation or any of its subsidiaries and a controlling shareholder, director or officer. In a novel new provision, the corporation adopting such a resolution would be able to petition a court of appropriate jurisdiction to hold an evidentiary hearing to validate the status of committee members as independent and disinterested.
There are various procedural provisions regarding this process that are beyond the scope of this alert. However, importantly, the new provision states that the court’s determination that the directors are independent and disinterested is dispositive in the absence of facts, not presented to the court, constituting evidence sufficient to prove that one or more of the directors is not independent and disinterested with respect to a particular transaction. Accordingly, the corporation may be able to avoid in subsequent litigation issues of whether directors are independent and disinterested. [Bill Sections 7 and 8; Adding TBOC Sections 21.416(g) and 21.4161.] The Bill also adds to the TBOC provisions governing shareholder derivative proceedings similar provisions that would authorize a court to make an advance dispositive determination as to whether the directors who are involved in making a decision whether to pursue a derivative action claim on behalf of the corporation are disinterested and independent. [Bill Section 13; Amending TBOC Section 21.554.]
Derivative litigation
The Bill would amend the TBOC to provide, for a Texas for-profit corporation having common shares listed on a national securities exchange or electing to be governed by the new business judgment rule provision, that a shareholder may not institute or maintain a derivative proceeding on behalf of the corporation unless the shareholder beneficially owns, at the time of instituting the derivative proceeding, a number of common shares to meet the required ownership threshold to institute a derivative proceeding in the right of the corporation as specified in the corporation’s certificate of formation or bylaws. However, that required ownership threshold may not exceed 3 percent of the corporation’s outstanding shares. [Bill Section 12; Adding TBOC Section 21.552(a)(3).] For these purposes, a “shareholder” can be a holder of record, a beneficial owner, or under a proposed amendment, two or more shareholders acting in concert. [Bill Section 11, Amending Section 21.551(2)(c).]
Disclosure-only settlements
Section 21.561 of the TBOC specifies certain circumstances in which a plaintiff’s attorneys may be awarded fees and expenses in a derivative proceeding, including the condition that the court finds the proceeding has resulted in a substantial benefit to the corporation. The Bill would amend this section of the TBOC to provide that a substantial benefit does not include “additional or amended disclosures made to shareholders, regardless of materiality.” [Bill Section 14; Adding TBOC Section 21.561(c).]
Status of Bill
The full text of SB 29 is available here. HB 15 is an identical companion bill. During the week of March 10, 2025, the Bill was heard in the Senate State Affairs Committee, which is chaired by Senator Hughes, and in the House Judiciary & Civil Jurisprudence Committee. The Bill was left pending in both Committees, and there was no significant testimony at the hearings in opposition to the Bill. Accordingly, the prospects for passage of the Bill by the Texas Legislature appear to be positive. However, the Bill has attracted a negative fiscal note from the Office of Texas Secretary of State, which estimates that the cost of implementing the amendments to TBOC Section 4.051 would be $1,752,965 for fiscal year 2026 and $513,040 annually for each fiscal year thereafter. If passed, the Bill would take effect on September 1, 2025, unless adopted by a two-thirds vote in both the Senate and House, in which case it would become immediately effective. In any case, any existing derivative proceedings would be grandfathered under pre-existing laws after the Bill’s amendments take effect.
No Soup for You – SEC Commissioners Revoke Authority of Director of Enforcement to Launch Investigations
In a famous Seinfeld episode, a master soup maker had strict rules for ordering his delicious confections. A violation of his rules, resulted in “No soup for you!” Just like the soup maker who had the power to withhold soup from anyone who violated the rules for ordering soup, the U.S. Securities and Exchange Commission (SEC) announced its final rule rescinding the delegation of authority that had allowed the SEC’s Director of the Division of Enforcement to “issue formal orders of investigation” — i.e., the authority to unilaterally open new investigations and issue subpoenas.
For the past 15 years, the SEC has afforded the Director the discretion to authorize and open formal investigations and issue subpoenas on behalf of the agency. This final rule effectively returns that authority solely to the SEC’s five Commissioners, restoring the pre-2009 framework. In other words, the Commissioners will exercise greater (and exclusive) control over whether to authorize formal orders to open investigations and issue subpoenas. [1]
According to the SEC, the change is based on its “experience with its nonpublic investigations” and “is intended to increase effectiveness by more closely aligning the Commission’s use of its investigation resources with Commission priorities.” [2] Centralizing this power with the full Commission may introduce more deliberation and oversight—but it could also lead to fewer or delayed investigations, depending on the Commission’s priorities and capacity to act.
This action follows vigorous criticism by FinTech companies that the SEC has been regulating the industry by enforcement and not through rules proposed by the SEC that are subject to public comment under the Administrative Procedure Act. SEC Commissioner Hester Peirce recently stated she has been concerned the use of enforcement was “part of [a] … larger strategy to use [the SEC’s] enforcement tool to regulate the crypto industry.” [3] The final rule stripping the Director of the power to launch investigations without the approval of the Commissioners will likely be cheered by the FinTech industry.
The new rule is set to become effective 30 days after its publication in the Federal Register.
[1] Release Nos. 33-11366; 34-102552; IA-6862; IC-35492 (March 10, 2025), available at https://www.sec.gov/files/rules/final/2025/33-11366.pdf.[2] Id.[3] Getting Back on Base: Statement of Commissioner Hester M. Peirce on the Dismissal of the Civil Enforcement Action Against Coinbase (Feb. 27, 2025), available at: https://www.sec.gov/newsroom/speeches-statements/peirce-statement-coinbase-022725.
Scott N. Sherman also contributed to this article.