Two United States congressmen introduced legislation in late December that would exclude certain digital currencies from being defined as securities – a bill that, if enacted, may finally provide the cryptocurrency industry with regulatory clarity regarding when the offer and sale of digital tokens must comply with federal securities laws.

The Token Taxonomy Act of 2018 – introduced on December 20, 2018 by Reps. Warren Davidson (R-Ohio) and Darren Soto (D-Florida) – would, among other things, amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude “digital tokens from the definition of a security,” as well as exempt digital tokens from the registration and reporting requirements of Section 5 of the 1933 Act. The bill effectively defines “digital tokens” as tokens created through the operation of the blockchain process and that are not “a representation of a financial interest in a company, including an ownership or debt interest or revenue share.” The definition explicitly includes such tokens issued through an initial coin offering (ICO, or the process of raising capital in exchange for tokens).

The bill leaves room for the SEC to deem certain “digital units” as securities – an umbrella term meant to represent any “economic, proprietary, or access rights that [are] stored in a computer-readable format” – if such units fall outside the definition of “digital tokens” and are actually meant to serve as equity. And when a party has a “reasonable and good-faith belief” that it is selling a token (versus a security) and the SEC disagrees, the bill grants that party a 90-day safe harbor period wherein it can avoid penalty by halting the sale of all tokens and returning all proceeds.
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New cryptocurrencies and tokens have been popping up all over the place, leading the SEC to set up an initial coin offering (ICO) section on its website and to promote recent enforcement actions in the digital currency space. The proliferation of new tokens offers a growing opportunity for cross-over and cooperation between different federal agencies. The SEC representative at a recent Bar Association of San Francisco panel last week noted that the SEC’s cyber unit is currently looking at dozens of new cryptocurrency or crypto market enforcement actions, including quite a few with the local U.S. Attorney’s office where fraud is implicated.
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It always comes when you least expect it – a government inquiry to investigate your business. While it may instill a sense of panic, there are steps you can take to make sure you’re in the best position possible when the investigation begins.

This blog series developed by Chrysty Esperanza, Litigation Counsel at Square, Inc., will address this main question: When you receive a subpoena, CID, or informal request from the government, how should you respond?


Cooperation and Voluntary Disclosure Issues – Benefits + Risks of Self Reporting

The Foreign Corrupt Policies Act (FCPA) unit at the DOJ recently enacted its Corporate Enforcement Policy. According to the policy, if a company self-reports an FCPA violation and cooperates fully and timely, there is a presumption of declination of prosecution.  However, there is an exception – the presumption will not apply if there are aggravating circumstances that warrant a criminal investigation,
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It always comes when you least expect it – a government inquiry to investigate your business. While it may instill a sense of panic, there are steps you can take to make sure you’re in the best position possible when the investigation begins.

This blog series by Chrysty Esperanza, Litigation Counsel at Square, Inc., will address this main question: When you receive a subpoena, CID, or informal request from the government, how should you respond?


When Civil and Criminal Investigations Collide

Civil and criminal investigations are not as separate as you may think, and it is quite possible they may blend together.  While an internal investigation may be launched in response to a civil request from a government agency, the degree of cooperation between civil and criminal government agencies means an open civil investigation can easily trigger a criminal inquiry. When parallel civil and criminal investigations occur jointly, the government agencies may share the work and information from their respective investigations.  For example, a subpoena from the Securities and Exchange Commission (SEC) will always note that information discovered during the investigation can be shared with multiple agencies, like the Department of Justice (DOJ). 
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At a recent panel organized by San Francisco’s Federal Bar Association, the San Francisco Regional Director of the Securities and Exchange Commission (SEC), Jina Choi, confirmed that the agency continues to focus on investor fraud in the pre-IPO private market space. Highlighting enforcement actions against the non-public Zenefits, Credit Karma, and Theranos[1]

SEC magnifying glassRamapo, New York Town Supervisor Christopher St. Lawrence heads to trial this week on federal securities fraud charges. St. Lawrence is one of two city officials charged in the case; his codefendant N. Aaron Troodler pleaded guilty earlier last month. The SDNY U.S. Attorney’s Office promoted the Troodler conviction as the first time municipal bond fraud has been successfully prosecuted under federal securities laws. The St. Lawrence trial is expected to draw lots of attention; St. Lawrence is an elected official who has spent nearly two decades at the helm of his town.
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people talking at courthouseRecent corporate guilty pleas can be expected to have serious implications for the individual executives and employees alleged to have been involved in the conduct under scrutiny. But there are other factors at play in such cases that can make even more of a difference to the eventual outcomes for individuals than whether their corporate

whistleblower

In a company with a robust compliance culture, potential whistleblowers can express their concerns without fear of retribution. By contrast, the penalty for a culture that silences whistleblowers just got steeper.  Companies caught punishing those who raise red flags, especially when they turn out to be lawyers, could be forced to confront documents otherwise inadmissible against the company due to attorney-client privilege. 
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On December 6, 2016, after nearly twenty years of silence on insider trading, the U.S. Supreme Court unanimously affirmed the Ninth Circuit in holding that prosecutors need not show that a tipster received a pecuniary or other tangible benefit for providing inside information where the insider and trader are close friends or relatives. Salman v. United States, U.S. Supreme Court Case No. 15-628.

Salman was convicted for trading on information received from his friend, Michael Kara, who had in turn received the information from his brother and Salman’s brother-in-law, Maher Kara, a former Citigroup investment banker. Although Salman was not the insider, he was convicted based on so-called “tippee liability,” where the insider discloses nonpublic information to an outsider (a “tippee”) who then trades on the basis of the information, as established by the Supreme Court in its landmark Dirks decision. Dirks v. S.E.C., 463 U.S. 646 (1983).  Under Dirks, a tippee can be liable for insider trading provided the insider received a “personal benefit” from tipping the information, which benefit may be inferred where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.”


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