Securities Law

Subscribe to Securities Law

The SEC suffered a significant loss last week in its ongoing legal battle with Ripple over the XRP digital token. While the District Court held that Ripple’s initial sales of XRP to institutional investors constituted the sale of unregistered securities, it was a Pyrrhic victory as the court held that all other ways in which Ripple sold or distributed XRP did not involve the sale of unregistered securities. In particular, the court held that Ripple’s program to sell XRP to public buyers on digital asset exchanges, as well as its distribution of XRP as compensation to employees and third parties, did not constitute the offer or sale of securities. The court also rejected the SEC’s arguments that Ripple used the institutional buyers as underwriters to sell XRP to the public. The opinion, if followed by other courts in pending litigation with the SEC, could have a far-reaching impact on the cryptocurrency markets, especially with respect to secondary market crypto trades on digital asset exchanges.               

The Delaware Court of Chancery rejected a lawsuit by a Walt Disney Company stockholder to compel inspection of Disney’s books and records relating to the company’s opposition to Florida’s “don’t say gay” law – a stance that allegedly caused the Governor and legislature to retaliate against Disney.  The decision in Simeone v. The Walt Disney Company (Del. Ch. June 27, 2023) holds that inspection of corporate books and records is not available under Delaware law unless the requesting stockholder – not his or her attorneys, who might have their own agenda – has stated a proper purpose for making such a demand.  It also emphasizes the role that a corporation’s board of directors must play in making business decisions about controversial social and political issues.  In addition, the ruling confirms that a board may exercise its business judgment to consider the interests of “corporate stakeholders” – such as “the workforce that drives a company’s profits” – when making decisions related to building the enterprise’s long-term value.

The gloves are off. The SEC’s recent enforcement actions against leading crypto exchanges suggest that the SEC has decided that time’s up for the crypto industry as it currently exists in the United States.

After spending years urging industry participants to come in and register, the SEC has made clear, by going after some of the biggest players in the space, that it does not intend to tolerate exchange operators’ offering of unregistered crypto trading in the United States, at least as to retail investors where the tokens are securities. From the SEC’s perspective, most crypto tokens are securities, so, if a company wants to provide the securities-like infrastructure to trade those tokens, it must be registered with the SEC – whether as an exchange (matching buyers and sellers), a broker-dealer (trading crypto on behalf of others), or a clearing agency (facilitating trade settlement).

The U.S. Supreme Court held that purchasers of shares sold to the public through a direct listing cannot sue under Section 11 of the Securities Act of 1933 unless they can trace their shares to an allegedly defective registration statement. The short, unanimous decision in Slack Technologies, Inc. v. Pirani (June 1, 2023) appears likely to increase the difficulty of pleading § 11 claims arising from direct listings, thereby requiring dissatisfied purchasers to resort to the Securities Exchange Act of 1934, which imposes stricter standards for liability. The Court declined to comment on Securities Act § 12(a)(2)’s requirements, leaving the issue for the Ninth Circuit on remand.

Walt Disney Parks and Resorts U.S., Inc. (“Disney”), the owner and operator of the Walt Disney World Resort in Florida, has sued Florida’s Governor and other officials for allegedly launching “a targeted campaign of government retaliation” in response to Disney’s opposition to Florida’s so-called “Don’t Say Gay” law.  The Complaint in Walt Disney Parks and Resorts U.S., Inc. v. DeSantis et al., highlights one of the most hotly debated topics in the era of competing ESG and anti-ESG sentiments:  to what extent should corporations take public positions on political and social issues that might not directly relate to the companies’ core business operations? Corporate boards of directors should be attuned to and exercise appropriate oversight over these questions, as well as the related issue of corporate political contributions.

The Supreme Court held today that constitutional challenges to administrative agencies’ structure can be brought in federal district court and need not be raised through an administrative proceeding with subsequent appellate review.  The decision in Axon Enterprise, Inc. v. Federal Trade Commission (U.S. Apr. 14, 2023) – which involved challenges to two federal agencies’ use of Administrative Law Judges (“ALJs”) for enforcement proceedings – considered only the issue of where such challenges can be brought.  The Court did not address substantive questions about whether the ALJ process or the agency structure itself is constitutional – hot topics that could come before the Court in other matters.

A federal district court in Virginia recently held that the federal securities laws can apply to transactions in a foreign issuer’s unsponsored American Depositary Receipts (“ADRs”) that traded over the counter in the United States.  However, the court ruled that statements by the foreign issuer’s U.S. subsidiary had not been sufficiently attributed to the foreign parent so that they could be deemed to have been made “in connection with” purchases of the parent’s ADRs.

On February 23, the U.S. Court of Appeals for the Fourth Circuit reversed a mid-trial grant of judgment as a matter of law against the Securities and Exchange Commission in a jury trial for insider trading.  The decision in SEC v. Clark is a reminder that the SEC can meet its burden of proof by presenting merely circumstantial, rather than direct, evidence of insider trading and that a trial court must not weigh evidence, determine witnesses’ credibility, or substitute its judgment for the jury’s in deciding whether to grant a motion for judgment as a matter of law.