Hey Everyone. Ian Lopez back with the latest developments at the intersection of law and technology. This week, we take a look at a UCLA professor’s attempt to clarify some of the haze around crypto regulation. Also up: crowdfunding SCOTUS briefs, Facebook’s move to knock out Cambridge Analytica lawsuits, and Google’s privacy grilling before congress.
Anything you want to see before the holidays? Thoughts on the year ahead? Get at me via email@example.com or @IanMichaelLopez.
➤➤ Would you like to receive What's Next as an email? Sign up here.
Balancing Protections & Entrepreneurship in the Crypto Securities Debate
Readers of this briefing are no strangers to the spate of recent activity in the cypto market. UCLA Law’s James Park tried synthesizing industry events in a recent academic paper to highlight just when an offering might fall within the purview of securities law.
In a recent chat over all-things-crypto, he told me much of the regulatory woes spurred by the nascent marketplace arise from “the SEC responding to something that developed quickly and normalized,” while trying “not to be seen as stomping entrepreneurship.” That also raises the question of whether securities laws “quash innovation potential.”
Here are a few notable snippets from my 1-1 with Park, edited for length and clarity:
Q: Your paper digs into the SEC deeming Ether a security, then changing its status. What’s the ramifications of such a status change on other initial coin offerings?
It at least raises the possibility that you could get to the point that you could start out as a security and evolve into something else. To some extent, I think that having a clear path towards that outcome could be sort of a plus for your ICO. If you could proceed in a way if you’re initially a security and you’re selling through private placement, methods where you don’t need registration, you could hopefully build it up to a point where you could distribute tokens more widely.
Even with Ether, though, there’s still some questions with centralization. Etherium is actively working to make Ether better. And then the question becomes, well isn’t that centralized management in a sense and thus potentially a security?
What thornier issues can arise from bouncing in and out of security status?
One is maybe you fall out and back in to status. You could imagine a point where you are decentralized but people aren’t active on your community, so it might get to the point where you decide to become more centralized. The other is to what extent do you have to be functional. I think it has to be, you achieve some sort of use by individuals of your platforms not by the promise of speculative returns but because you’ve got a good idea. I think that’s what will distinguish projects that can evolve out of security status and those that fail.
What do you make of the SEC’s pace of enforcement action?
The Nov. 16 enforcement actions—if they had not brought those I’d say they weren’t moving fast enough. I think the fact they were working on this, it sort of signals they are treating the ICO registration requirements seriously. But I have two worries about the amount of time. Number one, if you don’t have a presence in enforcing the law, people don’t know what the law is and go forward with ICOs. Secondly, you’re getting more retail investors who are now potentially trading real dollars in these bitcoins when early on it was people who had invested in bitcoin when it was a dollar and are now reinvesting the proceeds. You’re getting someone who’s buying for $4,000 and reinvesting—I think those are the people we’re most worried about.
You note that if a handful of working, viable projects ensue, the SEC should relax its regulation. How would they?
I think they could expand the amount you could raise without registration through crowdfunding. Now, you could raise about $1 million. Maybe you could modestly raise some of those thresholds so you could more easily get substantial amounts without registering as a security. And so getting more options in reaching the general public, that might balance the need for investor protections with the needs of entrepreneurship. But the burden is really on the tech industry to show these are some projects that are good and work and are worthwhile.
➤ Takeaway: Recent regulatory activity suggests a paced approach by the SEC in tackling crypto registration to both protect consumers and at least avoid looking like it’s hindering entrepreneurship.
On the Radar: Three Things to Know
➤ Tweet On. Social media, it’s the breeding ground of bad ideas. But apparently not in the opinion of Elon Musk. The embattled mastermind behind Tesla, whose tweets sparked an SEC probe, told “60 Minutes” viewers Sunday that the company’s ensuing settlement with the agency—which WSJ said calls for the company to get a grip on Musk’s handle—has done zilch to curb his social media use. But Musk didn’t stop there. Never one to mince words, he noted: “I want to be clear. I do not respect the SEC.”
➤ SCOTUS Rule Curbs Crowd Funds. At least in the case of amicus briefs. As Law.com’s Tony Mauro reports, a “nascent trend” of deploying GoFundMe to collect costs for producing amicus briefs to bring before the Supreme Court may be coming to a halt. A U.S. Alcohol Policy Alliance lawyer withdrew her brief, funded in part by anonymous donors, after hearing form the court clerk’s office that amicus groups need to identify any contributor forking funds for such an effort. The reason? Rule 37.6, a 1997 rule that prevents a case’s parties from purchasing what Mauro writes amount to “a second or supplemental merits brief, disguised as an amicus brief, to get around word limits.” Interestingly, the brief in question isn’t the only on the case fueled by GoFundMe—an organization on the other side of the case has used the site to raise over $26,000.
➤ Killing Cambridge Analytica litigation is what Facebook’s attorneys are trying to do in an ensuing MDL they deem “little more than a broadside against Facebook’s business model.” In a November motion to dismiss, Gibson Dunn’s Orin Snyder, repping the social media company, wrote that plaintiffs have been going on a limb to find a “viable cause of action against Facebook,” putting forth a 255 page complaint that includes “a kitchen sink-like lobbing of 50 claims—all in the hopes that something, anything, sticks.” A hearing for the dismissal motion is set for Jan. 23, and plaintiffs attorneys are charging ahead, writing in their opposition that Cambridge Analytica “represents only the tip of the iceberg with respect to Facebook’s willful pursuit of generating revenue at the expense of its users.”
Google CEO Sundar Pichai
Congress Calls Google on Its Privacy Problem
Sundar Pichai got an earful in a hearing before the House Judiciary Committee Tuesday that touched upon Google’s increasingly controversial practices around data collection, political bias, and the alleged launch of a censored search engine in China.
It’s interesting to consider how little consumers understand the data being collected on them. The NY Times recently found that “at least 75 companies receive anonymous, precise location data from apps whose users enable location services to get local news and weather or other information.” What’s more, Google is facing suits for surreptitious data collection practice.
Whether Congress is taking a cue and brushing up on data collection 101, however, is a different question (Iowa Republican Rep. Steve King, FWIW, got on Pichai about problems with an iPhone). But, according to Caroline Spiezio, Law.com’s in-house reporter covering Congressional (and EU) hearings over tech companies behind-the scenes practices, the fact that hearings over data collection and use “keep happening” shows “it’s important, even if Congress doesn’t realize why it’s important.”
Yet Congress seems to peg Pichai as evasive. When Rep. Ted Poe asked if Google tracked his whereabouts via his phone when he crossed the room, the Google CEO wouldn’t give a yay or nay, the Times reported.
“You make $100 million a year,” Poe said. “You should be able to answer that question… I’m shocked you don’t know. I think Google obviously does.”
➤ Looking Ahead: It’s tough to say what sort of impact hearings will have on practices by companies like Google, though they do show that people are waking up to how their data is being used, or at least making clear they aren’t happy about it.
Thanks for reading! See you next week!