Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • 2nd Circuit: CFPB funding is constitutional

    Courts

    On March 23, the U.S. Court of Appeals for the Second Circuit held that the CFPB’s funding structure is constitutional—splitting from the U.S. Court of Appeals for the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, which concluded that Congress violated the Constitution’s Appropriations Clause when it created what that Court described as a “perpetual self-directed, double-insulated funding structure.” The U.S. Supreme Court is scheduled to review the 5th Circuit’s decision next term (covered by InfoBytes here).

    Meanwhile, the 2nd Circuit concluded that it “cannot find any support” for the 5th Circuit’s determination in Supreme Court precedent, the text of the Constitution text, or in the history of the Appropriations Clause. “Because the CFPB’s funding structure was authorized by Congress and bound by specific statutory provisions, we find that the CFPB’s funding structure does not offend the Appropriations Clause,” the 2nd Circuit wrote. As such, the appellate court affirmed a 2020 district court order requiring the defendant debt collection law office to comply with a civil investigative demand issued by the Bureau in June 2017. As previously covered by InfoBytes, the CID requested information from the defendant as part of a Bureau investigation into whether debt collectors, furnishers, or other persons associated with the collection of debt and furnishing of information have engaged or are engaging in unfair, deceptive, or abusive acts or practices in violation of the CFPA, FDCPA, and FCRA. The defendant objected on several grounds, including that the CID was void ab initio under Seila Law LLC v. CFPB (the defendant contended that “the CFPB Director was shielded from presidential oversight by an unconstitutional removal provision at the time the CID was issued”), and that the Bureau is unconstitutionally funded. As noted in the opinion, the Bureau ratified the CID and the enforcement action against the defendant following the Supreme Court’s decision in Seila Law, and the district court ultimately granted the Bureau’s petition to enforce the CID.

    On review, the 2nd Circuit affirmed the district court’s order, concluding that the CID was not void ab initio because “there is no dispute that the CFPB Director who issued the CID was properly appointed.” The appellate court pointed to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here), which held that “‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the Bureau’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The panel further noted that “[s]ince the CID was issued, there have been three different CFPB Directors appointed by two different presidents, each of whom has been subject to at-will removal at some point in their tenure. There is nothing to suggest that the Director’s removal protection affected the issuance of the CID or the investigation into [the defendant].” The 2nd Circuit further concluded that “the CFPB’s funding structure is not constitutionally infirm under either the Appropriations Clause or the nondelegation doctrine, and that the CID served on [the defendant] is not an unduly burdensome administrative subpoena.”

    Courts CFPB Appellate Second Circuit Fifth Circuit CID Constitution Crowdfunding U.S. Supreme Court

  • Judgments reached in SEC’s first crowdfunding regulation enforcement action

    Securities

    On January 28, the U.S. District Court for the Eastern District of Michigan issued judgments (see here and here) against a real estate company and its CEO in the SEC’s first crowdfunding regulation enforcement action. As previously covered by InfoBytes, the SEC filed a complaint last September alleging that several entities and related individuals participated in a fraudulent scheme to sell nearly $2 million of unregistered securities through two crowdfunding offerings. The complaint alleged that two of the entities issued securities without registering with the SEC, while their principals diverted investor funds for personal use rather than using the funds for the disclosed purposes. Without admitting or denying the SEC’s allegations, the real estate company and the CEO consented to be permanently enjoined from violating certain securities laws. The CEO also agreed to a prohibition on “acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)].” The judgments decreed that, upon motion of the SEC, the court will decide whether disgorgement and/or civil money penalties are appropriate.

    Securities Enforcement SEC Crowdfunding Courts Securities Act Securities Exchange Act

  • SEC announces first crowdfunding enforcement action

    Securities

    On September 20, the SEC brought its first regulation crowdfunding enforcement action against several entities and related individuals allegedly involved in a fraudulent scheme to sell nearly $2 million of unregistered securities through two crowdfunding offerings. According to the SEC’s complaint, two of the entities issued securities without registering with the SEC, while their principals diverted investor funds for personal use rather than using the funds for the disclosed purposes. These actions, the SEC claimed, violated the antifraud and registration provisions of the Securities Act of 1933 and Securities Exchange Act of 1934. Among other things, the SEC claimed that one of the individuals—“a driving force behind both offerings”—also allegedly concealed his participation in the offerings from the public to hide a past criminal conviction arising from a mortgage fraud scheme out of concern that it could deter prospective investors. The SEC also charged the crowdfunding platform that hosted the offering, and its founder and CEO, with violations of the Securities Act and Regulation Crowdfunding for ignoring red flags about the other defendants. The complaint seeks disgorgement plus pre-judgment interest, penalties, permanent injunctions, and officer and director bars. Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, stressed the importance of full and honest disclosures in these types of offerings: “As companies continue to raise funds through crowdfunding offerings, we will hold issuers, gatekeepers and individuals accountable and enforce the protections in place for all investors.”

    Securities Enforcement SEC Crowdfunding Securities Act Securities Exchange Act

  • SEC's temporary amendments to expedite capital raises through securities offerings

    Federal Issues

    On May 4, the SEC announced it plans to make temporary amendments to Regulation Crowdfunding to enable small businesses impacted by Covid-19 to expeditiously “meet their funding needs through the offer and sale of securities.” After receiving feedback from its Small Business Capital Formation Advisory Committee, the SEC decided that small businesses may have difficulty in quickly raising urgently needed capital in short time frames due to current requirements. The temporary final rule provides relief to these small business issuers by, among other things, easing some Regulation Crowdfunding requirements—provided the issuers meet certain criteria—so that they can measure investor interest in the offering before committing the time and taking on the expense of creating “full offering materials” including financial statements. Further, in addition to other time saving measures pursuant to the temporary final rule, the offering does not need to remain open for 21 days or longer, but rather can close once sufficient binding commitments are received to meet its target, allowing the small business issuers to access the funds from the offering faster than they could under existing rules. The amendments are effective as of May 4 and terminate on March 1 for offerings made between May 4 and August 31.

    Federal Issues Agency Rule-Making & Guidance SEC Crowdfunding CARES Act Covid-19 Securities

  • SEC provides additional temporary regulatory relief and assistance to market participants affected by Covid-19

    Federal Issues

    On March 26, the SEC issued a press release announcing an order and a temporary final rule providing temporary relief and assistance to market participants affected by Covid-19. The statement notes that the SEC is providing (i) temporary relief from notarization requirements from March 26 through July 1 to filers in the EDGAR system, subject to certain conditions; (ii) for Regulation A and Regulation Crowdfunding issuers, a temporary extension of 45 additional days to file certain disclosure reports that would otherwise have been due between March 26 and May 31, subject to certain conditions; and (iii) a temporary conditional exemptive order that provides affected municipal advisors with an additional 45 days to file annual updates to Form MA that would have otherwise been due between March 26 and June 30, subject to certain conditions.

    Federal Issues SEC Securities Covid-19 Crowdfunding

  • SEC Issues Investor Bulletin on “SAFE” Crowdfunding Security Offering

    Securities

    On May 9, the SEC’s Office of Investor Education and Advocacy released an Investor Bulletin addressing crowdfunding risks associated with Simple Agreements for Future Equity (SAFE) securities. Regulation Crowdfunding, adopted by the SEC in November 2015 and effective as of May 16, 2016, “permits individuals to invest in securities-based crowdfunding transactions subject to certain thresholds, limits the amount of money an issuer can raise under the crowdfunding exemption, requires issuers to disclose certain information about their offers, and creates a regulatory framework for the intermediaries that facilitate the crowdfunding transactions,” among other things. According to an updated investor bulletin from the SEC, the rule allows individual investors to participate in securities-based crowdfunding offerings through funding portals that are registered with the SEC and members of FINRA. To assist issuers, the SEC published Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers, which outlines investor limits, restrictions, and exemptions.

    SAFE securities. Unlike common stock, SAFE purchasers do not receive a current equity stake in a company. Rather, a SAFE offering is an agreement to provide a future equity stake based on the investment amount only if a particular triggering event occurs. Because of this, the SEC cautioned that investors should pay particular attention to the terms of a given SAFE offering, since there is no guarantee that the necessary triggering event will occur. Furthermore, the SEC warned investors to review other SAFE provisions such as conversion terms, repurchase rights, dissolution rights, and voting rights. The SEC noted that SAFEs were developed to give “sophisticated venture capital investors” the opportunity to invest in “hot” startups in need of capital while avoiding some of the more labored negotiations associated with equity offerings. Moreover, since SAFEs are not standardized, the SEC stressed the importance of investors having a detailed understanding of the terms of these types of offerings.

    Securities SEC Crowdfunding

Upcoming Events