Law Decoded: Public companies, private markets, crypto offerings and you, Aug. 28–Sept. 4

Editor’s note

It is a cruel twist of fate that during the first hiatus week in Law Decoded’s existence, the SEC put out long-awaited updates to accredited investor qualifications. Upon reading the news, your faithful and ever-vigilant policy editor put down his phone, cast a wistful eye upon the sun’s reflection dancing in the midground of the Atlantic Ocean. Bracing himself with a deep quaff of Corona, he thought ‘Not today.’ Before the sorrow of not being the one to bring the news to you could overwhelm him, he grabbed a battered borrowed surfboard and made for the waves. 

Never one to dwell on the past, I will keep most of this week’s newsletter focused on more recent events. In our continuing mission to boldly present you with only the freshest of takes etc. Last week’s accredited investor shift is too fascinating to pass up, but it ties in with some broader trends about the barrier between public and private markets. 

This week has highlighted U.S. federal protection of publicly traded companies, while also amplifying discussion of what exactly public trading should and should not do. It’s an interesting debate in which crypto is a powerful case study. Aside from being a theoretical new monetary system, cryptocurrencies have a reputation for being among the most volatile investments accessible to the general public. In bringing them to heel, the SEC hopes to at least weed out overt frauds and scams. 

The flip side is that even without the example of crypto many people criticize the SEC for curating walled gardens of private investment for rich insiders. Crypto evangelists harp on about crypto breaching these walls. They do indeed have a point. But so too does the SEC. 

Accreditation rules the nation

Regarding the SEC’s announcement, the basic function of the commission for its nearly 90-year history has been to protect investors, full stop. A derived function is pruned investment markets are more attractive to investors. While everybody acknowledges that an overbearing regulator is bad for business, the commission has played a critical role in seeing the U.S.’s investment markets become the envy of the world since its Great Depression-era origins — though huge forces like the Second World War, decolonization and the collapse of old-world empires, Communism and even American innovation helped out over the years.

The accredited investor classification comes from Reg. D, an exemption to public filing that says some people don’t need as much protection. It dates to the Reagan years, though updates in the 2000s were a big part of ushering in the era of the “unicorn,” a company with a valuation of over $1 billion before its IPO — which doesn’t really happen without private investment. At the same time, recent years have seen private investment under Reg. D consistently dwarf IPO investment, which suggests that the rich can just get richer on the ripest returns while public investors are stuck waiting for companies who are in some sense already past their prime.

Largely due to high-profile attacks on crypto offerings using Reg. D in the U.S. (especially Telegram), 2020 has seen shifts to other exemptions that allow retail investors but have lower caps on how much total money can come in. The new rules are promising in that they open new avenues for people to demonstrate investment savvy rather than just resources to spare as a way of getting accreditation. But then again, will that just incentivize companies to stay private longer?

Remaining private saves firms from expensive disclosures and lets owners keep their power consolidated. But tilting the table further in favor of private equities runs the risk of cutting public markets off from new blood. 

FBI raids teenager’s home in Bitcoin giveaway Twitter hack investigation

The FBI searched the home of a 16-year-old in Massachusetts, who they claim may have masterminded July’s twitter hack alongside Graham Ivan Clark.

Clark is standing trial in Florida, where he faces charges that could add up to centuries behind bars. It seems the second mastermind evaded authorities for a month longer thanks to encrypted messaging services Signal and Wire, which should do a lot to advertise for those services. 

While this unnamed second mastermind has yet to face charges, a troubling component of the case is that it also seems like a really good advertisement for being a publicly traded company in the U.S. Very few murders see manhunts as far-reaching and efficient as this theft of some $117,000 at the expense of TWTR’s reputation. 

On the other hand, murder is generally a state crime that doesn’t invoke federal investigation in the same way as fraud committed across state lines. Given Twitter’s role in modern political discourse, the hack was especially scary because it brought out honest fears that more malicious hackers could have used the same exploit to start wars, 280 characters at a time. 

In defense of Tesla

In a case of a stitch in time saving nine, the FBI busted a Bitcoin ransomware attack aimed at Tesla.

Now-jailed Russian banker Pavel Kriuchkov allegedly spent a month in the U.S. trying to recruit a Tesla employee into a ransomware scheme that authorities say was aiming at extorting $4 million from the company. 

Unlike the Twitter case, which saw the attackers hoodwink an unwitting employee into turning over critical access to accounts, a loyal Tesla employee flagged Kriuckhov to the company, which in turn called on the FBI. The details of the case remain hazy. The original case against Kriuchkov doesn’t even name Tesla; CEO Elon Musk had to do that. 

Meanwhile, TSLA stock is seeing a plummet on the last few days, in step with the broader tech market. 

Further reads 

Jim Harper of the American Enterprise calls on Zcash’s grant committee to put more resources into philanthropic applications of its privacy technology. 

The Center for Strategic and International Studies looks at what China stands to gain from a digital yuan. 

Leaders at Coin Center argue that regulators are unlikely to demand that crypto exchanges restrict services to approved wallet addresses. For now.