Pub Date : 2019-08-27DOI: 10.36639/MBELR.9.1.SIREN
J. B. Heaton
For an investor, litigation funding is too tempting to resist. Litigation funding promises that most elusive of investment returns: ones uncorrelated with an investor’s other investment returns, like those from stocks and bonds and commodities. Litigation funding also invests in a world that seems fraught with possible pricing inefficiencies. It seems plausible — even likely — that a team of smart lawyer-underwriters can identify high-value litigation investments to generate superior returns for litigation-funding investors. But more than a decade of experience suggests that the promise of litigation funding is a siren song. The promise draws investors into the water, but the payoffs may be meagre and rare. While litigation funding has always been controversial with defendants and business trade associations, the real problem is that the investment class is a poor one. First, high-stakes civil litigation is far more complex and random than most investors understand. There are an overwhelming number of ways that litigants can lose and far fewer paths to significant victories. Second, only a subset of good cases — from an investment perspective — is likely to find its way to funders. Third, litigation funding is probably prone to optimism bias, causing litigation funders to overestimate the probability of victory in their cases. Finally, litigation funding is fungible with little value added by the funder, suggesting that competition will drive down any significant profits that have existed in the business previously. While litigation funding serves a valuable social purpose when it allows meritorious cases to proceed that otherwise would not be pursued, we can expect investor success in the field to be rare and likely limited to those funders with the most litigation savvy and the best luck. Nevertheless, investors are unlikely to give up on the space despite the large prospect of poor returns.
{"title":"The Siren Song of Litigation Funding","authors":"J. B. Heaton","doi":"10.36639/MBELR.9.1.SIREN","DOIUrl":"https://doi.org/10.36639/MBELR.9.1.SIREN","url":null,"abstract":"For an investor, litigation funding is too tempting to resist. Litigation funding promises that most elusive of investment returns: ones uncorrelated with an investor’s other investment returns, like those from stocks and bonds and commodities. Litigation funding also invests in a world that seems fraught with possible pricing inefficiencies. It seems plausible — even likely — that a team of smart lawyer-underwriters can identify high-value litigation investments to generate superior returns for litigation-funding investors. But more than a decade of experience suggests that the promise of litigation funding is a siren song. The promise draws investors into the water, but the payoffs may be meagre and rare. While litigation funding has always been controversial with defendants and business trade associations, the real problem is that the investment class is a poor one. First, high-stakes civil litigation is far more complex and random than most investors understand. There are an overwhelming number of ways that litigants can lose and far fewer paths to significant victories. Second, only a subset of good cases — from an investment perspective — is likely to find its way to funders. Third, litigation funding is probably prone to optimism bias, causing litigation funders to overestimate the probability of victory in their cases. Finally, litigation funding is fungible with little value added by the funder, suggesting that competition will drive down any significant profits that have existed in the business previously. While litigation funding serves a valuable social purpose when it allows meritorious cases to proceed that otherwise would not be pursued, we can expect investor success in the field to be rare and likely limited to those funders with the most litigation savvy and the best luck. Nevertheless, investors are unlikely to give up on the space despite the large prospect of poor returns.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"83 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-08-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82998491","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Confronted with eroding market confidence in a country's debt obligations, what's a local politician to do? Major changes to fiscal policies are inevitably controversial back home. Securing financial support from multilateral official sector entities usually involves knuckling under to unpopular economic reforms. But there is one measure all politicians can take quickly and cheaply – cross their hearts, hope to die, and solemnly promise to treat debt service payments as the first, the highest and the most sacred priority in the use of public funds. The question is, what are such promises worth in practice? We argue not much.
{"title":"Nailing the Flag to the Mast – Promises of Super-Priority in Public Debt","authors":"M. Gousgounis, G. M. Gulati, L. Buchheit","doi":"10.2139/ssrn.3432139","DOIUrl":"https://doi.org/10.2139/ssrn.3432139","url":null,"abstract":"Confronted with eroding market confidence in a country's debt obligations, what's a local politician to do? Major changes to fiscal policies are inevitably controversial back home. Securing financial support from multilateral official sector entities usually involves knuckling under to unpopular economic reforms. But there is one measure all politicians can take quickly and cheaply – cross their hearts, hope to die, and solemnly promise to treat debt service payments as the first, the highest and the most sacred priority in the use of public funds. The question is, what are such promises worth in practice? We argue not much.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"30 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90268636","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Recent regulatory restrictions on proprietary trading by banks, such as the “Volcker Rule”, have elevated discussion about the potential costs to non-financial firms of restricting investments of major institutional investors, such as banks. History provides some hints to the possible costs of excluding banks from “speculative” investments. On February 15th, 1936 the Office of the Comptroller of the Currency unexpectedly announced that member banks of the Federal Reserve System, one of the largest investors in corporate bonds, were no longer allowed to purchase securities rated as speculative grade by rating agencies. This controversial ruling affected more than half of all publicly traded corporate bonds and represented the inception of federal rating-contingent bank investment restrictions. Using a fuzzy regression discontinuity at the investment grade cut-off, I find that following the announcement financing constraints induced by the exclusion of banks from the speculative grade corporate debt market cause a persistent 3-5% decline in the equity market value of firms requiring speculative financing. I find that this decline is concentrated among firms in industries reliant on external financing. This decline does not, however, appear to be driven by a change in perceived default risk or direct debt financing costs, since bond yields do not change. Instead, I find that firms who initially require speculative financing reduce the size of their debt issuances to improve their credit rating. These firms subsequently have less long-term debt, fewer investments, and slower asset growth in the years following the ruling. Overall these results provide evidence that regulators may need to consider the costs to non-financial firms of policies that attempt to curb speculative trading by banks.
{"title":"The Costs of Curbing Speculation: Evidence from the Establishment of 'Investment Grade'","authors":"Asaf Bernstein","doi":"10.2139/SSRN.2700814","DOIUrl":"https://doi.org/10.2139/SSRN.2700814","url":null,"abstract":"Recent regulatory restrictions on proprietary trading by banks, such as the “Volcker Rule”, have elevated discussion about the potential costs to non-financial firms of restricting investments of major institutional investors, such as banks. History provides some hints to the possible costs of excluding banks from “speculative” investments. On February 15th, 1936 the Office of the Comptroller of the Currency unexpectedly announced that member banks of the Federal Reserve System, one of the largest investors in corporate bonds, were no longer allowed to purchase securities rated as speculative grade by rating agencies. This controversial ruling affected more than half of all publicly traded corporate bonds and represented the inception of federal rating-contingent bank investment restrictions. Using a fuzzy regression discontinuity at the investment grade cut-off, I find that following the announcement financing constraints induced by the exclusion of banks from the speculative grade corporate debt market cause a persistent 3-5% decline in the equity market value of firms requiring speculative financing. I find that this decline is concentrated among firms in industries reliant on external financing. This decline does not, however, appear to be driven by a change in perceived default risk or direct debt financing costs, since bond yields do not change. Instead, I find that firms who initially require speculative financing reduce the size of their debt issuances to improve their credit rating. These firms subsequently have less long-term debt, fewer investments, and slower asset growth in the years following the ruling. Overall these results provide evidence that regulators may need to consider the costs to non-financial firms of policies that attempt to curb speculative trading by banks.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"35 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85556546","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper measures the influence of "say on pay" (SoP) - mandatory shareholder votes on top-management compensation - on the market value of corporate voting rights. By exploiting the staggered introduction of SoP regulations across ten major European economies, we show by difference-in-differences (DiD) regressions that the value of voting rights at annual shareholder meetings - extracted from prices of liquid options - has increased for firms with excessive CEO pay, while it has decreased for other companies. Surprisingly, shareholders tend to value advisory SoP votes but not the stricter binding votes. Thus, the option to signal dissent with current compensation via SoP votes is not per se valuable and can actually translate into net costs for shareholders. Finally, the effect of mandatory SoP on voting values is concentrated on the year of introduction and fades out over time. Placebo regressions support the accuracy of our DiD research design.
{"title":"The Value of Say on Pay","authors":"Axel H. Kind, Marco Poltera, Johannes Zaia","doi":"10.2139/ssrn.3337192","DOIUrl":"https://doi.org/10.2139/ssrn.3337192","url":null,"abstract":"This paper measures the influence of \"say on pay\" (SoP) - mandatory shareholder votes on top-management compensation - on the market value of corporate voting rights. By exploiting the staggered introduction of SoP regulations across ten major European economies, we show by difference-in-differences (DiD) regressions that the value of voting rights at annual shareholder meetings - extracted from prices of liquid options - has increased for firms with excessive CEO pay, while it has decreased for other companies. Surprisingly, shareholders tend to value advisory SoP votes but not the stricter binding votes. Thus, the option to signal dissent with current compensation via SoP votes is not per se valuable and can actually translate into net costs for shareholders. Finally, the effect of mandatory SoP on voting values is concentrated on the year of introduction and fades out over time. Placebo regressions support the accuracy of our DiD research design.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"16 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"91234125","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the impact of changes in regulations and policy interventions on systemic risk among European sovereigns measured as volatility spillovers in respective credit risk markets. Our unique intraday CDS dataset allows for precise measurement of the effectiveness of these events in a network setting. In particular, it allows discerning interventions which entail significant changes in network cross-effects with appropriate bootstrap confidence intervals. We show that it was mainly regulatory changes with the ban of trading naked sovereign CDS in 2012 as well as the new ISDA regulations in 2014 which were most effective in reducing systemic risk. In comparison, we find that the effect of policy interventions was minor and generally not sustainable. In particular, they only had a significant impact when implemented for the first time and when targeting more than one country. For the volatility spillover channels, we generally find balanced networks with no fragmentation over time.
{"title":"Effectiveness of Policy and Regulation in European Sovereign Credit Risk Markets: A Network Analysis","authors":"Rebekka Buse, M. Schienle, Jörg Urban","doi":"10.5445/IR/1000092476","DOIUrl":"https://doi.org/10.5445/IR/1000092476","url":null,"abstract":"We study the impact of changes in regulations and policy interventions on systemic risk among European sovereigns measured as volatility spillovers in respective credit risk markets. Our unique intraday CDS dataset allows for precise measurement of the effectiveness of these events in a network setting. In particular, it allows discerning interventions which entail significant changes in network cross-effects with appropriate bootstrap confidence intervals. We show that it was mainly regulatory changes with the ban of trading naked sovereign CDS in 2012 as well as the new ISDA regulations in 2014 which were most effective in reducing systemic risk. In comparison, we find that the effect of policy interventions was minor and generally not sustainable. In particular, they only had a significant impact when implemented for the first time and when targeting more than one country. For the volatility spillover channels, we generally find balanced networks with no fragmentation over time.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"53 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87018736","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Have the Supreme Court’s recent patent eligibility cases changed the behavior of venture capital and private equity investment firms, and if so how? This Article provides empirical data about investors’ answers to those important questions. Analyzing responses to a survey of 475 investors at firms investing in various industries and at various stages of funding, this Article explores how the Court’s recent cases have influenced these firms’ decisions to invest in companies developing technology. The survey results reveal investors’ overwhelming belief that patent eligibility is an important consideration in investment decisionmaking, and that reduced patent eligibility makes it less likely their firms will invest in companies developing technology. According to investors, however, the impact differs between industries. For example, investors predominantly indicated no impact or only slightly decreased investments in the software and Internet industry, but somewhat or strongly decreased investments in the biotechnology, medical device, and pharmaceutical industries. The data and these findings (as well as others described in the Article) provide critical insight, enabling evidence-based evaluation of competing arguments in the ongoing debate about the need for congressional intervention in the law of patent eligibility. And, in particular, they indicate reform is most crucial to ensure continued robust investment in the development of life science technologies.
{"title":"Patent Eligibility and Investment","authors":"David O. Taylor","doi":"10.2139/ssrn.3340937","DOIUrl":"https://doi.org/10.2139/ssrn.3340937","url":null,"abstract":"Have the Supreme Court’s recent patent eligibility cases changed the behavior of venture capital and private equity investment firms, and if so how? This Article provides empirical data about investors’ answers to those important questions. Analyzing responses to a survey of 475 investors at firms investing in various industries and at various stages of funding, this Article explores how the Court’s recent cases have influenced these firms’ decisions to invest in companies developing technology. The survey results reveal investors’ overwhelming belief that patent eligibility is an important consideration in investment decisionmaking, and that reduced patent eligibility makes it less likely their firms will invest in companies developing technology. According to investors, however, the impact differs between industries. For example, investors predominantly indicated no impact or only slightly decreased investments in the software and Internet industry, but somewhat or strongly decreased investments in the biotechnology, medical device, and pharmaceutical industries. The data and these findings (as well as others described in the Article) provide critical insight, enabling evidence-based evaluation of competing arguments in the ongoing debate about the need for congressional intervention in the law of patent eligibility. And, in particular, they indicate reform is most crucial to ensure continued robust investment in the development of life science technologies.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"289 3","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-02-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"72567173","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Much has been written and discussed in banking circles about recent rollbacks in prudential regulation, with some seeing the rollbacks as unsafe and others seeing them as allowing stronger financial action. Undiscussed is that the basic taxation of the corporation in the United States—and banks are taxed like ordinary corporations—has a profound impact on the level of debt and equity throughout the economy and in the banking system in particular, and that recent changes to the tax code could affect bank safety, stability, and capitalization levels. We analyze here how and why the 2017 tax act will incentivize banks to be better capitalized, albeit modestly so. For those worried about regulatory rollbacks that decrease bank safety, this tax incentive—which has been unremarked upon and not analyzed in the academic literature, as far as we can tell—offsets some recent regulatory rollbacks. And, more important analytically and potentially for policy, we show that this tax change, if properly expanded, would have a major beneficial safety impact on banks. Properly reformed, the taxation of banks (1) can substantially improve bank safety, at a level that may well rival the improvements from post-crisis regulation and (2) can be done in a revenue-neutral way.
{"title":"The 2017 Tax Act’s Potential Impact on Bank Safety and Capitalization","authors":"M. Roe, M. Troege","doi":"10.2139/SSRN.3268891","DOIUrl":"https://doi.org/10.2139/SSRN.3268891","url":null,"abstract":"Much has been written and discussed in banking circles about recent rollbacks in prudential regulation, with some seeing the rollbacks as unsafe and others seeing them as allowing stronger financial action. Undiscussed is that the basic taxation of the corporation in the United States—and banks are taxed like ordinary corporations—has a profound impact on the level of debt and equity throughout the economy and in the banking system in particular, and that recent changes to the tax code could affect bank safety, stability, and capitalization levels. \u0000 \u0000We analyze here how and why the 2017 tax act will incentivize banks to be better capitalized, albeit modestly so. For those worried about regulatory rollbacks that decrease bank safety, this tax incentive—which has been unremarked upon and not analyzed in the academic literature, as far as we can tell—offsets some recent regulatory rollbacks. And, more important analytically and potentially for policy, we show that this tax change, if properly expanded, would have a major beneficial safety impact on banks. Properly reformed, the taxation of banks (1) can substantially improve bank safety, at a level that may well rival the improvements from post-crisis regulation and (2) can be done in a revenue-neutral way.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"27 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-02-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88502986","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Domino Causal Theory in this paper takes a game theoretic approach to assessing the causes of the financial crisis of 2007-9. The paper assesses the relationship between the causal contributors highlighted at each stage and uses descriptive game theory to determine whether the impact of the 2007-09 crisis could have been resolved. The paper focuses on the causes of the crisis based on the pre-crisis events that occurred in the UK and US and as such the concept of a Global Financial Regulation Organisation as a resolution to prevailing financial regulation failures is limited to the critical analysis of these two jurisdictions. The Domino Causal Theory developed by the author derives from descriptive models of Game Theory. The domino causal theory categorizes the causes of the crisis into four stages 1) regulatory failures 2) Market failures 3) The failure of Non-Governmental Organisation 4) Depositor panic. At each stage the author will critically assess the failures that occurred prior to the crisis, it determines whether they have been resolved and whether these failures support the need for a GFRO capable of mitigating the occurrence of another crisis.
Please note that the article cited 'The Entrepreneurial Nature of Salespeople: How They Justify Unethical Behaviors', was applied by SSRN I have no involvement in its application or to this paper please contact SSRN directly to discuss why this has been applied to this article.
{"title":"A Game Theoretic Approach to Assessing the Causes of the Financial Crisis and the Extent to Which a Global Financial Regulatory Organization May Be Necessary to Resolve the Issues and Lasting Impact of the 2007–9 Financial Crisis?","authors":"Khadijah Gibril Sesay","doi":"10.2139/ssrn.3329615","DOIUrl":"https://doi.org/10.2139/ssrn.3329615","url":null,"abstract":"The Domino Causal Theory in this paper takes a game theoretic approach to assessing the causes of the financial crisis of 2007-9. The paper assesses the relationship between the causal contributors highlighted at each stage and uses descriptive game theory to determine whether the impact of the 2007-09 crisis could have been resolved. The paper focuses on the causes of the crisis based on the pre-crisis events that occurred in the UK and US and as such the concept of a Global Financial Regulation Organisation as a resolution to prevailing financial regulation failures is limited to the critical analysis of these two jurisdictions. The Domino Causal Theory developed by the author derives from descriptive models of Game Theory. The domino causal theory categorizes the causes of the crisis into four stages 1) regulatory failures 2) Market failures 3) The failure of Non-Governmental Organisation 4) Depositor panic. At each stage the author will critically assess the failures that occurred prior to the crisis, it determines whether they have been resolved and whether these failures support the need for a GFRO capable of mitigating the occurrence of another crisis. <br><br>Please note that the article cited 'The Entrepreneurial Nature of Salespeople: How They Justify Unethical Behaviors', was applied by SSRN I have no involvement in its application or to this paper please contact SSRN directly to discuss why this has been applied to this article.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"66 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-02-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90913756","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Theory suggests that government aid to banks may either reduce or increase systemic risk. We are the first to address this issue empirically, analyzing the Troubled Assets Relief Program (TARP). Analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for larger and safer banks, and those in better local economies. This occurred primarily through a capital cushion channel that reduced market leverage by increasing the value of common equity. Results are robust to endogeneity and selection bias checks. Findings yield policy conclusions about whether to aid banks, the best targets for future assistance, and short-term versus long-term effects.
{"title":"Did TARP Reduce or Increase Systemic Risk? The Effects of Government Aid on Financial System Stability","authors":"Allen N. Berger, Raluca A. Roman, John Sedunov","doi":"10.2139/ssrn.2844817","DOIUrl":"https://doi.org/10.2139/ssrn.2844817","url":null,"abstract":"Theory suggests that government aid to banks may either reduce or increase systemic risk. We are the first to address this issue empirically, analyzing the Troubled Assets Relief Program (TARP). Analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for larger and safer banks, and those in better local economies. This occurred primarily through a capital cushion channel that reduced market leverage by increasing the value of common equity. Results are robust to endogeneity and selection bias checks. Findings yield policy conclusions about whether to aid banks, the best targets for future assistance, and short-term versus long-term effects.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"9 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-01-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78859815","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Shaanan N. Cohney, David Hoffman, Jeremy M. Sklaroff, David A. Wishnick
This Article presents the legal literature’s first detailed analysis of the inner workings of Initial Coin Offerings. We characterize the ICO as an example of financial innovation, placing it in kinship with venture capital contracting, asset securitization, and (obviously) the IPO. We also take the form seriously as an example of technological innovation, where promoters are beginning to effectuate their promises to investors through computer code, rather than traditional contract. To understand the dynamics of this shift, we first collect contracts, “white papers,” and other contract-like documents for the fifty top-grossing ICOs of 2017. We then analyze how such projects’ software code reflected (or failed to reflect) their contractual promises. Our inquiry reveals that many ICOs failed even to promise that they would protect investors against insider self-dealing. Fewer still manifested such contracts in code. Surprisingly, in a community known for espousing a technolibertarian belief in the power of “trustless trust” built with carefully designed code, a significant fraction of issuers retained centralized control through previously undisclosed code permitting modification of the entities’ governing structures. These findings offer valuable lessons to legal scholars, economists, and policymakers about the roles played by gatekeepers; about the value of regulation; and the possibilities for socially valuable private ordering in a relatively anonymous, decentralized environment.
{"title":"Coin-Operated Capitalism","authors":"Shaanan N. Cohney, David Hoffman, Jeremy M. Sklaroff, David A. Wishnick","doi":"10.2139/SSRN.3215345","DOIUrl":"https://doi.org/10.2139/SSRN.3215345","url":null,"abstract":"This Article presents the legal literature’s first detailed analysis of the inner workings of Initial Coin Offerings. We characterize the ICO as an example of financial innovation, placing it in kinship with venture capital contracting, asset securitization, and (obviously) the IPO. We also take the form seriously as an example of technological innovation, where promoters are beginning to effectuate their promises to investors through computer code, rather than traditional contract. To understand the dynamics of this shift, we first collect contracts, “white papers,” and other contract-like documents for the fifty top-grossing ICOs of 2017. We then analyze how such projects’ software code reflected (or failed to reflect) their contractual promises. Our inquiry reveals that many ICOs failed even to promise that they would protect investors against insider self-dealing. Fewer still manifested such contracts in code. Surprisingly, in a community known for espousing a technolibertarian belief in the power of “trustless trust” built with carefully designed code, a significant fraction of issuers retained centralized control through previously undisclosed code permitting modification of the entities’ governing structures. These findings offer valuable lessons to legal scholars, economists, and policymakers about the roles played by gatekeepers; about the value of regulation; and the possibilities for socially valuable private ordering in a relatively anonymous, decentralized environment.","PeriodicalId":10698,"journal":{"name":"Corporate Law: Law & Finance eJournal","volume":"32 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2019-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89181019","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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