Business Law Institute

Business Law Institute
June 2017

Firm Facts
 Polsinelli serves clients nationally across the full
spectrum of their legal needs:
– 100+ services and 70+ industry areas
– 800+ Attorneys, 20 offices
– Ranked #74 in AmLaw 100 firms

Polsinelli National Footprint
ADDITIONAL OFFICES
Overland Park, KS
St. Joseph, MO

Legal Industry National Recognition
US News and World Report Recognitions
 2015 Law Firm of the Year in Health Care
 2017 “Best Law Firm” recognitions:
– 28 Nationally Recognized Practice Groups, including National Tier 1 Designation for:
• Commercial Litigation
• Corporate Law
• Franchise Law
• Healthcare Law
• Intellectual Property Litigation
• Labor & Employment Litigation
• Public Finance Law
BTI Recognitions
 2016 Most Recommended Law Firms (Top 20%)
 2016 Best Client Relationships (Top 10%)
 2016 Intellectual Property Litigation Powerhouse (1 of only 4 firms)
 2017 Brand Elite (Top 4%)
 2017 Client Service A-Team among 650 U.S. firms (Top 3%)
 2017 Law Firm Leading the Charge in Cybersecurity (1 of only 30 firms)
 2017 Commercial Litigation Powerhouse (1 of only 6 firms)

2017 Chambers USA Recognitions
 National Recognition in Health Care and Real Estate
 Rankings in Nine Practice Areas and 55 Attorneys firm wide
Diversity and Inclusion Recognitions
 2016 Top 100 Law Firms for Women by Law360
 2016 Gold Standard Certification by the Women in Law Empowerment
Forum
 Recognized by the Human Rights Campaign for diversity policies and
practices involving LGBTQ employees
Legal Industry National Recognition

Recent Growth at Polsinelli
Over 200 attorneys have recently joined Polsinelli from
distinguished firms such as:
• Akin Gump
• Armstrong Teasdale
• Baker McKenzie
• Dentons
• DLA Piper
• Foley & Lardner
• Greenberg Traurig
• Holland & Knight
• King & Spalding
• Kirkland Ellis
• McDermott Will & Emery
• Morgan, Lewis & Bockius
• Norton Rose Fulbright
• Paul Hastings
• Quarles & Brady
• Sidley Austin
• Snell & Wilmer
• Steptoe & Johnson

Impact of Rising Interest Rates on
M&A and Real Estate Financing
Activities

Impact of Rising Interest Rates on
M&A and Real Estate Financing
Activities
Joseph Bealmear
Kolin Holladay

Introduction
 What is the impact of rising interest rates on real estate financing
transactions?
– The answer for commercial real estate (CRE) financing transactions, with a few
exceptions, may be: Not so much, with other market fundamentals more
likely to have a more significant impact.
 What is the impact of rising interest rates on M&A activity?
– The answer for M&A activity, with a few exceptions, may be: the speed at
which the rise in interest rates occurs.
• A slow, gradual rise in interest rates that comes from a strong economy will likely be coupled
with rising corporate confidence that could increase deal activity.
• A sudden, large increase in interest rates could create higher volatility in the market due to rate
shock, ultimately dampening deal activity for a period of time.

Some Real Estate Economics Terms:
 NOI or Net Operating Income = annual revenue from
operations – operating expenses (not including debt
service).
 Cap Rate or Capitalization Rate = NOI / market value.
– Rate of return for a real estate investment property
based on income generated by the property.
– RE professionals will often use Cap Rates for
comparable properties to calculate market value as
NOI / Cap Rate.

Some Real Estate Economics Terms:
 DSCR or Debt Service Coverage Ratio = NOI / debt service
obligations.
 LTV or Loan to Value Ratio = loan amount / market value.
[Usually applied to stabilized operating properties.]
 LTC or Loan to Cost Ratio = loan amount / cost of
property. [Land + construction; or purchase price.]

Potential Impacts on Real Estate Transactions?
 Increased cost of debt – larger debt service payments.
 Loan compliance concerns – potential difficulty satisfying
minimum DSCR maintenance covenants or loan
extension tests.
 Smaller loan amounts –
– Due to effect of minimum DSCR underwriting tests.
– Due to larger interest reserves in construction loans.
– Due to the application of maximum LTV ratios to potentially lower
property valuations.

What Might The Impacts Be To Real Estate
Transactions?
 Lower CRE property values and higher Cap Rates.
 Reduced returns to CRE investors – due to higher debt
costs and lower property valuations.

Are Interest Rates Rising? Fed Funds Rates
Fed Funds Rate historical graph – 60 yrs.
Source: https://www.macrotrends.net

 The Fed Funds Rate dropped to below 4% in 2001. Since
then, the Fed Funds Rate has been quite a bit lower, on
average, than the average rate for the previous 30+
years.
 In December 2008, the Fed reduced the Fed Funds Rate
to 0.25% (essentially, 0%), and it remained at this level
for about 7 years.

 As of March of this year, the Fed Funds Rate rose to 1%.
 The Fed has told us to expect more increases in the Fed
Funds Rate. But the Fed Funds Rate is now well below
historical averages.

Fed Funds Rate historical graph – 30 yrs.

Are Interest Rates Rising? LIBOR 30-day
LIBOR 30 day historical graph – 30 yrs.

Are Interest Rates Rising? LIBOR
 There is a strong correlation between the movement of
LIBOR rates over the last 30 years and the Fed Funds
Rate.
 During the period from 2008 – 2015 that the Fed Funds
Rate hovered at or below 0.25%, LIBOR 1-month rates
were comparably low.

Are Interest Rates Rising? LIBOR
 As of March of this year, the LIBOR 1-month rate rose to
about 1%, consistent with the movement of the Fed
Funds Rate.
 The LIBOR 1-month rate is an important index for certain
kinds of variable-rate, shorter-term borrowing, like
construction loans and so-called mini-perm loans.
 If history is our guide, we can expect the LIBOR 1-month
rate to rise with increases in the Fed Funds Rate.

Are Interest Rates Rising?
10-Year Treasuries
10-Year Treasuries historical graph – 30 yrs.

10-Year Treasuries

10-Year Treasuries
 Although the yield on 10-Year Treasuries does not have a
strong direct correlation with the Fed Funds Rate. Over
long periods, the 10-Year Treasuries yield generally
moves with the Fed Funds Rate.
– But the highs aren’t as high, and the lows aren’t as low as Fed
Funds Rate movements.
 For most of the period from late 2008 through 2015, the
yield on 10-Year Treasuries moved in a range roughly
between 2% and 2.5% – and never as low as the Fed
Funds Rate or LIBOR.

10-Year Treasuries
 If history is our guide, we can expect that the yield on 10-
Year Treasuries (and, correspondingly, CRE mortgage loan
interest rates) may increase if the Fed Funds Rate
continues to climb, but probably not as quickly or as
much.
 Of course, lenders can adjust their interest-rate spreads
above the 10-Year Treasuries yield, subject to
competitive market forces.

10-Year Treasuries
 From December 2015 to March 2017, the Fed Funds Rate
increased 75 bps from 0.25% to 1%. In that same period,
the yield on 10-Year Treasuries increased only a third as
much – by roughly 25 bps – to about 2.5%.
 As of May, yields were trending level to slightly down for
the period following December 2016.
 Interest rates for mortgage loans for operating CRE assets
generally correlate to the yield on 10-Year Treasuries.

Will We See Adverse Impacts to RE Activity
from Rising Interest Rates?
CRE Cap Rates vs. 10-Yr. Treasuries
Source: Commercial property outlook in a rising rate environment. Ernst & Young, September 2015

NPI Total Returns vs. 10-Yr. Treasuries
Source: Real Estate: The impact of rising interest rates. TIAA, Summer 2016

 NOI growth is projected to continue for CRE (although
slower NOI growth is generally expected for some
product types).
 NOI growth will mitigate some of the impact of higher
interest rates.
 History indicates that rising interest rates do not
necessarily lead to higher Cap Rates.
 So, property values and total returns for investors may
not fall as interest rates rise.

 CRE is not monolithic –it’s comprised of different product
types, and it doesn’t include some common product
types.
 The analysis will vary somewhat by product type.
Examples:
– Retail
– Health Care

What We Are Seeing
 Deal activity into April suggests that the
commercial property investment market in
the U.S. is still hung.
 Preliminary estimates indicate another high
double-digit percentage decrease in deal
volume versus a year ago, but with prices that
are generally flat.

What We Are Seeing
 Trump Administration Effect on Capital Markets
– Quick Rise of 10 year Treasuries in anticipation of a pro-growth, inflationary
environment.
– Correction absent implementation.
– Lender Uncertainty—Fixed Rate or Floaters
 Tax Credit Finance
– Halt based on anticipated tax reform
 CMBS Finance
– Dodd Frank and Risk Retention—Working it Out
 Underwriting Remains Steady
 Lots of Private Equity Available for Real Estate Deals

What Might the Impacts be on M&A Activity?
 Ultimately the answer likely hinge on the speed at which rates are
hiked, not whether hikes occur
 If rise in rates is accompanied by strong economic growth will likely
increase corporate confidence and further fuel positive trends
 Fed has signaled and market expects gradual hikes over the next
couple of years
 Other factors such as geopolitical and domestic regulatory/tax
uncertainty are equally significant
 Substantial tail winds remain in place that weigh in favor of the
positive trend continuing

2016 M&A Overview
– $3.9 trillion in global M&A activity
– 3rd best year on record (2007, 2015) despite double
digit fall off from year prior
– Market remains strong despite significant geopolitical
and domestic policy uncertainties
– Cross-border transactions up over 2015
– Technology was leading sector, followed by energy,
real estate and health care

Do The Current Levels of Capital and Liquidity
Balance The Effect of Rising Rates on M&A?
 Liquidity and capital markets remain strong
 Corporate balance sheets remain flush with cash - $1.5
trillion as of Q3 2016, a 7% year over year increase
 PE funds and financial buyers similarly situated
 Buyers still relying on cash and low borrowing costs, with
cash deals accounting for 62% of transactions in 2016 vs.
54% in year prior

Strategic vs. Financial Buyers
 Strategic buyers tend to focus on synergies and
therefore slightly higher borrowing costs less likely to
move the risk-return needle
 Strategic continue to be active buyers as they seek
unique acquisition opportunities to complement
organic growth
 Financial buyers in particular might ordinarily seek to
depress valuations to maintain returns, but are facing
intensive competition from strategic buyers

International M&A Issues
– Rising rates will be expected to strengthen the dollar increasing
acquisition costs
– Demand for dollar denominated assets remains strong
– Outbound activity from China and EMEA was up 470% and 250%,
respectively in 2016
– Chinese capital controls continue to be a source of uncertainty in
deals, though most expect that regulators will be supportive of
strategic acquisitions by well-known acquirers, though less-well
known acquirers and opportunistic transactions that are primarily
financial in nature are likely to continue to face scrutiny

Regulatory Impacts on M&A
 Continued uncertainty surrounding regulatory, tax and
health care reforms may drag on the market in the
short term
 Certain expectations already baked into the market
 Corporate tax reform and repatriations of foreign cash
holdings would presumably further bolster war chests
to finance further acquisitions, particularly among
strategic buyers

M&A Take Aways
 Expectation is set for gradual rate hikes over the next couple of
years and should not in and of itself materially impair M&A activity
 Borrowing costs still low by historical standards
 Strategic and financial buyers remain flush with cash and actively
seeking out attractive targets
 International outbound M&A activity should remain strong
assuming that capital controls and foreign regulatory issues do not
become an impediment
 Regulatory and tax uncertainty remains an issue and a potential
drag on activity

International Trade Policy &
Strategic Business Planning
in a Time of Uncertainty

Topics for Discussion
 Up-to-the-Minute US International Trade Policy Updates
 Risk Mitigation & Opportunities for dealings with:
– Non-US Suppliers
– Non-US Distributors
– Non-US Customers
– Non-US Investors

As of June 2017 . . .
Recent Developments:
 TransPacific Partnership Agreement.
 WTO Trade Facilitation Agreement.
 Presidential Executive Orders:
– Reducing Regulation and Controlling Costs.
– Establishing Enhanced Collection and
Enforcement of Antidumping and
Countervailing Duties (AD/CVDs) and
Violations of Trade and Customs Laws.
– Omnibus Report on Significant Trade Deficits.
– Buy American and Hire American.
– Addressing Trade Agreement Violations and
Abuses.
– Establishment of Office of Trade and
Manufacturing Policy.
– Etc.
 Many Senior Positions Remain Unfilled.
 USTR Trade Policy Agenda Released.
 Status of Other Agreements.
 Release of Foreign Trade Barriers Report.
 Release of Report on IPR Trade Barriers.
 USTR Notice to Congress to Renegotiate the
NAFTA.
 Additional developments as of late….
Open Questions:
 Possible Border Adjustment Tax (BAT).
 Status of US Embargoes and Sanctions.
 CVDs on Canadian Softwood Lumber.

International Opportunities
Non-US Suppliers Non-US Distributors and
Non-US Customers
Non-US Investors (FDI)
• NAFTA renegotiations may
lead to more favorable
duty/tax treatment, new
clearance processes, and new
protections– formal notice of
intent to renegotiate to
Congress May 18, 2017.
• New bilateral trade deals may
duty/tax treatment, new
clearance processes, and new
protections.
• NAFTA renegotiations and new
bilateral trade deals may lead to
more favorable duty/tax
treatment, new clearance
processes, and new protections.
• US export control reform
developments may lead to new
opportunities in non-US markets.
• New framework for US – China
Trade Agreement.
• One Belt One Road Initiative
(PRC).
• Monitor US Department of
Commerce SelectUSA information -
e.g. trends in FDI in your industry.
• Mexico anticipated to become the
world’s 5th largest economy by 2050.
• PRC 2015 FDI in US $74.6B –
increasing focus on health care
sector.
• One Belt One Road Initiative (PRC).
• Trump Administration welcoming
tone regarding PRC FDI into US.

International Opportunities
Non-US Customers
• Liberalization and lifting of US
sanctions programs.
• Trade Facilitation Agreement
(TFA) implementation may
treatment and clearance
processes.
• Possibility of Border
Adjustment Tax (BAT) –net pro
or con for your business.
sanctions programs.
• Trade Facilitation Agreement (TFA)
implementation.
• New US Commerce Department
incentives for US exporters.
• New bilateral trade deals may
eliminate or reduce foreign trade
barriers to US goods and services.
• Possibility of BAT - net pro or con
for your business.
sanctions programs.
• International Joint Ventures – take
advantage of new trade
opportunities by sector.
• Canada 2015 FDI in US $448.5
billion.
• More than $2 billion in two-way
trade flows across US-Canada shared
border daily –increase with
completion of new Gordie Howe
International Bridge.

International Risk Mitigation Strategies: Trade
Non-US Customers
• Monitor new US AD/CVDs
and other trade remedies and
consider alternative sourcing
options.
• Monitor increased duties on
US imports - potential
increased prices or slow
downs from suppliers.
• Monitor procedural changes
at ports– often very little
notice.
• Monitor NAFTA renegotiations for
changes in rules of origin,
certifications, favorable
treatment, process flows.
• Monitor new US export control
reform requirements and new US
sanctions restrictions.
• Monitor non-US government
reactions to US trade actions -
e.g. increased duties on US
goods.
• International Joint Ventures –
monitor risks to current JVs of
negative trade impacts by sector.
• Monitor trend in PRC diversion of FDI
to Mexico instead of US – Mexico
FTAs with many countries across the
world.

International Risk Mitigation Strategies: Financial
Non-US Customers
• To avoid increased supplier
prices due to increased US
import duties, consider:
o Sourcing from current supplier
affiliates in other countries
(e.g. Taiwan, Vietnam for
current PRC suppliers).
o Sourcing from new companies
to avoid increased prices due
to increased US import duties.
o Multi-country sourcing
options, to avoid sole sourcing
risks.
o Sourcing from US Free Trade
Agreement countries, or
countries with special US trade
programs.
• Mitigate Payment Risks.
o Strict enforcement of contract payment
terms.
o Consider requiring letters of credit or
pre-payment before product shipment or
provision of services.
o Break up large payment requirements.
o Require payment of smaller on-going
deposits, and/or advance service/license
fees.
o Require evidence that funds are available
in easily convertible currency (e.g. HKD)
o Ensure invoices and other documents
exactly comply.
o Be flexible with invoice formats and
multiple requests for new copies and
non-substantive changes. (PRC)
• Recent events have wounded the
Mexican “national dignity”: possibly
less interest in US FDI.
• Monitor new China Cyber Security
Law implementing regulations – June
1, 2017 planned effective date.
• Mitigate Payment Risks.
o Break up large payment requirements
to ease SAFE approvals for foreign
exchange (PRC).
o Require PRC investor to obtain
funding through RMB-guaranteed USD
loans for its HK or US affiliate as
direct investor (PRC).

International Risk Mitigation Strategies: Operations
Non-US Customers
• Consider new 3D printing
sourcing options.
• Address continued weak
enforcement of IP rights (PRC,
Mexico).
• Monitor regulations and
administrative guidance limiting
distributor activities (PRC).
• Monitor industry for new policies to
limit purchases of certain US goods
– e.g. agriculture and aerospace
(PRC).
• Address continued weak
enforcement of IP rights (PRC,
Mexico).
• Monitor US CFIUS committee rejections
– e.g. may mean reduced success of
FDI/M&A from PRC investors.
• Monitor Mexico’s Carlos Slim and other
billionaires who own significant US
assets and invest in the US as “thought
leaders.”
• Monitor July 2018 Mexican Presidential
Election front runner AMLO (Andres
Manuel Lopez Obrador).

US Company Strategies for
International Trade Compliance
 Senior Management commitment to international trade compliance.
 Formal international trade compliance policies and procedures for:
– Imports, Exports and Reexports.
– Assessment of potential liability in Mergers, Acquisitions & Divestitures.
– Vetting and selecting foreign distributors, agents, customs brokers, forwarders.
– Recurrent international trade compliance training.
– Regular risk assessments and internal audits.
– Issue escalation and corrective action processes.
– Proper routing and handling of US Government inquiries.
– Record retention policy and process.
 Assess potential impact of new developments on operations and activities.
 Participate in legislative/regulatory decision-making process (public comments).
 Monitor elections in Countries of Interest for potential increase in power of
nationalist/anti-trade candidates.

US Company Strategies If International Trade
Violations Discovered
 Promptly cease and desist activity.
 Collect and preserve relevant information.
 Commence internal review, implement remedial action.
 Use outside counsel to ensure attorney-client privilege.
 Notice to employees that counsel represents only the company (not the employee).
 Considerations for personnel or info located outside the US
 Identify specific violations under the various laws and regulations.
 Assess whether civil penalties, criminal penalties or both are possible.
 Voluntary Self-Disclosure and Prior Disclosure Considerations.
 Consider risk of personal liability for violations under US law.

INTERNATIONAL TRADE
REFERENCE MATERIALS

Timeline of Recent Trade Developments
Withdrawal from TPP
(Jan. 23rd )
Executive Order #13771:
Repeal 2 regs for every new
reg adopted (1/30/2017)
WTO Trade Facilitation
Agreement Enters into Force
(2/2/2017)
USTR 2017 Trade Policy
Agenda & Report on Foreign
Trade Barriers
(3/31/2017)
Omnibus Report of Significant
Trade Deficits
(3/31/2017 )
Enforcement of AD/CVD and
Trade Violations
(3/31/2017 )
Buy American Hire
American (4/18/2017)
Addressing Trade
Agreement Violations &
Abuses (4/29/2017)
Establishment of Office of Trade
& Manufacturing (4/29/2017)
USTR Formal Congressional
Notification to Renegotiate
the NAFTA (5/18/2017)
USTR Requests Public
Comments and Schedules
Hearing for NAFTA
Modernization (5/23/2017)
Open Questions:
Border Adjustment Tax?
Modification of US Sanctions?
Other Intl Agreements?
© Polsinelli 2017

U.S. International Trade with Canada, China,
Mexico & NAFTA (FY 2016)
Facts & Figures

Facts & Figures: Canada
 Canada is the USA’s largest customer (18% of total exports).
– Top USA exports: vehicles; auto parts; machinery; electronics; fuels; plastics; agriculture; medical/tech
equipment; aircraft; spacecraft; iron/steel products; furniture; lighting; signs.
 USA is Canada’s largest customer (76% of total exports).
– Top Canada exports: vehicles; fuels; machinery; agriculture; plastics; wood; electronics; gems/precious
metals; aluminum; aerospace; and, paper.
 Canada exported $390 billion in goods and services to the USA (Mexico 1%, China – 4%)
 USA exported $1.3 trillion in goods and services to Canada (Mexico – 16%, China – 8%)
 $1.7 billion in goods and services crossed the US/Canadian border on a daily basis.
 Heavy supply chain integration in US and Canadian aerospace and
automotive sectors.

Facts & Figures - PRC
 USA exports of goods and services to China: $169.3 billion.
– Top USA exports: miscellaneous grain, seeds, fruit; aircraft; electrical machinery; machinery; vehicles;
soybeans; hides and skins; pork; cotton.
 China exports of goods and services to USA: $478.9 billion.
– Top China exports: electrical machinery; machinery; furniture; bedding; toys; sports equipment; footwear;
processed fruit and vegetables; juices; snack foods; fresh vegetables; tea.
 China is USA’s largest 2-way goods trading partner in FY 2016.
 USA FDI in China: $74.6 billion in 2015 (latest data available), led by manufacturing, wholesale
trade and depository institutions.
 China FDI in USA: $14.8 billion in 2015 (latest data available), led by manufacturing, depository
institutions and real estate.

Facts & Figures: Mexico
 Mexico is the USA’s 2nd largest customer (14% of total exports, $231 billion in FY 2016).
– Top US exports: machinery; electrical machinery; vehicles; fuels; plastics; corn, soybeans, pork, beef, dairy
 Mexico is the USA’s 14th largest FDI partner.
 Mexico was USA’s 2nd largest supplier of goods (14% of total exports, >$294 billion)
– Top Mexico exports: vehicles; electrical machinery; optical and medical instruments; machinery; furniture;
bedding; fresh fruit and vegetables; wine and beer; snacks; processed fruits and vegetables
 Bloomberg/PWC/Telegraph predict that Mexico will overtake Russia as world’s 5th largest economy
by 2050.
 When USA “buys Mexican,” it purchases 40% US content, as compared to 4% US content when
goods purchased from China.

Facts & Figures: NAFTA
 For 30 out of the 50 States, Canada or Mexico rank as the first or second largest export market.
 Under NAFTA, U.S. trade with Canada and Mexico have supported over 140,000 small and
medium-sized businesses in the United States.
 U.S. exports to Canada and Mexico support more than three million American jobs.
 Since its entry into force, US manufacturing exports to NAFTA parties have increased 258%.
 US exports of computer and electronic products, furniture, paper, and fabricated metals have all
more than tripled since NAFTA implementation.
 Nearly 60 percent of US total goods imports from Canada and Mexico are used in the production
of U.S. goods and services.

Congress and the Inevitable Issues:
Health Care and Taxes

Overview
Health Care
Tax Reform

Health Care Landscape
Affordable Care Act
Repeal and Replace
Status: Ongoing
Anticipated Completion: Early Fall
Food and Drug
Administration User Fee
Reauthorization
Status: Sept. 30th Deadline
Anticipated Completion: Summer
Children's Health
Insurance Program
(CHIP) Reauthorization
Status: Sept. 30th Deadline
Anticipated Completion: Late-
Summer/Fall

Components of ACA Replacement
 Medicaid expansion
 Insurance reform
– Health insurance exchanges
– Individual mandate
– Consumer protections
• Pre-existing conditions
• Annual and lifetime limits on benefits
• Clinical trials coverage
– Mandated coverage of select services

H.R. 1628 American Health Care Act
Ends the ACA’s
Medicaid expansion
for new enrollees.
Ends the ACA’s
Medicaid expansion
for new enrollees.
Reforms the Medicaid
program into a per
enrollee grant system.
Reforms the Medicaid
program into a per
enrollee grant system.
Repeals many of the
ACA’s taxes.
Repeals many of the
ACA’s taxes.
Replaces the law’s
premium tax subsidies
with an age based tax
credit that ranges from
$2,000 to $4,000.
Replaces the law’s
premium tax subsidies
with an age based tax
credit that ranges from
$2,000 to $4,000.
Passed the House on May 4, 2017

Health Care Reform: Onto the Senate
Senate Working Group
Byrd Rule
Current Status

Trump Administration Health Care Team
President Donald
Trump
HHS Secretary
Tom Price, MD
CMS Administrator
Seema Verma
FDA Commissioner
Scott Gottlieb, MD

Trump Executive Orders
 ACA (Inauguration Day)
– Agencies to use all discretion to remove
financial burdens on states, individuals,
families, providers and insurers
 “One In, Two Out” (January 30th)
– Includes requirement involving cost analyses
that could fundamentally alter the process
and content of regulations
– Cost analyses to be performed by OMB
within White House (not CBO)

Tax Reform: Calendar Considerations
“I think the American
Health Care Act is,
frankly, written to set
up tax reform”
– U.S. Senator Bill Cassidy
(R-LA)

Directional Disagreements
Who’s driving this car?
House vs. Senate
Congress vs. White House

Budget Reconciliation
Pros
Cons

“A Better Way”:
House GOP Blueprint on Tax Reform
 Proposes drastic design
changes to the U.S. tax
code
 Replaces net income tax
system with
consumption tax system

Border Adjustability
Border adjustment tax (BAT) =
hallmark of the plan
BAT = $$$

Where’s the Senate?
That’s an excellent question.

Role of the President
White House: Lesson
learned on health care

Republican Reactions
“We don’t think BAT works in its current form, and we’re going to continue to have
discussions with them about revisions”– Treasury Secretary Steven Mnuchin
“If [the] administration takes the BAT off the table, I would say it’s off the table”– Rep.
Chris Collins (R-NY), Member of Congress and liaison to the Trump administration
“So Republicans get in power and the first thing we’re going to do is put a new tax on
the American people? You’ve got to be kidding me” – Rep. Jim Jordan (R-OH),
Chairman of House Freedom Caucus

The Path Forward
Why still pay
attention in spite
of these
challenges?

Criminal Enforcement: What to
Expect From The New
Administration

Overview
 The Department of Justice has not provided significant insight
regarding government investigations and regulatory
enforcement priorities or policies
 Congress likewise has provided little indication as to whether
it will push to enact any changes in this area
 Clear trend has been to enforce white collar crimes more
aggressively under both Republican and Democratic
administrations
 Every reason to believe DOJ will continue to take a tough
stance on white collar crime

Individual Accountability in Cases of
Corporate Wrongdoing
 Yates Memo 2016 Overview
 Future of the Yates Memo? Sessions-led DOJ likely to
support and continue Yates Memo policy of holding
individuals engaged in corporate wrongdoing liable
 “Corporations are subject as an entity to fines and
punishment for violating the law, and so are the
corporate officers. And sometimes it seems to me … that
the corporate officers who caused a problem should be
subjected to more severe punishment than stockholders
of the company who didn’t know anything about it.”

Foreign Corrupt Practices Act
 Prohibits individuals and entities from paying foreign
government officials to assist in obtaining or retaining
business
 2016: A Year of Blockbuster FCPA Enforcement
 Odebrecht / Braskem, Och-Ziff, VimpelCom
 Lots of FCPA investigations in queue at DOJ and the SEC
 DOJ has put substantial resources in its FCPA unit
 FCPA pilot program aimed at encouraging voluntary self-
disclosure

Healthcare Fraud
 Several significant corporate resolutions (Tenet, Olympus,
Biodiagnostic Labs) in 2016
 Aggressive enforcement of healthcare fraud laws likely to
continue
 Future of ACA’s anti-fraud provisions? Likely to remain on the
books even if ACA is repealed
 Career prosecutors are responsible for much of the decision-
making in healthcare fraud enforcement, so there is reason to
believe consistency will be maintained during this
administration as well

False Claims Act
 Qui tam suits are at all-time high, often proceeding
without government intervention. As long as qui tam
relators remain financially incentivized to bring suits,
they will continue to drive FCA enforcement and FCA
suits will always be a concern.
 AG Sessions has disapproved of long seal periods - could
mean more declinations but given the sophistication and
aggressiveness of the relator’s bar, those cases are likely
to move forward with or without DOJ intervention.

Securities and Financial Fraud
 Includes a broad array of financial crimes like
mortgage fraud, investment fraud, telemarketing
fraud, insider trading, fraud against the
government
 State Street, Volkswagen, and Takata
 AG Sessions has expressed support for both the
DOJ and SEC in their policing of U.S. financial
markets

Immigration Enforcement
 AG Sessions seeks greater role for Justice in
immigration enforcement
 Area most susceptible to change – immigration is
a top priority and permeates every part of
Administration’s agenda.
 Tougher stance on immigration enforcement
could result in more companies being
investigated for employing illegal workers

Charging and Sentencing
 May 12, 2017 – AG Sessions announced new DOJ
criminal charging policy
– Instructed federal prosecutors to charge and pursue
“the most serious readily-provable offense”
• E.g., drug and gun offenders
• Often involve mandatory minimum sentences
– Rescinded Eric Holder’s 2013 enforcement policy
• Holder’s policy had been to avoid triggering mandatory
minimum sentences for non-violent drug offenses
• Holder encouraged prosecutors to consider individual
circumstances and show discretion regarding drug crimes

 Impact of AG Sessions’ new policy
– Large increase in federal prosecutions for blue collar offenses
– Fewer resources or discretion to pursue sophisticated crimes
such as cybercrime, health care fraud, etc.
– Less ability for defense attorneys to negotiate plea bargains
– Increased federal prison population
• Sessions hinted at a growing federal prison population
• Encouraged use of private prisons to meet demand
• Reversed Sally Yates’ directive to stop private prison use

 Basically reverts DOJ policy to the 2003 “Ashcroft Memo”
– Required federal prosecutors generally to pursue “the most serious
readily provable chargeable offense”
– Generally prohibited prosecutors from "charge bargaining" when
negotiating guilty pleas
– At sentencing, required prosecutors to actively oppose defense requests
for "downward departures" from the sentencing range dictated by the
U.S. Sentencing Guidelines
 New policy provides few exceptions to restrictions
– Ashcroft Memo: outlined six types of “limited exceptions”
– Sessions’s Memo: few specifics, instead telling prosecutors to “carefully
consider whether an exception may be justified”
• Exceptions must be approved by US Attorneys or assistant AGs

Financial Technology: Legal and
Regulatory Updates and Challenges

Agenda
 Introduction
 What is FinTech?
 Examples of FinTech
 Leading FinTech Firms
 Views of FinTech
 Why FinTech Matters?
 Regulation of FinTech
 Conclusions

What is FinTech?
 FinTech is a dynamic segment of the financial services industry where
technology focused startups, well established technology firms, and
traditional financial services firms develop new technologies to improve the
industry.
 Examples include peer-to-peer payment technology, peer-to-peer lending,
clearing and settlements solutions built on Blockchain technology, platforms
for trading digital assets, and other customer-focused solutions.
 Financial institutions must respond faster to innovation.
 In a recent PwC survey of the banking industry, 29% of respondents cited
“research, development, and innovation” as one of their top three investment
priorities.
 Many institutions have implemented initiatives or even launched dedicated
labs to drive innovation.

Examples of FinTech
 Blockchain technology – Ethereum, Hyperledger, IBM, and Microsoft Azure
 Crowdfunding – Rockethub, Indiegogo, and Kickstarter
 Digital asset trading and lending platforms – Kraken, Poloniex, Salt Lending, and Shapeshift
 Peer-to-peer lending platforms – Prosper, Lending Club, and Funding Circle
 Peer-to-peer payment technology – Ant, Apple Pay, Chase Pay, PayPal, Starbucks Pay, and
Venmo
 Automated lending platforms – Kabbage, On Deck and Rocket Mortgage
 Robotic Investment Advisers – Wealfront, Future Advisor, and Bettermint
 Cash Securities (equities, repos, leveraged loans) – Axoni, Chain, Digital Asset Holdings, itBit,
Nasdaq Linq, Ouisa Capital, R3CEV, Ripple, and Symbiont
 Artificial Intelligence – IBM Watson and ROSS

Blockchain
 From Silicon Valley to Wall Street, technologists and investors alike are buzzing
about the potential for the Blockchain to revolutionize everything.
 The funding backdrop is healthy and the eco-system is growing.
 Once considered the technology behind Bitcoin, this technology has taken center
stage from its crypto-currency parent.
 Blockchain technology promises a new set of tools to cut costs and challenge the
profit pool of the middle-man with a promise to make centralized institutions
obsolete.
 This solution promises to not just address consumer opportunities but also those
for the far more lucrative enterprise.
 Blockchain is a means of recording and verifying transactions in a tamper and
revision-proof way that is public to all.

Firms Focusing on FinTech
 Traditional Banks
 Barclays
 BBVA
 BNY Mellon
 BNP Paribas
 CIBC
 Citibank
 Credit Suisse
 Deutsche Bank
 Goldman Sachs
 HSBC
 ING
 JPMorgan Chase
 Macquarie Group
 Mitsubishi UFJ
 Morgan Stanley
 Northern Trust
 Royal Bank of Canada
 Royal Bank of Scotland
 Santander
 Scotia Bank
 Societe Generale
 State Street
 TD Bank
 UBS
 US Bancorp
 Wells Fargo
 Stock exchanges and clearing houses
 Australian Stock Exchange
 BM&F BOVESPA (Brazil)
 Deutsche Bourse and London Stock Exchange
 DTCC
 Nasdaq
 NYSE
 TSX

KPMG FinTech 50
 Ant Financial
 Qudian
 Oscar
 Lufax
 Zhong An
 Atom Bank
 Kreditech
 Avant
 Sofi
 JD Finance
 Klarna
 Funding Circle
 Square
 Xero
 Adyen
 Nubank
 Kabbage
 OurCrowd
 Affirm
 Circle
 Stripe
 Collective Health
 Lendingkart
 Wealthfront
 Credit Karma
 Lending Club
 Propser
 Xapo
 Spotcap
 OnDeck
 Prospa
 Lendix
 WeLab
 Rong360
 iZettle
 League
 LendUp
 Kueski
 PINTEC
 Motif Investing
 Wealth Migrate
 SecureKey Technologies
 Tyro
 Policybaxxar
 itBit
 VivaReal
 Coinbase
 Knip
 Payoneer
 SocietyOne
Source https://h2.vc/reports/FinTechinnovators/2016

20 FinTech Companies to Watch
 Ripple
 IdentityMind Global
 Trunomi
 Feedzai
 Fenergo
 Gro Solutions
 nCino
 Moneythink
 InAuth
 Intellaegis
 Iovation
 Mambu
 Utapt
 Gigaspaces Technologies
 Leadfusion
 AcceptEmail
 BioCatch
 Avoka
 Addepar
 Zenbankx
Source: American Banker -
http://www.americanbanker.com/gallery/20-FinTech-
companies-to-watch-1077196-1.html

Views of FinTech Are Divergent
 Bitcoin has been described by Bill Gates as a “techno tour de force.”
 Peter Thiel, the co-founder of PayPal and an early investor in Facebook,
believes Bitcoin has “world changing” promise for online transactions
without fees.
 Fred Wilson of Union Square Ventures believes “Bitcoin represents something
fundamental and powerful. . . .”
 Leading Silicon Valley investors, including Andreessen Horowitz, Lightspeed
Ventures, and Hong Kong Billionaire Li Ka-shing’s Horizon Ventures, are
supporters of the digital currency.
 Bitcoin is a digital, private crypto currency that is exchanged by means of the
Internet.

Views of FinTech Are Divergent
 Supporters of FinTech believe blockchain technology has the potential to
support more efficient global commerce and to help combat poverty.
 Marc Andreessen of Andreessen Horowitz has invested nearly $50 million in
blockchain-related startups and believes the technology solves what he calls
the “Byzantine Generals Problem” or how to establish trust between
otherwise unrelated parties over an untrusted network like the Internet.
 Andreesen notes the “practical consequence of solving this problem is that
Bitcoin gives us, for the first time, a way for one Internet user to transfer a
unique piece of digital property to another Internet user, such that the
transfer is guaranteed to be safe and secure, everyone knows that the transfer
has taken place, and nobody can challenge the legitimacy of the transfer.”

Criticisms of FinTech
 Critics of Bitcoin have been equally as vocal in their skepticism of the digital
currency and concern about its long-term viability as a unit of exchange as
well as its potential impact on financial services and commerce.
 Bitcoin has been derided as a “shady online currency” and as “a digital Wild
West for narco traffickers and other criminals.”
 Senator Charles Schumer has described Bitcoin as a form of money laundering.
 Leading economist, Paul Krugman, has been critical of Bitcoin, suggesting that
the structure of the currency incentivizes hoarding.
 Other analysts have raised concerns of a Bitcoin bubble.
 Former Secretary of the Treasury Larry Summers has been more circumspect
in his evaluation of the digital currency and appears to be waiting to judge its
potential.

Congressional Focus on FinTech
 “[FinTech] companies are changing financial services, and it is vital that the
regulators and Congress understand all the impacts and take actions as
appropriate.”1
 In July 2016, Senators Sherrod Brown (D-OH) and Jeffrey Merkley (D-OR) sent
a letter to the leaders of Federal Reserve, the Office of the Comptroller of the
Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), the
National Credit Union Administration, and the Consumer Financial Protection
Bureau (“CFPB”) asking them to outline the steps they are taking to ensure
effective oversight of FinTech.
1 Letter from Senators Sherrod Brown and Jeffrey Merkley to the leaders of Federal Reserve, the Office of
the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union
Administration, and the Consumer Financial Protection Bureau (July 21, 2016).

Congressional Focus on FinTech
 The Senators noted:
[W]e must be mindful that some of these products, activities, and business models may be new
and innovative, while others may largely resemble those of existing, federally regulated firms, . . .
As Congress considers its role in overseeing FinTech and its impact on American consumers, we
believe it is important that Congress better understand the way federal regulators oversee FinTech
and their relationships with federally regulated financial institutions.
 Senators Brown and Merkley believe:
If a FinTech company is neither directly regulated by [the federal] agencies nor a third party service
provider, there are concerns that applicable federal consumer laws may not extend to consumers
engaging with FinTech companies, and that consumers or small business owners may not
understand that protections provided by federal financial institutions do not apply to the products
and services offered by these companies. . .
 While members of Congress from both parties have expressed their support and concerns about
FinTech, the response from the federal agencies has been less clear.

OCC Regulation
 Late last year, the OCC published a proposal to bring FinTech companies within the scope of the
agency’s jurisdiction.
 The proposal is useful as part of a greater discussion of how to properly regulate FinTech
companies in a way that will protect the public without stifling innovation.
 The OCC proposal appears to echo the sentiments of some lawmakers that FinTech should be
regulated like banks.
 Critics of this approach believe the OCC’s proposal to register FinTech companies as special purpose
national banks will more than likely prove unduly burdensome for the majority of early stage
FinTech companies.
 Others believe such an approach may prove a useful option for well-established FinTech companies
that can afford the costs associated with the application process and on-going compliance with
applicable rules and regulations.
 As Congress considers how to regulate FinTech, lawmakers should consider the free market
approaches being employed in other jurisdictions that are actively supporting the development of
FinTech, including Singapore and the United Kingdom.

OCC Regulation
 The proposal offers an approach that would allow FinTech companies to receive charters as
special purpose national banks.
 Comptroller of the Currency Thomas J. Curry stated in his announcement of the proposal that:
[i]t will be much better for the health of the federal banking system and everyone who relies
on these institutions, if [FinTech] companies enter the system through a clearly marked front
gate, rather than in some back door, where risks may not be as thoughtfully assessed and
managed.
 The proposal is an important step forward in acknowledging the growing importance of FinTech
to the United States financial services industry and a move to address the fragmented approach
to regulation of FinTech by the states.
 It remains to be seen whether the proposal will afford FinTech companies an approach that will
obviate the need to register with one or more state regulators under state banking and
securities laws.

OCC Regulation
 The OCC has the authority to grant charters to national banks under the National Bank Act
(the “Act”).
 The Act has long been interpreted to allow the OCC to grant charters for special purpose
national banks, traditionally covering trust banks as well as credit card banks.
 In the proposal, the OCC seeks to expand special purpose charters beyond these two types of
banks and into FinTech, subject to the restrictions provided in the Act.
 For a bank or other entity to be chartered as a special purpose national bank it must engage
in fiduciary activities or provide at least one of the following banking services: receiving
deposits, paying checks, or lending money.
 The OCC believes the innovative services provided by many FinTech companies are
equivalent to these traditional activities in their utilization of modern technology.
 For instance, the OCC noted in its proposal that issuing debit cards or engaging in other
means of facilitating electronic payments are the “modern equivalent” of paying checks.

OCC Regulation
 While this approach may have some merit considering the diversity of products and
services offered by FinTech companies, the OCC intends to determine an entity’s
eligibility for the special purpose charter on a case-by-case basis.
 The OCC acknowledges that it will not be the sole source of oversight for FinTech,
noting that other agencies such as the Federal Reserve, the FDIC, and the CFPB will
likely have additional supervisory roles.
 The proposed framework will bring FinTech companies within the OCC’s jurisdiction
under the Act as special purpose national banks that are subject to the same forms of
regulation as other national banks.
 This means that special purpose national banks are subject to the same laws,
regulations, examination, reporting requirements and ongoing supervision as national
banks.

OCC Regulation
 The OCC intends to apply the safety and soundness, fair access, and fair treatment of
customer rules to FinTech companies while tailoring the rules to address the size and
associated risks of FinTech companies.
 Although the system means there will be no licensure requirement at the state level,
state law will continue to apply in complimentary areas including anti-discrimination,
fair lending, debt collection, taxation, and unfair or deceptive treatment of customers,
with the goal of achieving a high level of supervision similar to that of national banks.
 In the proposal the OCC set forth a list of guiding supervisory expectations for FinTech
companies seeking a special purpose charter.
 These expectations include: a well-developed business plan, a corporate governance
structure, capital, liquidity, compliance risk management, financial inclusion, and
recovery and resolution planning.

State Regulation
 The proposal would bring qualifying FinTech entities into the scope of the same laws that
cover national banks, thus limiting state regulation to laws “that only incidentally affect” the
authorized powers of a national bank.
 In doing this, the OCC seeks to reduce the complexity of FinTech regulation and shift away
from the existing state-by-state supervisory framework through preemption by federal law.
 Currently many FinTech companies face the challenge of attempting to determine the state
and federal regulations that apply to their business.
 The proposed framework seeks to address these challenges by allowing FinTech companies
to register at the federal level and eliminating state licensing requirements.
 The OCC believes the public interest will be served by ensuring that FinTech companies
operating “in a safe and sound manner,” promoting “consistency” in governing law, and
making “the federal banking system stronger.”

Challenge to the FinTech Charter
 After raising objections to the OCC’s plans to offer a FinTech charter, state regulators on
April 26, 2016, sued the federal agency, arguing it lacks the legal authority.
 John Ryan, the president and CEO of the Conference of State Bank Supervisors, said in a
press release, “[t]he OCC’s action is an unprecedented, unlawful expansion of the
chartering authority given to it by Congress for national banks,”
 Ryan noted, “[i]f the OCC is allowed to proceed with the creation of a special purpose
nonbank charter, it will set a dangerous precedent that any federal agency can act
beyond the legal limits of its authority.”
 The suit, filed in U.S. District Court for the District of Columbia, presents the state
regulators’ claim that the OCC does not have statutory authority to create a special-
purpose charter.
 The group argued that the OCC has the authority to charter only those firms engaged in
the business of banking.

 The group believes the OCC needs specific congressional approval to create a charter for non-
depository institutions.
 The group claims “[t]he OCC’s proposed action ignores Congress, seeks to preempt state consumer
protection laws, harms markets and innovation, and puts taxpayers at risk of inevitable FinTech
failures.”
 In addition to the CSBS, a number of state regulators have been vocally opposed to the FinTech
charter, including New York's superintendent for financial services, Maria T. Vullo.
 They have argued that the charter would preempt their authority to impose consumer protection
requirements, such as usury caps, on FinTech companies that might obtain the national charter.
 The OCC’s has also prompted opposition from consumer protection groups and community banks.
 Comptroller of the Currency Thomas Curry has responded to critics that the OCC has the legal
power to offer the charter, and that it will ensure that FinTechs obtaining it will face bank-like
standards.

 The states argue they are better positioned to observe the risks and opportunities of
the growing FinTech industry, and that the FinTech charter would strip them of their
ability to protect consumers within their borders.
 Ryan noted ”[s]tate regulators already supervise a vibrant financial services marketplace
that includes nonbanks and banks.”
 Several states have pledged to better coordinate among themselves to facilitate the
licensing process and disparate regulatory requirements faced by FinTech firms.
 Ryan has stated “[m]oving forward state regulators will continue to streamline
regulation and automate licensing across state lines, ensuring the system will work even
better for state-licensed companies and consumers while protecting taxpayers.”

SEC Regulation
 The definitions of “security” under the Securities Act of 1933 (the “Securities Act”) and the
Securities Exchange Act of 1934 are nearly identical and each is broad enough to include the
various types of instruments that are used in commercial marketplaces that one might
suspect to fall within the ordinary concepts of a security.
 This would include common instruments like stocks, bonds, and notes, as well as the various
collective investment pools and common enterprises devised by persons seeking to generate
profits from the efforts and investments of others (i.e. investment contracts and instruments
commonly known as securities).
 Section 2(a)(1) of the Securities Act defines a “security” as:
[A]any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of
indebtedness, . . . transferable share, investment contract, . . . any put, call, straddle, option, or privilege on any
security, certificate of deposit, . . . or any put, call, straddle, option, or privilege entered into on a national
securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a
“security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for,
guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

SEC Regulation
 The definition of “security” under the Securities Act does not include currencies.
 The SEC has argued that investments in Bitcoin related schemes are investment contracts - a contract,
transaction, or scheme involving: (1) an investment of money, (2) in a common enterprise, (3) with the
expectation that profits will be derived from the efforts of the promoter or a third party. Securities
Exchange Commission v. W.J. Howey, Co., 328 U.S. 293 (1946); Brotherhood. of Teamsters v. Daniel, 421
U.S. 837, 852 (1979).
 Any investment in securities in the United States remains subject to the jurisdiction of the SEC regardless
of whether the investment is made in U.S. dollars or a digital currency.
 Individuals selling investments are typically subject to federal or state licensing requirements.
 Whether a bitcoin is a security for the purposes of the Securities Act and the Exchange Act has been at the
heart of recent Bitcoin controversies and government actions against persons engaged in the trading of
bitcoins.
 In Securities Exchange Commission v. Trendon T. Shavers and Bitcoin Savings and Trust (“BST”), a well-
publicized case involving the SEC’s regulation of Bitcoin investment schemes, the SEC alleged that Shavers
and BST engaged in the fraudulent offer and sale of securities without registration under the Securities
Act.

SEC Regulation
 The question before the court in Shavers was whether the BST investments being offered by
Shavers constituted securities under federal securities laws.
 The court focused on the characterization of the investments and not the underlying commodity--
Bitcoins
 The court found that:
 Because Bitcoin can be used as money to purchase goods or services and also can be
exchanged for conventional currencies, Bitcoin is in fact a currency or form of money;
 The investors and the promoter were interdependent because the investors were dependent
on Shavers’s expertise in Bitcoin markets and his local connections and in addition, Shavers
allegedly promised a substantial return on their investments as a result of his trading and
exchanging Bitcoin; and
 Investors participating in the BST investments were expecting profits from Shavers’s efforts.
 The court concluded that “[i]t is clear that Bitcoin can be used as money” and that the BST
investments met the definition of investment contract, and as such, were securities.

CFTC Regulation
Coinflip
 On September 17, 2015, the CFTC entered into a settlement with Coinflip, Inc. d/b/a Derivabit and Francisco Riordan.
 The CFTC found that Coinflip operated an “options trading platform that connected buyers and sellers of standardized
Bitcoin options and futures contracts.“
 By doing so, the company had violated the Commodities Exchange Act by operating a facility for trading options or
processing swaps without being registered with the CFTC as a Swap Execution Facility (“SEF”) or a designated contract
market.
TeraExchange
 The CFTC sanctioned Tera, a provisionally registered SEF, for failing to enforce its prohibition on wash trading and
prearranged trading on the SEF platform.
 The CFTC found that Tera offered for trading on its SEF a non-deliverable forward contract based on the relative value of the
U.S. Dollar and Bitcoin, a digital currency (the Bitcoin Swap).
 On October 8, 2014, the only two market participants authorized at that time to trade on Tera’s SEF entered into two
transactions in the Bitcoin Swap.
 The transactions were for the same notional amount, price, and tenor, and had the effect of completely offsetting each
other.

CFTC Regulation
 Tera arranged for the two market participants to enter into the transactions.
 Tera brought together the market participants, telling one that the trade would be “to test the pipes by doing a
round-trip trade with the same price in, same price out, (i.e. no P/L [profit/loss] consequences) no custodian
required.”
 Subsequent to the transactions, Tera issued a press release and made statements at a meeting of the CFTC’s
Global Markets Advisory Committee (GMAC) announcing the transactions, creating the impression of actual
trading interest in the Bitcoin swap.
 Neither Tera’s press release nor the statements at the GMAC meeting indicated that the October 8 transactions
were pre-arranged wash sales executed for the purpose of testing Tera’s systems.
LabCFTC
 On May 17, 2017, CFTC acting Chairman J. Christopher Giancarlo announced the establishment of LabCFTC, an
initiative to help FinTech companies navigate compliance and regulatory issues and to promote the use of
blockchain and other FinTech developments with the CFTC.

Taxation of Digital Currencies
 On March 25, 2014, the Internal Revenue Service provided guidance to
miners, users, and traders of digital currencies, such as Bitcoin.
 The IRS noted:
[digital currency] operates like “real” currency--i.e., the coin and paper money of
the United States or of any other country that is designated as legal tender,
circulates, and is customarily used and accepted as a medium of exchange in the
country of issuance -- but it does not have legal tender status in any jurisdiction.

Conclusion
 The OCC’s proposal is useful as part of a greater discussion of how to properly regulate
FinTech companies in a way that will protect the public without stifling innovation.
 While the concerns of Senators Brown and Merkley are well founded, the OCC’s proposal to
register FinTech companies as special purpose national banks will more than likely prove
unduly burdensome for the majority of early stage FinTech companies.
 Such an approach may prove a useful option for well-established FinTech companies that can
afford the costs associated with the application process and on-going compliance with
applicable rules and regulations.
 Members of Congress should look to the adoption of a regulatory sandbox similar to those
used in other jurisdictions because it will protect the public, and promote innovation and
compliance with applicable laws by fostering a constructive dialogue between the regulators
and FinTech companies.

Polsinelli’s FinTech and Practice
 Polsinelli’s FinTech and Regulation practice helps clients meet the challenges posed by
the development of these new technologies.
 Bringing together attorneys from across the firm, members of the FinTech and
Regulation practice advise clients on a variety of matters, including:
 Corporate and transactional issues
 Cybersecurity
 Government investigations and compliance
 Intellectual property
 Labor and employment
 Litigation
 Public policy
 Regulation by the CFTC, the SEC and FinCEN
 Securities and corporate finance
 Tax

Current Trends in Private Company
Financing

CURRENT TRENDS: PRIVATE
OFFERINGS

Topics
 Rule 147, 147A and 504: New rules; updates
 IRC Sec. 1202: Impact on entity selection
 506(c): Possible uses
 SAFEs: Pros and cons
 Financial CHOICE Act: Paring back Dodd-Frank

Rule 147, 147A and 504
 In October 2016, SEC adopted final rules that:
– Amended Rules 147 and 504
– Established new Rule 147A
– Repealed Rule 505
 Effective dates are as follows:
– Rule 504: January 20, 2017
– Rule 147 and 147A: April 20, 2017
– Rule 505: May 20, 2017

Original Rule 147
 Rule 147 was promulgated in 1974 as a safe
harbor for intrastate offerings under Section
3(a)(11)
 Section 3(a)(11) exempts securities offered and
sold only:
– by an issuer residing and doing business within a
single state
– to persons resident within such state

Original Rule 147- Requirements
 Issuer – residence of the state, means:
– State of incorporation or organization
 Issuer – doing business within a state, requires the principal office to be in
state, and all of the following:
– 80% of gross revenue in state
– 80% of assets in state
– 80% of net proceeds of offering used in state
 Offeree and purchasers – residence rules
– Individuals: based on principal residence
– Entities: based on principal office
– Entities (that are formed for the purpose): All beneficial owners must be
residents of the state
 Resales – For nine months following end of offering, limited to residents of
the state

Amended 147 and new 147A
 Residence for issuers:
– 147: “Principal office” requirement replaced with “principal
place of business,” but incorporation still required
– 147A: Only requires “principal place of business”
– Under both rules, an issuer that conducts a 147 or 147A offering
in one state must wait six months to conduct a 147 or 147A
offering in another state
 Doing business requirement - for both rules:
– Issuer only needs to satisfy one (instead of all) of the 80%
thresholds
– New threshold added based on a majority of employees

Amended 147 and new 147A
 For both rules, new “reasonable belief” standard to issuer’s
determination as to purchasers’ residence
– Avoids loss of exemption under old rule if a purchaser was not a
resident
– But, also establishes that a written representation from purchaser
regarding residence, alone, is not sufficient
 Resales: Restricted changed from nine months to six months
 Integration
– Pre-offering offers and sales; not integrated
– Post-offering; various transactions not integrated
 Multi-state offers:
– 147 does not permit offers outside of state
– 147A does permit multi-state offers

Original Rule 504
 Exemption for offers and sales up to $1MM in a twelve-
month period
 Issuer cannot be:
– Public (i.e., subject to Sec. 13 or 15(d))
– Investment company
– “blank check company”
 General solicitation permitted in limited circumstances:
– If registered under, and PPM filed pursuant to, state law
– If sold only to accredited investors pursuant to state law
exemption that permits general solicitation

504 amendments and 505 repeal
 $1MM threshold increased to $5MM
 Bad actor disqualification provisions recently
enacted for Rule 506 offerings now apply to
Rule 504 offerings
 Rule 505 repealed
– Deemed not needed in light of increase to
threshold under Rule 504

Potential Benefits of new 504
 Can sell to any number of unaccredited investors
 No particular disclosure required (although
always keep 10b-5 in mind)
 General solicitation permitted under certain
circumstances
 But: Not a “covered security” so no blue sky
preemption

SECTION 1202
QUALIFIED SMALL BUSINESS STOCK
AND ENTITY SELECTION

Entity Selection for Early Stage Companies
 Typical entities are:
– S Corporations
– Limited Liability Companies
– C Corporations
 Various pros and cons for each entity
 IRC Section 1202 has become an important factor

1202: History and Developments
 Section 1202 Applies to “Qualified Small Business Stock” Held
by Non-Corporate Shareholders for More than 5 Years
Purchased after August 10, 1993
 Originally Allowed for 50% of Gain to be Excluded from
Taxation
 Recent 2015 Path Act Permanently Extended 100% Exclusion
on Gain for Stock Acquired after September 27, 2010.
 AMT Issues Addressed in a Pro-Taxpayer Manner

Requirement to Qualify for §1202
 Exclusion Applies to Non-Corporation Shareholders (special
rules for pass-throughs)
 Stock Must be Acquired at its Original Issue in Exchange for
Money, Property or Compensation
 Must be a C Corp., subject to certain limitations
 Must Remain a C Corp During Holding Period
 Shareholder Must Hold Stock for 5 Years

Nature of Entity to Qualify
 Must be a Qualified Small Business Unit Until After Stock
Issued
 Must Meet Active Business Requirement
– Assets of Less than $50,000,000 until after Stock Issuance
– 80% of Assets Used in Active Conduct of Business
– Be in a Qualified Trade or Business (not banking, insurance,
professional services or farming)
 Must Remain a C Corp During Substantially all of Taxpayers
Holding Period

Cap on Gains
 Greater of:
–$10,000,000
–10 Times Adjusted Tax Basis of
Stock

Conclusion
 If an Investor can Satisfy all of these
Requirements and Company does a Stock Sale,
a Large Capital Gain can Avoid Tax Completely
 If All of Those Events do not Occur, you have
chosen a C Corp over Other Tax Flow Through
Options

Rule 506(c) - History
 Enacted in 2013 pursuant to the JOBS Act
 Viewed by some as a game-changer by permitting general
solicitation
 SEC issued white paper in October 2015 reported that 99%
of private offerings since 2009 raised using Rule 506.
 However, the white paper, and Chairman White in early
2016, reported 506(c) is rarely used. During 2013-2015:
– $2.8 trillion market for 506(b)
– $71 billion market for 506(c)
– Only about 2% of eligible non-registered offerings

Rule 506(c) - Summary
 Permits general solicitation
– Any form: internet advertising; social media
 But only available for accredited investors
– Under 506(b), accredited investors can self-certify
– 506(c) requires issuer to take “reasonable steps”
• Verify income from past two years’ tax returns and written
assertions of continued income
• Review bank/brokerage statements and appraisals to verify assets;
review credit reports to verify liabilities
• Third-party (BD, RIA, JD or CPA) attestation confirming status
within the past 90 days

Rule 506(c) – why limited use?
 506(c) cannot be used for unaccredited investors
 The novelty of being able to use general solicitation is
still not widely-accepted, and “heightened” verification
steps viewed as creating uncertainty
 Practical concern with accepting capital from
“unknown” investors
 More established companies requiring more than
$1MM may have easier time raising capital using
traditional relationships/markets

Rule 506(c) – possible uses
 On-going offerings: some private funds and venture companies
 Broker-dealers using the internet to build new investment relationships
 General solicitation can be an issue in those situations
– General rule to avoid general solicitation: pre-existing, substantive relationship
– Company websites and general PR, even if not directly related to an offering,
can be viewed as general solicitation
– Recent C&DIs clarify and expand activities that are not general solicitation, but
there are still limitations and gray areas
 506(c): resolves issues with general solicitation
– Can sell to “new” accredited investors after commencement of the offering
– No concerns about promoting offering on the firm’s website or issuing press
releases announcing deals
– Can use internet to create new relationships

SAFE
SIMPLE AGREEMENT FOR FUTURE EQUITY

History of SAFE
 Created by Y Combinator in 2015-2016 in California as an
Alternative Funding Mechanism for Early Stage Companies
 Developed to Replace the Industry Standard Convertible Note
 Issues with Convertible Notes
− Interest Accrued
− Maturity Dates
− Threat of Insolvency
− Subordination Agreements

SAFE
 How
– Investor Makes Cash Investment in Company and Receives Neither Debt or
Equity at that Time
– Investor Enters into SAFE
– Has Opportunity to Acquire Stock on Later Date Subject to Specific Event
– Only Negotiation is Valuation Cap on Basic SAFE
 Why
– Vehicle to Fund Startup soon after Formation
– Can Issue SAFE Quickly and Efficiently
– As a Flexible One Document Security with Minimum Points to Negotiate,
Saves Time and Money
– Don’t Need to Amend Charter Documents

Terms of Basic SAFE
 Investor and Issuer Agree on Valuation Cap, Sign Agreement, and
Investor makes Investment
 Nothing Occurs Until Triggering Event in SAFE
 On Cap Table, SAFE Referenced like any other Convertible Security
 Upon Financing, SAFE Must Convert
 Upon Conversion into Preferred Securities, Will Obtain Preemptive
Rights
 SAFE Never Expires

Conversion of SAFE
 SAFE Converts Upon Future Preferred Equity Funding Round, IPO or
Liquidity Event
 If Price Per Share Higher than Cap, SAFE Converts at Cap Valuation
 Has Liquidation Preference at Original SAFE Investment Amount,
not at Price for New Investors
 SAFE Preferred is a Separate Series Security (shadow preferred or
sub-series)
 Same Rights and Privileges as Preferred, except for Liquidation
Preference

Types of SAFEs
 Standard
– Only Valuation Cap is Negotiated
 Cap and Discount
– Has a Valuation Cap and Discount Rate
– Upon Conversion, Either Cap or Discount can be Used, but not both
 Discount, No Cap
– Has Negotiated Discount Rate
– If Liquidity Event, can be Repaid Investment Amount or Acquire Shares at Discount
 No Cap or Discount, MFN Provision
– No Valuation Cap and No Discount Rate
– If Later SAFE Issued with Better Terms, SAFE Holder can Exercise MFN Provision
– Can Only Exercise MFN Once
– Must Automatically Convert if Non-SAFE Security Issuance of 250K or More.

Financial CHOICE Act of 2017 v 2.0
 “Hope and opportunity for investors, consumers and
entrepreneurs…”
 Relief from Dodd-Frank
– Banking Provisions
– Consumer Financial Protection Bureau
 Compensation, Capital Formation and Corporate
Governance

Capital Formation Initiatives
 Increased Threshold for Rule 701 Disclosures
 Expanded Eligibility for S-3
 Additional Exemptions for EGCs
 Clarification of “General Solicitation”
 Reg A+ Increase
 Testing the Waters

Corporate Governance
 Pay Ratio and Hedging Disclosures
 Proxy Access and Universal Proxies
 Conflict Minerals
 Shareholder Proposals
 Frequency of Shareholder Approval of
Executive Compensation

2017 Update and Impact: Executive Orders,
Regulations and the Status of Federal and State Law
Enforcement Efforts

Wage and Hour Compliance
 Injunction blocking Final Regulations on “White Collar” salary
thresholds under FLSA appealed to 5th Circuit by DOL
 Injunction did not bar increase in Highly Compensated Employee
exemption
 New Labor Secretary Acosta considering whether to continue DOL
appeal
 Secretary Acosta has indicated interest in cost of living increases to
salary threshold
 DOL interest in addressing misclassification of workers [Employees
vs. Independent Contractors] shows few signs of abating

Immigration Executive Actions
 Travel Ban
 Extreme Vetting
 Suspension of Waiver of Interview for Visa
Applications at US Consulates
 Border Security and Interior Enforcement
 Buy American and Hire American

H-1B Visa Changes
 Suspension of Premium Processing
 H-1B Lottery
 The H-1B in 2018 and Beyond
– Recruitment
– Entry Level Positions
– Wage Requirements
– Increased Application Fees

NLRB Policies Likely to be
Impacted by a Republican Board
 “Quickie” or Ambush Elections
– Currently: The pre-election time period may be as
short as 10 days
– Anticipated: Reversion to the 42-day pre-election time
period
 Micro-Units
– Currently: Unions may attempt to organize non-
majority subsections of a workplace
– Anticipated: Reversal of the Specialty Healthcare
decision and elimination of micro-units

NLRB Policies Likely to be
Impacted by a Republican Board
 Social Media
– Currently: Employers are limited in restricting employees’
negative social media posts
– Anticipated: Board will grant employers more leeway in
regulating employees’ disparaging social media posts
 Handbooks
– Currently: Certain provisions are unlawful due to a potential
“chilling effect” in violation of the NLRA
– Anticipated: Reversion to challenges as to whether an
employer applies the policies discriminatorily

NLRB -- When and How Can
Changes Be Expected?
 It is likely to take up to one year after
appointments are made for Republican policies to
be adopted or for Democratic policies to be
“rolled back”
 Changes can be made by:
– Issuing decisions on cases in front of the Board;
– Board Rulemaking
– Memoranda issued by the NLRB General Counsel

Current Members of NLRB Board
 Phillip Miscimarra (R)
– Named Chairman on April 24, 2017
– Term expires on December 16, 2017
 Mark Gaston Pearce (D)
– Appointed in 2010; Term expires on August 27, 2018
 Lauren McFerran (D)
– Appointed in 2014; Term expires on December 19, 2019
 *Richard Griffin, Jr. (D) – General Counsel
– Appointed in 2013; Term expires on November 4, 2017

Rumored NLRB Board Appointments
 The following have been mentioned as potential
nominees for the Board’s two vacancies:
– Doug Seaton
– Marvin Kaplan
– William Emmanuel
– Zachary Fasman
 To date, President Trump has not appointed anyone
to the two vacant positions and Mr. Griffin remains
the General Counsel

Joint Employer = Joint Liability
 Staffing agencies, franchisees,
consultants
 Separate/independent, but
sufficient control
 Indirect, unexercised control =
new standard
 Project based v. replacement
work

Class Action Waivers
 Allowed under the Federal Arbitration Act
 NLRB: class action waivers violate the NLRA
 Not so, according to the Second, Fifth, and Eighth
Circuits
 Seventh and Ninth Circuits agree with the NLRB
 U.S. Supreme Court to decide the issue in the
2017 term

News from the SCOTUS
 Cases decided this term
– McLane Co. v. EEOC
– NLRB v. SW General
 Cases to watch
– Legality of class action waivers in arbitration
agreements
– Does Title VII prohibit sexual orientation
discrimination?

Update on the Affordable Care Act:
Employee Classification Issues and Third –Party
Vendor Agreements for Your Company’s Benefit Plans

Today’s Topics
 Update on “Replace and Repeal” Legislation
for the Affordable Care Act
 Employee Classification Issues and Potential
Benefit Liabilities
 Trends for the Third Party Vendor Agreements
for Your Company's Benefit Plans

What’s Happening with the ACA?
 Affordable Care Act enacted in 2010
– Most ACA changes now in effect relating to
minimum coverage mandates and penalties for
companies, employees and group health plans
– Future impact of “Cadillac Tax” for high-value
health plans still looming and currently scheduled
to take effect in 2020

What’s Happening with the ACA?
 Trump administration seeks prompt “repeal and
replace” of most ACA requirements
 May 2017: House Republicans re-propose and
then approve American Health Care Act (AHCA)
– Stiff opposition expected in Senate
 In its current form, AHCA would make a number
of key changes to the ACA framework for
companies and their group health plans

What Would the AHCA do?
 Eliminate the ACA individual and employer coverage mandate penalties
 Impose a continuous coverage penalty in 2019 on those who have a gap in
coverage of more than 63 days
 Phase out the Medicaid expansion under the ACA
 Reinstate the employer deduction for the Medicare Part D subsidy
 Repeal the ACA tax credit in favor of an age-based tax credit
 Repeal the ACA cost-sharing subsidies in 2020
 Delay the “Cadillac Tax” until 2025
 Reinstate the full Code Section 162(m) deduction for compensation plans for
insurance company executives

What Does This Mean for Employers?
 Post-ACA requirements for group health plans still
unknown for 2018 and beyond
– Form 1094/1095 reporting requirements continue
 Trump administration also expected to provide additional
flexibility to companies for offering HSA and FSA plans to
employees
 Companies may want to review health benefit and
prescription drug designs in light of proposed changes
under AHCA

Employment Classifications and
Employee Benefit Liabilities
 Employers have increasingly sought to reduce employment
costs by replacing employees with independent contractors
 Creates many risks for employers
– In recent years, the IRS and DOL have announced specific audit
initiatives centered on employee misclassifications
– Cross-referrals for additional enforcement through other
regulatory agencies
– Employee misclassifications can also result in state agency
audits of employers for compliance with worker’s
compensation, unemployment, and other state laws

Potential Employer Liabilities
 Employment taxes (e.g., FICA/FUTA withholdings) and income tax
withholding
– Penalties and interest assessed for missed withholdings
– Penalties for incorrect tax reporting (i.e., Form 1099 vs. W-2)
 Worker’s compensation payments
 Unemployment violations
 FLSA (overtime) – lends itself to class actions
 Entitlement of individuals to FMLA/COBRA protections and other
rights under state/federal employment laws afforded to employees

Examples of Potential
 For larger companies and their group health plans,
ACA currently requires offer of qualifying health
insurance to at least 95% of full-time employee
 If enough independent contractors should be
classified as full-time employees, significant ACA risks
and penalties may apply if it causes the company to
fall below the 95% coverage threshold

 Potential ACA penalty each year is generally $2,000 (as
indexed for inflation) times all full-time employees
– Example: If Company has 1,000 full-time employees, potential ACA
penalty each year is almost $2 million (i.e., $2,000 times 1,000 full-
time employees)
– Only takes one misclassified individual who gets coverage through ACA
health exchange (and qualifies for an ACA tax credit) to trigger the
entire penalty!
 May also cause issues with insurance companies/TPAs for
company’s health and other welfare benefit plans

 For pension and 401(k) plans, misclassified individuals may bring
claims for retroactive benefits they would have received had they
been considered employees instead
 Individuals may bring claims for retroactive vesting and benefit
accruals
 May require company to make restorative company contributions
(plus missed investment earnings)
 May cause issues with IRS discrimination/coverage testing
 In addition to the costs for the additional pension/401(k) benefits,
this may lead to large penalties if the misclassifications are found
upon audit by the IRS

Recommendations
 Categorize typical independent contractor scenarios and
estimate number of individuals in each category
 Review small samplings of IC agreements from each
category and determine potential risks to the company
 Determine whether adjustments to employment
practices and/or revisions to IC agreements can be made
to mitigate potential penalties to the company for
higher-risk scenarios

Recommendations
 Review employee benefit plans and determine
corrective options
– Consider whether clarifying language limiting impact of
employee misclassifications should be inserted
 Preservation of attorney-client privilege is critical if
outside vendor is used to review IC agreements
– Consider having outside counsel retain vendor to
maintain full privilege

Benefit Plan Vendor Agreements
 DOL requires companies to conduct “regular
review” of service providers to their ERISA plans
– Periodic benchmarking and monitoring of plan costs is
critical for satisfaction of ERISA fiduciary obligations
– Must also ensure that indemnification and other key
commercial terms in vendor agreements are
reasonable

 Traditional sources of profit margin for TPAs have
eroded in recent years
– Greater reliance on plan services agreements to shift value
from employers
 Services agreements are now much more detailed and
complicated with nuanced contract language
– Used as a vehicle to “disclose” or provide notice of
business practices

 Significant increase in number of lawsuits and
other disputes in recent years between
employers and their benefit plan vendors
– Employee data breaches
– Benefit overpayments
– Unreasonable administrative fees

 More important than ever to review the key terms of the
vendor agreements for your company’s benefit plans
– Reasonableness of fees
– Data security/ownership and breach notification
procedures
– Provider’s compliance with law and express ERISA fiduciary
acknowledgement (if appropriate)
– Remedial provisions such as indemnification protections
audit procedures, and contract termination rights
 Consider periodic RFP or other “market check” mechanism

Building a Competitive Edge Through
Linking Business and IP Strategy:
Moving Ahead Together

Introduction
 Has intellectual property become a new global
currency?
– Is there a movement towards a privatized global tax?
– Will collateralization continue to rise?
 How do financial policy changes impact global
intellectual property strategies?
– R&D Credits and Deductions
– BEPS
– Patent Boxes

Global Filing Trends Continue to Rise
– to what end?

Global Filing Trends Continue to Rise – to
what end?

What’s Behind China’s Strategy?
China accounts for most of the global growth in patent filings – Why?

How Do You Finance a Service and
Technology Economy?

Will Collateralization Continue to Rise?

What Happens if Intangible Assets Lose
Value?
 What happens to markets if
liquidity is threatened?
– Since Alice v. CLS Bank (June
19, 2014)
• DJI +8.56%;
• S&P +10.90%
• NASDAQ +21.78%
• IBB (biotech) +19%
– Patent Trials and Appeals
Board (70+% invalidated)
http://www.bilskiblog.com/blog/2016/06/two-years-after-alice-a-survey-of-the-impact-of-
a-minor-case.html
http://www.gooogle.com/finance

How is Liquidity?
http://www.ipwatchdog.com/2017/04/27/2016-patent-market-size-conclusions/id=81717/
• $165MM brokered sales in 2016,
down nearly 30% yoy - but still
significant
• New models emerging (IAM
Market; IP3, direct corporate
buying (e.g., Uber, Google, etc.))

HOW FINANCIAL POLICY IMPACTS GLOBAL
INTELLECTUAL PROPERTY STRATEGIES

Intersection of Tax Strategies with
Innovation Development
 Front End – Offsetting the cost of producing Innovation
– R&D Credits
– Deductions
 Back End – Minimizing tax burden for recognizing benefit
from Innovation
– Corporate Structure
– BEPS

Considerations on Front End Taxation (U.S.)
 R&D Credits under 26 U.S. § 41 – Credits for Increasing research
activities
– Not a deduction, but an actual dollar-for-dollar credit against taxes
owed.
– Approximately 80% of R&D credits given out go to largest
companies
– Can be claimed on open tax years – can carry forward 20 years
– New offsets against payroll tax for small companies
 R&D Expenditures under 26 U.S. 174 – Research and
experimental expenditures

Considerations on Back End Taxation
Organisation for Economic Co-Operation
The mission of the Organisation for Economic Co-Operation and Development
(OECD) is to promote policies that promote the economic and social well being of
people around the world. OECD is made of 35 member countries including
France, Germany, Japan, United Kingdom, United States, etc.
Base erosion and profit shifting (BEPS)
BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax
rules to shift profits to low or no-tax locations
BEPS included 15 Actions, of particular relevance is Action 5, Action 8 and Action
10 that encourage groups to combine IP ownership, decision making and control
and development activity in the same entity.

Existing IP Regimes do not Comply with BEPS

Existing IP Regimes do not Comply with BEPS
Nexus Approach
Existing IP regimes did not do enough to foster R&D that would promote growth
and employment because they did not align taxation with expenditures.
The purpose of the nexus approach is to assure IP regimes reward R&D
expenditures that give rise to IP income. The nexus approach is a focus on back
end tax regimes – e.g., after the IP is generated.
Front end regimes – e.g., R&D credits, deductions, etc. are already tied to tax
benefit because expenditures are used to calculate credits.

Rise of the Patent Box?
• Rep. Charles Boustany (R-La) and
Rep. Richard Neal (D-Mass.)
introduced a discussion draft in
2015 with a 10.15% effective
rate
• How will new administrations’
Tax Plans impact IP?

Strategy Points
 IP Policy should match business objectives
– Monitor BEPS implementation and US
Corporate Tax policies
– Where should R&D investments occur?
– What is global patent filing strategy – does it
match market?
– Should certain assets be liquidated?

Privacy and Security Challenges for
Business and Healthcare

Top Privacy and Security Challenges
 Social Media
 Location Technologies
 Recent Enforcement
 Marketing &
Advertising
 California Privacy
Laws
 Privacy Policies
 Digital Health
 State Security Laws

Hot on Your Trail!
 “Hot on Your Trail: Privacy, Your Data, and Who Has Access to It,”
produced by Reveal
Video Credit to “Reveal,” which is produced by the Center for Investigative Reporting and features investigative journalism from around the world.

Massachusetts Attorney
General issued a no-fault
settlement
&
Federal Trade Commission
(FTC) imposed $950,000 in
civil penalties
Recent Enforcement

Strike a balance between
the sensitivity of the
information and the
underlying purpose for
collection
The “Creep” Factor
COPPA
Marketing & Advertising

California Law Summary
Online Privacy Protection Act
(“CalOPPA”)
Must post a privacy policy, and provide information on the operator’s
online tracking practices
Privacy Rights for California
Minors in the Digital World
(“Eraser” Law)
Gives minors the right to request removal of their information posted
online or on a mobile app. Prohibits marketing certain products or
services to minors they are legally prohibited from buying.
Shine the Light Law Must provide a list of categories of personal information disclosed to
other companies for their marketing purposes during the preceding
calendar year OR post a privacy statement giving a cost-free
opportunity to opt-out
Song-Beverly Credit Card Act Prohibits the collection of unnecessary personal information in
connection with a credit card transaction
California Privacy

 Transparency
 Accuracy
 Simplicity
 Consumer rights
 Contact information
 Review and revise
Privacy Policy Best Practices

FTC Mobile Health App Tool
212

 Massachusetts
 Nevada
 California
 Texas
State Security Laws

Recent Developments in
International Privacy and Data
Security

Introduction
 Legislative Update (NY & CO)
 Class Action Trends & Recent Issues
 Cloud Security Update
 GDPR

Legislative Update
 NY Cybersecurity Rules For Financial Services
Entities
 Proposed Colorado Broker-Dealer
Cybersecurity and Investment Adviser
Cybersecurity Rules
 Illinois Right To Know Act

Class Action Trends
 We-Vibe
 Bose
 ComScore
 MD Live

Recent Matters
 Unroll.me
– Don’t hide in your privacy policy
 WannaCry
– Stockpiled vulnerabilities (?)
– Ransomware trends
 Google Docs Phishing
– Same problems, new day

Cloud Security Update
 Data Security, Management and Breach
– How does the service provider protect the data?
– How can the customer ensure compliance
(transfer/deletion/etc.) with security
requirements? Notice requirements?
– Transfer, access, retention and destruction
– Use the right tool for the right job

 Key Issues for contracts:
– Can’t be take it or leave it – must have some ability to
negotiate and control:
• Notice and communication protocols
• Security conditions
• Transparency regarding location of data (by server)
(impossible to notify for breach if you don’t know what’s
affected) – do you trust the provider to tell you? Need to
build those security/notice mechanisms into your contracts.
• No hyperlinks!

 Key Issues for contracts:
• Indemnification and Limitations on Liability should take into
account:
– Data breach – are they indemnifying? Typically try to disclaim all
responsibility, no special damages, etc.
– Insurance (insurance proceeds should be a carve out from any caps)
• No termination for convenience
• Data collection by the host – what usage information are you
allowing them to collect? What controls have you given them?
• IP Rights in SaaS environment - improvements and ownership of
certain transformative data

GDPR Outline
1. History of the Data Protection Directive
2. How we got to GDPR
3. New requirements under GDPR
4. Steps to prepare for GDPR
5. Questions and Discussion

History
 Officially known as Directive 95/46/EC
 Adopted in 1995
 Historic ties to Article 8 of the European
Convention on Human Rights (ECHR)
 ECHR provides that the right to respect for private
and family life is guaranteed
 The Directive is (presently) the primary legal
mandate in the EU for data protection

History
 The Directive was adopted to harmonize EU states’
data protection laws
 EU directives are legal acts that have to be enacted by
each EU member state
– Ex. United Kingdom: Data Protection Act
– Ex. Germany: Federal Data Protection Act
(Bundesdatenschutzgesetz, BDSG)
– Ex. Ireland: Data Protect Act (1988) + 2003 Amendment
Act

History
 The Directive (and all enactments of it)
requires compliance with three core Principles
when processing personal data:
1. Transparency
2. Legitimate Purpose
3. Proportionality

GDPR
 General Data Protection Regulation (GDPR) (officially
Regulation (EU) 2016/679)
 Enacted in April 2016 but not enforceable until May
2018
 GDPR will replace the Directive when it comes into
force in 2018
 GDPR is an EU regulation, meaning it will automatically
be law (i.e. EU member states do not have to
individually implement it)

GDPR
 GDPR was enacted because technology and data
collection and use has dramatically changed since
1995
 Discussions on updating the Directive began in
2009 and eventually got us to GDPR
 The purpose of GDPR is to update the existing
framework set out by the Directive so that the
Principles have better application

New Requirements
1. Wider Territorial Scope
2. Consent
3. Privacy by Design
4. DPOs
5. Breach Notification
6. Cross border data transfers
7. Fines

New Requirements
1. Wider Territorial Scope (Article 3)
 GDPR applies to companies in the EU and to
companies outside of the EU that process EU
personal data
 Completely changes landscape of application
– Consider in relation to Privacy Shield, Model Clauses,
and BCRs (Article 43)
– Vendor Management for Onward Transfer

New Requirements
2. Consent
 Must be freely given, specific, informed, and
unambiguous
 Click wrap agreements still acceptable so long as check
box not pre-checked (requires user affirmative action)
 Some data types, like health information, may only be
collected by explicit consent (higher standard)

New Requirements
2. Consent (Continued) – Conditions for
Collection/Use
 Legal Basis for Processing (Article 6)
 Purpose Limitation and Big Data
 Individual Rights/Profiling
– Right to Be Forgotten
– Data Portability
– Limitation on Profiling (Article 20)

New Requirements
3. Privacy by Design (Article 23)
 Data protection concepts and principles must be
considered and built into products and data collection
processes
 Collecting the minimum data necessary first priority
 Forces privacy to be a pillar of business, not a
secondary issue
 Data Mapping (Article 30), Data Portability, Right to Be
Forgotten

New Requirements
4. Data Privacy Officers
 Companies must appoint DPOs to monitor
compliance with GDPR
 Individual must possess expert knowledge of data
protection law and practices
 Generally must have degree of independence and
cannot also have operational IT responsibility

New Requirements
5. Breach Notification
 Companies have only 72 hours to notify
applicable regulator in the event of a breach
 Severe breaches may require direct
notification to affected individual

New Requirements
6. Cross border data transfers
 Codified acceptable means to transfer data out of
the EU (BCR’s acknowledged Article 43)
 Still able to rely on model contract clauses,
corporate binding rules, Privacy Shield*
 Cost goes up when moving away from EU
preferred transfer model (Privacy Shield most
expensive)

Business Law Institute

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Was ist angesagt?

Was ist angesagt? (17)

Ähnlich wie Business Law Institute

Ähnlich wie Business Law Institute (20)

Mehr von Polsinelli PC

Mehr von Polsinelli PC (20)

Kürzlich hochgeladen

Kürzlich hochgeladen (20)

Business Law Institute