WSGR Fintech Update - August 2017

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Wilson Sonsini Goodrich & Rosati is pleased to present the August 2017 issue of the WSGR Fintech Update. This latest edition features an article on the State of Delaware's amendments to permit Delaware corporations to use networks of electronic databases (such as distributed ledger using blockchain technology) to record and effect transactions in shares of the corporation’s stock, as well as an article on the U.S. Commodities Futures Trading Commission granting the applications of LedgerX LLC to register and operate as a swap execution facility (SEF) and as a derivatives clearing organization (DCO)—making LedgerX the first federally regulated bitcoin options exchange and clearinghouse. In addition, this issue includes an article on the New York Stock Exchange’s proposal to amend its listing requirements to make it easier for certain private companies to list their shares without also conducting a public offering of their securities, and an article on the Office of the Comptroller of the Currency highlighting the growth of fintech companies as a possible risk to the federal banking system.


Delaware Set to Adopt Use of Blockchain

The State of Delaware is poised to embrace blockchain technology for Delaware corporations. In March 2017, it proposed amendments to its General Corporation Law of the State of Delaware (DGCL) to permit such corporations to use networks of electronic databases (such as distributed ledger using blockchain technology), as opposed to traditional stock ledgers, to record and effect transactions in shares of the corporation’s stock. Explained in its simplest terms, a distributed ledger system based on blockchain technology enables a seller to securely and quickly transfer a corporation’s stock to a buyer without the use of an intermediary (such as a broker and clearinghouse) and the associated costs, time delay, and susceptibility to manual error. The amendments, if adopted, are expected to take effect on August 1, 2017. Delaware is the first state to make such a move.

CFTC Permits First-Ever Bitcoin Options Exchange and Clearinghouse

In July 2017, the U.S. Commodities Futures Trading Commission (CFTC) granted the applications of LedgerX LLC to register and operate as a swap execution facility (SEF) and as a derivatives clearing organization (DCO). An SEF is a platform for the trading of swaps among eligible participants, and a DCO is essentially an entity through which derivatives transactions are cleared and settled and through which each party to the derivatives contract can substitute the credit of the DCO for the credit of the party. As a result of the CFTC granting these applications, LedgerX is the first federally regulated bitcoin options exchange and clearinghouse authorized to list and clear fully collateralized and physically settled options on bitcoin for the institutional market. The CFTC’s grant of SEF and DCO status to LedgerX is consistent with its recently announced fintech innovation initiative, in which it strives to be “more accessible to FinTech innovators and [serve] as a platform to inform the CFTC’s understanding of new technologies.”1

1See our discussion of the CFTC initiative in the June 2017 WSGR Fintech Update.


NYSE Considers Easing Listing Requirements for Qualifying Private Companies

Private companies wishing to list their shares on the New York Stock Exchange (NYSE) may soon be able to list without also conducting a public offering of their securities. The NYSE has proposed amending its listing requirements to make it easier for certain private companies to do so.1 Under the current NYSE listing requirements, a company must list, as a general matter, in connection with an initial public offering of its shares, pursuant to a spin-off, or upon transfer of its shares from another market.

The NYSE proposal, however, would permit the listing of private company shares so long as the company can provide an independent third-party valuation demonstrating that it has a market value of at least $250 million in qualifying shares and the valuation agent employed satisfies certain competency and independence requirements. If the NYSE proposal is adopted, highly valued private companies (so-called “unicorns”) that are not seeking to raise capital through a public securities offering (and pay associated underwriting commissions) could list their shares on the NYSE and provide increased liquidity to their investors.

1See Notice of Filing of Proposed Rule Change to Amend Section 102.01B of the NYSE Listed Company Manual, Exchange Act Release No. 80933 (Jun. 15, 2017). The NYSE had previously proposed a similar amendment, but withdrew that proposed amendment after submitting the June 15 proposal. See Notice of Withdrawal of a Proposed Rule Change, Exchange Act Release No. 81000 (Jun. 22, 2017).


OCC Cites Fintech Companies as Risk Factor to Banking System

The Office of the Comptroller of the Currency (OCC), in its semiannually published risk perspectives report, highlights the growth of fintech companies as a possible risk to the federal banking system.1 The OCC notes that banks are facing greater competition from fintech companies that provide banking services (e.g., lending and/or facilitating payments), which is contributing to changes in how customers and financial institutions approach banking. The OCC also suggests that the increasing reliance by banks on third-party service providers to provide new products to compete with fintech companies (and the resulting need for oversight) is another emerging risk within the federal banking system. Previously, the OCC had explored granting special purpose bank charter status to fintech companies2—although the OCC has been sued in federal court by state regulators that take issue with the OCC’s authority to provide such charters.3

1See OCC, Semiannual Risk Perspective (Spring 2017).

2See our discussion of the special purpose charter in the April 2017 WSGR Fintech Update.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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