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The Looming SPAC Meltdown

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How hedge fund traders known as the SPAC Mafia are driving an $80 billion investment boom with a no-lose trade.

If you want to see the future of so many of the special purpose acquisition companies currently flooding the market, look to the recent past. Nearly five years ago, Landry’s Seafood billionaire Tillman Fertitta took Landcadia Holdings public to the tune of $345 million. No matter that, true to the SPAC “blank check” model, there was not yet any operating business—dozens of hedge funds piled into its $10-per-unit IPO. 

In May 2018, Landcadia finally located its target: a budding online restaurant delivery service called Waitr that would merge with the SPAC in exchange for $252 million in cash. Fertitta touted the fact that the Louisiana startup, with $65 million in revenue, would now have access to 4 million loyalty members of his restaurant and casino businesses, and a new partnership with his Houston Rockets NBA franchise. Two years later, though, you very likely have never heard of Waitr. As such, its stock recently traded at $2.62, down more than 70% from its IPO price (the S&P 500 has climbed 76% over the same period).

Waitr was a disaster for pretty much anyone who bought the stock early. But the hedge funds that purchased Landcadia’s IPO units did just fine. Virtually all recouped their initial investment, with interest, and many profited by exercising warrants in the aftermarket. “SPACs are a phenomenal yield alternative,” says David Sultan, chief investment officer at Fir Tree Partners, a $3 billion hedge fund that bought into Fertitta’s Landcadia SPAC IPO—and pretty much any other it could get its hands on. 

The SPAC boom of 2020 is probably the biggest Wall Street story of the year, but almost no one has noticed the quiet force driving this speculative bubble: a couple dozen obscure hedge funds like Polar Asset Management and Davidson Kempner, known by insiders as the “SPAC Mafia.” It’s an offer they can’t refuse. Some 97 percent of these hedge funds redeem or sell their IPO stock before target mergers are consummated, according to a recent study of 47 SPACs by New York University Law School professor Michael Ohlrogge and Stanford Law professor Michael Klausner. Though they’re loath to talk specifics, SPAC Mafia hedge funds say returns currently run around 20%. “The optionality to the upside is unlimited,” gushes Patrick Galley, a portfolio manager at Chicago-based RiverNorth, who manages a $200 million portfolio of SPAC investments. Adds Roy Behren of Westchester Capital Management, a fund with a $470 million portfolio of at least 40 SPACs, in clearer English: “We love the risk/reward of it.” 

What’s not to love when “risk” is all but risk-free? There’s only one loser in this equation. As always, it’s the retail investor, the Robinhood novice, the good-intentions fund company like Fidelity. They all bring their pickaxes to the SPAC gold rush, failing to understand that the opportunities were mined long before they got there—by the sponsors who see an easy score, the entrepreneurs who get fat exits when their companies are acquired and the SPAC Mafia hedge funds that lubricate it all. 

It’s about to get far worse for the little guy. Giant quant firms—Izzy Englander’s Millennium Management, Louis Bacon’s Moore Capital, Michael Platt’s BlueCrest Capital—have recently jumped in. Sure, they all raised billions based on algorithmic trading strategies, not by buying speculative IPOs in companies that don’t even have a product yet. But you don’t need AI to tell you the benefits of a sure thing. And that means torrents of easy cash for ever more specious acquisitions. Says NYU’s Ohlrogge: “It’s going to be a disaster for investors that hold through the merger.” 

In the first 10 months or so of 2020, 178 SPACs went public, to the tune of $65 billion, according to SPAC­Insider—more than the last ten years’ worth of such deals combined. That’s just one indication that the current wave of blank-check companies is different from previous generations. 

In the 1980s, SPACs were known as “blind pools” and were the domain of bucket-shop brokerage firms infamous for fleecing gullible investors under banners such as First Jersey Securities and The Wolf of Wall Street’s Stratton Oakmont. Blind pools circumvented regulatory scrutiny and tended to focus on seemingly promising operating companies—those whose prospects sounded amazing during a cold-calling broker’s telephone pitch. The stockbrokers, who typically owned big blocks of the shares and warrants, would “pump” prices up, trading shares among clients, and then “dump” their holdings at a profit before the stocks inevitably collapsed. Shares traded in the shadows of Wall Street for pennies, and the deal amounts were tiny, typically less than $10 million. 

uncaptioned
Former stockbroker and convicted felon Jordan Belfort was immortalized in The Wolf Of Wall Street. In the late 1980s and early 1990s, blank check companies, similar to today’s SPACs but known as blind pools, were his stock and trade. GETTY EDITORIAL

In 1992, a Long Island lawyer named David Nussbaum, CEO of brokerage GKN Securities, structured a new type of blank-check company, with greater investor protections including segregating IPO cash in an escrow account. He even came up with the gussied-up “special purpose acquisition company” moniker. 

The basics of the new SPACs were as follows: A sponsor would pay for the underwriting and legal costs of an initial public offering in a new shell company and have two years to use the proceeds to buy an acquisition target. To entice IPO investors to park their money in these new SPACs as the sponsors hunted for a deal, the units of the IPO, which are usually priced at $10 each, included one share of common stock plus warrants to buy more shares at $11.50. Sometimes unit holders would also receive free stock in the form of “rights” convertible into common stock. If a deal wasn’t identified within two years, or the IPO investor voted no, holders could redeem their initial investment—but often only 85% of it. 

GKN underwrote 13 blank-check deals in the 1990s, but ran into regulatory trouble with the National Association of Securities Dealers, which fined the brokerage $725,000 and forced it to return $1.4 million for overcharging 1,300 investors. GKN closed in 2001, but Nussbaum reemerged in 2003 running EarlyBirdCapital, which remains a big SPAC underwriter today. 

SPACs fell out of favor during the dot-com bubble years, when traditional IPO issuance was booming. In the early 2000s, interest in SPACs returned with the bull market, and the deals started getting bigger. Leading up to the 2008 crisis, dealmakers Nelson Peltz and Martin Franklin both turned to SPACs for financing, raising hundreds of millions of dollars each.

Around 2015, SPACs began to offer IPO investors 100% money-­back guarantees, with interest; the holder would also be entitled to keep any warrants or special rights, even if they voted against the merger and tendered their shares. Even more significantly, they could vote yes to the merger and still redeem their shares. In effect, this gave sponsors a green light on any merger partner they chose. It also made SPAC IPOs a no-lose proposition, effectively giving buyers a free call option on rising equity prices. As the Fed’s low-rate, easy-money policy propelled the stock market higher for over a decade, it was just a matter of time before SPACs came back into vogue. And so they have, with unprecedented force. 

Hedge funders may be the enablers of the SPAC boom, but they certainly aren’t the only ones getting rich. In September, a billionaire-sponsored SPAC called Gores Holdings IV said it would give Pontiac, Michigan–based entrepreneur Mat Ishbia, owner of mortgage lender United Wholesale Mortgage, a $925 million capital infusion, which would value his company at $16 billion. If the deal is completed, Ishbia’s net worth will rise to $11 billion, making him one of the 50 richest people in America. “I never knew what a SPAC was,” Ishbia admits. “I felt like it was a more efficient process.”

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SPAC MVP: United Wholesale Mortgage’s Mat Ishbia won a national basketball championship with Michigan State twenty years ago but missed his only shot in the finals. His first attempt at the SPAC game could be a slam dunk. JACOB LEWKOW FOR FORBES

There are also the sponsors, underwriters and lawyers who create SPACs, each taking their pound of flesh from the deals. Sponsors, who pay underwriting and legal fees to set up and merge SPACs, normally wind up with a generous shareholder gift known as the “promote”—roughly 20% of the SPAC’s common equity after the IPO. 

Alec Gores, the private equity billionaire who helped take United Wholesale public, has listed five SPACs and raised over $2 billion. In the United Wholesale deal, Gores and his partners are entitled to purchase $106 million worth of “founder shares” for $25,000, or $0.002 a share. Gores’ private equity firm hasn’t raised a new fund since 2012. With easy scores like this, why would he? 

Among SPAC sponsors, few can match Chamath Palihapitiya’s frenetic pace. Palihapitiya, 44, is a former Facebook executive who founded Silicon Valley venture capital firm Social Capital in 2011. With his venture business slowing down, Palihapitiya has recently turned to the public markets. In the span of 37 months, he has raised $4.3 billion in six New York Stock Exchange–listed SPACs that go by the tickers IPOA, IPOB, IPOC, IPOD, IPOE and IPOF. The founder’s stock he has received for his “promote” will amount to no less than $1 billion, by Forbes estimates. In late 2019, Palihapitiya used one of his SPACs to take Virgin Galactic public. Two other deals have already been announced: mergers with home­buying platform Opendoor at a $5 billion valuation and with medical-insurance company Clover Health at $3.7 billion. Palihapitiya and Gores point out that they intend to invest hundreds of millions via private placements in their deals. 

Of the $65 billion raised in SPAC IPOs so far in 2020, Forbes estimates that all told, sponsors like Gores and Palihapitiya should net more than $10 billion in free equity. Great for them, but terrible for the rest of the shareholders. In fact, by the time the average SPAC enters into a merger agreement, warrants afforded to hedge funds, underwriting fees and the generous sponsor’s promote eat up more than 30% of IPO proceeds. According to the study of recent SPACs by Ohlrogge and Klausner, a typical SPAC holds just $6.67 a share in cash of its original $10 IPO price by the time it enters into a merger agreement with its target company. 

“The problem with the typical founder-shares arrangement is not just the outsized nature of the compensation or the inherent misalignment of incentives, but also the fact that the massively dilutive nature of founder stock makes it difficult to complete a deal on attractive terms,” says billionaire Bill Ackman. 

A handful of billionaires like Ackman are structuring fairer deals with their SPACs. In July, Ackman raised a record $4 billion SPAC called Pershing Square Tontine Holdings. He’s shopping for deals, but his shareholders will face much less dilution because his SPAC has no promote. 


“A handful of billionaires are structuring fairer deals with their SPACs. but most SPAC deals don’t come with benevolent billionaires attached. “


Billionaire hedge fund mogul Daniel Och, backer of unicorn startups Coinbase, Github and Stripe via his family office, recently raised $750 million in a SPAC IPO called Ajax I but reduced its promote to 10%. His investing partner in Ajax, Glenn Fuhrman, made billions in profits running Michael Dell’s family office; the SPAC’s board includes an all-star lineup of innovators: Kevin Systrom of Instagram, Anne Wojcicki of 23andMe, Jim McKelvey of Square and Steve Ells of Chipotle. The group has pledged their personal capital into Ajax’s future deal. 

“We’re lowering the sponsor economics to make clear that this is not about promoting someone’s capital,” Och says. “It’s about investing our own capital, and then finding a great company that we can hold for a long period of time.” 

Most SPAC deals don’t come with benevolent billionaires attached. In fact, if history is any guide, the average post-merger SPAC investor is in for a fleecing not unlike the ones dealt out in the shoddy blind-pool deals peddled by those bucket shops of the 1980s and ’90s. 


According to NYU’s Ohlrogge, six months after a deal is announced, median returns for SPACs amount to a loss of 12.3%. A year after the announcement, most SPACs are down 35%. The returns are likely to get worse as the hundreds of SPACs currently searching for viable merger partners become more desperate. 

Problems are already surfacing in the great SPAC gold rush of 2020. 

Health-care company MultiPlan, one of the most prominent recent deals, may already be in trouble. Acquired by a SPAC called Churchill Capital Corp. III in a $1.3 billion deal, its shares plunged 25% in November after a short seller published a report questioning whether its business was deteriorating more than it let on. 

The Churchill SPAC is one of five brought to market by former Citigroup banker Michael Klein, which have raised nearly $5 billion. Klein and his partners now sit on stock holdings worth hundreds of millions, thanks largely to the lucrative promotes. Klein’s investment bank, M. Klein & Co., has made tens of millions of dollars in fees advising his own SPACs on their deals. In the case of MultiPlan, Klein’s bank earned $30 million in fees to advise Churchill to inject SPAC capital into MultiPlan. IPO proceeds, however, are now worth only 70 cents on the dollar. 

“Coming out of the financial crisis there was all this talk about the expected outcomes when you have all these traders who have heads-they-win-tails-they-don’t-lose incentives, because it’s somebody else’s money,” says Carson Block, the short seller who called out MultiPlan. “Those incentive structures are alive and well on Wall Street in the form of SPACs.” 

Nikola Motor, the SPAC that broke the dam on electric-vehicle speculations, now faces probes from the Department of Justice over whether it misled investors when raising money. Its founder, Trevor Milton, is gone, and a much-hyped partnership with General Motors is in doubt. Shares have traded down 36% from where they stood when the SPAC merger was completed. 

Electric vehicles aren’t the only overhyped SPAC sector. So far 11 cannabis SPACs have either announced a deal or are searching for one. And in online gaming, there are no fewer than 10 SPACs in the works. 


Blank Checks For Billionaires 

SPACs were once shunned by savvy investors. Today they’re beloved by THE WEALTHIEST. 

It wasn’t long ago that fracking was all the rage on Wall Street, too, and SPAC IPOs provided quick and easy capital infusions. Energy private equity firm Riverstone Holdings issued three large SPACs—one in March 2016, for $450 million; then two more IPO’d in 2017, raising $1.7 billion—all intent on profiting from shale oil-and-gas investments. 

Riverstone’s Silver Run II SPAC acquired Alta Mesa Resources in 2018, but the company quickly went bankrupt, incinerating $3.8 billion of market capitalization on oil fields in Oklahoma. Its other two SPACs completed mergers, and now both are trading below $3 per share. 

Despite its dismal track record, Riverstone had no trouble raising $200 million in October for its fourth SPAC IPO, “Decarbonization Plus Acquisition.” Shale fracking is yesterday’s game, so Riverstone has moved on to clean tech. 

Hope springs eternal—especially when you can count on hedge fund money to back you up. 

Source: Forbes – The Looming SPAC Meltdown

Source: https://spacfeed.com/the-looming-spac-meltdown?utm_source=rss&utm_medium=rss&utm_campaign=the-looming-spac-meltdown

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Senate banking hearing grills Gensler on SEC regs, crypto, retail investing, and more

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Tuesday morning, the Senate Banking Committee held an oversight with the Securities Exchange Commission’s Chairman Gary Gensler.

A bipartisan group of senators questioned Gensler’s regulatory intentions on topics from cryptocurrency to retail investing.

Gensler began by speaking with board Chairman Sen. Sherrod Brown (D-OH), reporting his staff was researching the dangers of SPACS.

But as ranking member Sen. Pat Toomey (R- PA) took the talking stick, he went right into Payment for Order Flow (PFOF). 

“I worry you would favor the paternalistic push by some on the left to restrict investor freedom under the guise of protection while actually harming retail investors; such harm may result in the form of your opposition to Payment for Order Flow,” Toomey said.

“Banning Payment for Order Flow could very well have the effect of eliminating commission-free investing, which would be a great disservice to average investors.”

Toomey’s point comes from the idea that PFOF has enabled the best time ever to be a retail investor in America.

Through commission-free trading, no minimum balances, low or no-fee mutual funds ETFs, and user-friendly tech-like mobile apps, Toomey said investors could take part in the profits of Wall Street like never before.

Securities Exchange Commission’s Chairman Gary Gensler. | CSPAN

Payment for order flow

Gensler said his biggest worry about the equity market was competition and consolidation. While retail investing has taken off, the PFOF that enables it is ripe for conflict of interest: he said more than half of all PFOF trades go into one big pool. 

“Nearly half of the volume transacted is executed in “dark pools” or by wholesalers. I wonder whether this means that the consolidated tape — the so-called National Best Bid and Offer — fully reflects the full range of activity on exchanges,” Gensler said in testimony.

“As I have stated previously, I believe payment for order flow and exchange rebates may present a number of conflicts of interest.”

Retail investors have flocked to products like Robinhood, which offers fee-less and fractional investing in stocks, and securities, by selling their customer’s trades to partner market makers instead of “actually” posting them on the true securities markets.

The practice, pioneered by Bernie Madoff, printed $2.5 billion in 2020 for top trading firms like T.D. Ameritrade, Robinhood, and Charles Swab.

Feeless trading would disappear

The majority of fees collected come from options trades in small amounts of $.50 at a time. Without it, Toomey and others argue feeless trading would disappear overnight, and so would retail investing. 

In March, PFOF became a retail investor rallying cry when Robinhood shut down trading of Gamestop to cover a change in its own market maker deposit requirements.

To some, it looked like PFOF had enabled hedge funds to shut down orders that were losing them money by requiring Robinhood to foot the bill. But, ironically, PFOF is the only reason retail investors got into Gamestop in the first place. 

SenatorJack Reed (D-RI) went into PFOF, asking Gensler, “is the owner of these securities getting the best deal?”

“I think it may make our markets less efficient; retail traders may not be getting the best execution even if with a price improvement [feeless trading,]” Gensler said.

“If anyone on this Commission or this staff makes a trade on these platforms, it is 97 per cent chance that it does not go to an exchange; it goes to dark markets and secondary sale.”

As Gensler later went on to tell Senator Tim Scott (R-SC): the goal is to encourage more competition in the investing order market, not less. In addition, he hopes to find a way to shorten the settlement cycle, to leave traders less exposed. 

“Technology has driven down the cost of investing, but there’s still a cost left PFOF, even a couple of pennies out there is still a cost,” Gensler said.

“What I have raised with Jennifer Leete: we can we do better with more competition, rather than one reseller buying half the orders in America. I think we will try to drive it down to an even lower cost.”

Leete was appointed as Associate Director in Enforcement in the SEC in 2020, with 20 years of experience supervising cases against convicted trading order fraudsters at the SEC.

Cryptocurrency security regulation

As Toomey first brought up and jumped into during his question period, Gensler has recently made it clear he believed some cryptocurrency products were securities and needed to be regulated. The senator said he would like to see more public guidance. 

“So I’m frustrated by the lack of helpful SEC public guidance, explaining how you make this distinction: What makes some of them securities while others are not,” Toomey said. “Why not publicly announce what characteristics make the cryptocurrency?”

Toomey referred to stable coins, crypto-assets founded with the goal of stability to govern exchanges and offer liquidity as non-securities. However, if they don’t have an “expectation of profit on the investment,” they don’t beat the Howey test for securities, and in Toomey’s book, they are not securities. 

“As Thurgood Marshall wrote in the Reves opinion, in defining the scope of the market that it — Congress wished to regulate — Congress painted a broad brush, and it actually included about 35 different things inside the definition of a security,” Gensler said.

“Senator, this, this congress could change the laws, but the laws that we have right now have a very broad definition of a security, including a note, including an investment contract, and the like.”

Without naming names, the senator had referenced last week’s news that Coinbase’s USDC savings product had come under fire from the SEC for unregulated security fears.

Coinbase, through CEO Brian Armstrong, took up arms via Twitter posts and claimed they had no idea why their money market bank loan product was being considered a security.

The SEC has been known to work privately with firms that aim to create securities or investment products.

How to get away with security

Though believing that some stable coins are fair game, in general, Gensler thinks his hands are tied: most cryptocurrencies are investment products.

“I agree with you that, that some of these tokens have been deemed to be commodities, many of them are securities, and the Supreme Court has weighed in a number of times you noted, the Howey Test,” Gensler said. 

The Howie test comes from a Supreme Court decision in 1946 between a Florida orange grove owner selling speculative land and the SEC. The SCOTUS ruled that Howie was violating the rules set down in the 1933 Securities act, defining an ‘”investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Under this ruling, if it is advertised to make money on money, it is a security. 

The Senator and Gensler brought up the Reves test, another securities law case decided in 1990 concerning an Arkansas co-op farm “investment” shares. The SCOTUS found the promissory notes were securities and thus violated the ’33 act.

However, after 60 years of innovation that had created many financial products, the Reves case had to be more technical. Basically, to cover all the new products, the SCOTUS stated that anything marketed like SEC-compliant security or resembled one would have to be SEC-compliant: the average investor expected that the SEC would check investment products for fraud. 

Gensler said he believes the Senate and House can change the laws, but he interprets the 1933 Securities to act as a broad set of rules that he must follow regarding security regulation.

He said that many things have become classified as securities at times, including whiskey barrels bought with speculative intent in the 1960s— which is true.

“I’m not negative or minimalist about crypto; I am technology-neutral, Gensler said. “I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework.”

In other news

Aside from arguing over cryptocurrency and retail investing, Gensler presented two goals for the SEC. One, to release new cyber security “hygiene” guidelines in the coming months for firms to follow in the age of ransomware hacking attacks.

Gensler agreed with Sen Jon Tester (D – MT), who said cyber security was a dire challenge facing American businesses like climate change. 

“I couldn’t agree with you more. So there are two lists we’re looking at: how are you managing your cyber risk because it’s a real risk, how are you governing and managing it, and what are your costs for cyber hygiene,” Gensler said. “Secondly is incident reporting, if you have a breach, and you’re paying ransomware and the like.”

Two, as Gensler made clear in a Wall Street Jornal Op-Ed Tuesday morning: the U.S. intends to increase oversite into the financial activities of Chinese companies tenfold.

Under new laws passed by the Senate, Chinese companies must open their books to U.S. audit within a new three-year timeframe. Gensler said that if they refuse, the companies will be barred from trade and U.S. stock exchanges.  

“The Securities and Exchange Commission may need to prohibit trading in about 270 China-related companies by early 2024.

The reason can be traced to the Enron and WorldCom accounting scandals,” Gensler wrote in an Op-Ed. “Congress passed the Sarbanes-Oxley Act in 2002, mandating inspections of public companies’ auditors by the Public Company Accounting Oversight Board. More than 50 foreign jurisdictions allow the board to “audit the auditors.” Two do not: China and Hong Kong.”

Gensler said last year Congress passed the Holding Foreign Companies accountable act, which prohibits trading a foreign-issued stock if the US oversight board can’t inspect or audit the firm. It does not have to be a US-based firm that performs the audit, but someone has to audit every three years, or you’re out. 



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Source: https://www.lendacademy.com/senate-banking-hearing-grills-gensler-on-sec-regulation-crypto-retail-investing-and-more/

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Senate banking hearing grills Gensler on SEC regs, crypto, retail investing, and more

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Tuesday morning, the Senate Banking Committee held an oversight with the Securities Exchange Commission’s Chairman Gary Gensler.

A bipartisan group of senators questioned Gensler’s regulatory intentions on topics from cryptocurrency to retail investing.

Gensler began by speaking with board Chairman Sen. Sherrod Brown (D-OH), reporting his staff was researching the dangers of SPACS.

But as ranking member Sen. Pat Toomey (R- PA) took the talking stick, he went right into Payment for Order Flow (PFOF). 

“I worry you would favor the paternalistic push by some on the left to restrict investor freedom under the guise of protection while actually harming retail investors; such harm may result in the form of your opposition to Payment for Order Flow,” Toomey said.

“Banning Payment for Order Flow could very well have the effect of eliminating commission-free investing, which would be a great disservice to average investors.”

Toomey’s point comes from the idea that PFOF has enabled the best time ever to be a retail investor in America.

Through commission-free trading, no minimum balances, low or no-fee mutual funds ETFs, and user-friendly tech-like mobile apps, Toomey said investors could take part in the profits of Wall Street like never before.

Securities Exchange Commission’s Chairman Gary Gensler. | CSPAN

Payment for order flow

Gensler said his biggest worry about the equity market was competition and consolidation. While retail investing has taken off, the PFOF that enables it is ripe for conflict of interest: he said more than half of all PFOF trades go into one big pool. 

“Nearly half of the volume transacted is executed in “dark pools” or by wholesalers. I wonder whether this means that the consolidated tape — the so-called National Best Bid and Offer — fully reflects the full range of activity on exchanges,” Gensler said in testimony.

“As I have stated previously, I believe payment for order flow and exchange rebates may present a number of conflicts of interest.”

Retail investors have flocked to products like Robinhood, which offers fee-less and fractional investing in stocks, and securities, by selling their customer’s trades to partner market makers instead of “actually” posting them on the true securities markets.

The practice, pioneered by Bernie Madoff, printed $2.5 billion in 2020 for top trading firms like T.D. Ameritrade, Robinhood, and Charles Swab.

Feeless trading would disappear

The majority of fees collected come from options trades in small amounts of $.50 at a time. Without it, Toomey and others argue feeless trading would disappear overnight, and so would retail investing. 

In March, PFOF became a retail investor rallying cry when Robinhood shut down trading of Gamestop to cover a change in its own market maker deposit requirements.

To some, it looked like PFOF had enabled hedge funds to shut down orders that were losing them money by requiring Robinhood to foot the bill. But, ironically, PFOF is the only reason retail investors got into Gamestop in the first place. 

SenatorJack Reed (D-RI) went into PFOF, asking Gensler, “is the owner of these securities getting the best deal?”

“I think it may make our markets less efficient; retail traders may not be getting the best execution even if with a price improvement [feeless trading,]” Gensler said.

“If anyone on this Commission or this staff makes a trade on these platforms, it is 97 per cent chance that it does not go to an exchange; it goes to dark markets and secondary sale.”

As Gensler later went on to tell Senator Tim Scott (R-SC): the goal is to encourage more competition in the investing order market, not less. In addition, he hopes to find a way to shorten the settlement cycle, to leave traders less exposed. 

“Technology has driven down the cost of investing, but there’s still a cost left PFOF, even a couple of pennies out there is still a cost,” Gensler said.

“What I have raised with Jennifer Leete: we can we do better with more competition, rather than one reseller buying half the orders in America. I think we will try to drive it down to an even lower cost.”

Leete was appointed as Associate Director in Enforcement in the SEC in 2020, with 20 years of experience supervising cases against convicted trading order fraudsters at the SEC.

Cryptocurrency security regulation

As Toomey first brought up and jumped into during his question period, Gensler has recently made it clear he believed some cryptocurrency products were securities and needed to be regulated. The senator said he would like to see more public guidance. 

“So I’m frustrated by the lack of helpful SEC public guidance, explaining how you make this distinction: What makes some of them securities while others are not,” Toomey said. “Why not publicly announce what characteristics make the cryptocurrency?”

Toomey referred to stable coins, crypto-assets founded with the goal of stability to govern exchanges and offer liquidity as non-securities. However, if they don’t have an “expectation of profit on the investment,” they don’t beat the Howey test for securities, and in Toomey’s book, they are not securities. 

“As Thurgood Marshall wrote in the Reves opinion, in defining the scope of the market that it — Congress wished to regulate — Congress painted a broad brush, and it actually included about 35 different things inside the definition of a security,” Gensler said.

“Senator, this, this congress could change the laws, but the laws that we have right now have a very broad definition of a security, including a note, including an investment contract, and the like.”

Without naming names, the senator had referenced last week’s news that Coinbase’s USDC savings product had come under fire from the SEC for unregulated security fears.

Coinbase, through CEO Brian Armstrong, took up arms via Twitter posts and claimed they had no idea why their money market bank loan product was being considered a security.

The SEC has been known to work privately with firms that aim to create securities or investment products.

How to get away with security

Though believing that some stable coins are fair game, in general, Gensler thinks his hands are tied: most cryptocurrencies are investment products.

“I agree with you that, that some of these tokens have been deemed to be commodities, many of them are securities, and the Supreme Court has weighed in a number of times you noted, the Howey Test,” Gensler said. 

The Howie test comes from a Supreme Court decision in 1946 between a Florida orange grove owner selling speculative land and the SEC. The SCOTUS ruled that Howie was violating the rules set down in the 1933 Securities act, defining an ‘”investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Under this ruling, if it is advertised to make money on money, it is a security. 

The Senator and Gensler brought up the Reves test, another securities law case decided in 1990 concerning an Arkansas co-op farm “investment” shares. The SCOTUS found the promissory notes were securities and thus violated the ’33 act.

However, after 60 years of innovation that had created many financial products, the Reves case had to be more technical. Basically, to cover all the new products, the SCOTUS stated that anything marketed like SEC-compliant security or resembled one would have to be SEC-compliant: the average investor expected that the SEC would check investment products for fraud. 

Gensler said he believes the Senate and House can change the laws, but he interprets the 1933 Securities to act as a broad set of rules that he must follow regarding security regulation.

He said that many things have become classified as securities at times, including whiskey barrels bought with speculative intent in the 1960s— which is true.

“I’m not negative or minimalist about crypto; I am technology-neutral, Gensler said. “I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework.”

In other news

Aside from arguing over cryptocurrency and retail investing, Gensler presented two goals for the SEC. One, to release new cyber security “hygiene” guidelines in the coming months for firms to follow in the age of ransomware hacking attacks.

Gensler agreed with Sen Jon Tester (D – MT), who said cyber security was a dire challenge facing American businesses like climate change. 

“I couldn’t agree with you more. So there are two lists we’re looking at: how are you managing your cyber risk because it’s a real risk, how are you governing and managing it, and what are your costs for cyber hygiene,” Gensler said. “Secondly is incident reporting, if you have a breach, and you’re paying ransomware and the like.”

Two, as Gensler made clear in a Wall Street Jornal Op-Ed Tuesday morning: the U.S. intends to increase oversite into the financial activities of Chinese companies tenfold.

Under new laws passed by the Senate, Chinese companies must open their books to U.S. audit within a new three-year timeframe. Gensler said that if they refuse, the companies will be barred from trade and U.S. stock exchanges.  

“The Securities and Exchange Commission may need to prohibit trading in about 270 China-related companies by early 2024.

The reason can be traced to the Enron and WorldCom accounting scandals,” Gensler wrote in an Op-Ed. “Congress passed the Sarbanes-Oxley Act in 2002, mandating inspections of public companies’ auditors by the Public Company Accounting Oversight Board. More than 50 foreign jurisdictions allow the board to “audit the auditors.” Two do not: China and Hong Kong.”

Gensler said last year Congress passed the Holding Foreign Companies accountable act, which prohibits trading a foreign-issued stock if the US oversight board can’t inspect or audit the firm. It does not have to be a US-based firm that performs the audit, but someone has to audit every three years, or you’re out. 



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Click here to access.

Source: https://www.lendacademy.com/senate-banking-hearing-grills-gensler-on-sec-regulation-crypto-retail-investing-and-more/

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Senate banking hearing grills Gensler on SEC regs, crypto, retail investing, and more

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Tuesday morning, the Senate Banking Committee held an oversight with the Securities Exchange Commission’s Chairman Gary Gensler.

A bipartisan group of senators questioned Gensler’s regulatory intentions on topics from cryptocurrency to retail investing.

Gensler began by speaking with board Chairman Sen. Sherrod Brown (D-OH), reporting his staff was researching the dangers of SPACS.

But as ranking member Sen. Pat Toomey (R- PA) took the talking stick, he went right into Payment for Order Flow (PFOF). 

“I worry you would favor the paternalistic push by some on the left to restrict investor freedom under the guise of protection while actually harming retail investors; such harm may result in the form of your opposition to Payment for Order Flow,” Toomey said.

“Banning Payment for Order Flow could very well have the effect of eliminating commission-free investing, which would be a great disservice to average investors.”

Toomey’s point comes from the idea that PFOF has enabled the best time ever to be a retail investor in America.

Through commission-free trading, no minimum balances, low or no-fee mutual funds ETFs, and user-friendly tech-like mobile apps, Toomey said investors could take part in the profits of Wall Street like never before.

Securities Exchange Commission’s Chairman Gary Gensler. | CSPAN

Payment for order flow

Gensler said his biggest worry about the equity market was competition and consolidation. While retail investing has taken off, the PFOF that enables it is ripe for conflict of interest: he said more than half of all PFOF trades go into one big pool. 

“Nearly half of the volume transacted is executed in “dark pools” or by wholesalers. I wonder whether this means that the consolidated tape — the so-called National Best Bid and Offer — fully reflects the full range of activity on exchanges,” Gensler said in testimony.

“As I have stated previously, I believe payment for order flow and exchange rebates may present a number of conflicts of interest.”

Retail investors have flocked to products like Robinhood, which offers fee-less and fractional investing in stocks, and securities, by selling their customer’s trades to partner market makers instead of “actually” posting them on the true securities markets.

The practice, pioneered by Bernie Madoff, printed $2.5 billion in 2020 for top trading firms like T.D. Ameritrade, Robinhood, and Charles Swab.

Feeless trading would disappear

The majority of fees collected come from options trades in small amounts of $.50 at a time. Without it, Toomey and others argue feeless trading would disappear overnight, and so would retail investing. 

In March, PFOF became a retail investor rallying cry when Robinhood shut down trading of Gamestop to cover a change in its own market maker deposit requirements.

To some, it looked like PFOF had enabled hedge funds to shut down orders that were losing them money by requiring Robinhood to foot the bill. But, ironically, PFOF is the only reason retail investors got into Gamestop in the first place. 

SenatorJack Reed (D-RI) went into PFOF, asking Gensler, “is the owner of these securities getting the best deal?”

“I think it may make our markets less efficient; retail traders may not be getting the best execution even if with a price improvement [feeless trading,]” Gensler said.

“If anyone on this Commission or this staff makes a trade on these platforms, it is 97 per cent chance that it does not go to an exchange; it goes to dark markets and secondary sale.”

As Gensler later went on to tell Senator Tim Scott (R-SC): the goal is to encourage more competition in the investing order market, not less. In addition, he hopes to find a way to shorten the settlement cycle, to leave traders less exposed. 

“Technology has driven down the cost of investing, but there’s still a cost left PFOF, even a couple of pennies out there is still a cost,” Gensler said.

“What I have raised with Jennifer Leete: we can we do better with more competition, rather than one reseller buying half the orders in America. I think we will try to drive it down to an even lower cost.”

Leete was appointed as Associate Director in Enforcement in the SEC in 2020, with 20 years of experience supervising cases against convicted trading order fraudsters at the SEC.

Cryptocurrency security regulation

As Toomey first brought up and jumped into during his question period, Gensler has recently made it clear he believed some cryptocurrency products were securities and needed to be regulated. The senator said he would like to see more public guidance. 

“So I’m frustrated by the lack of helpful SEC public guidance, explaining how you make this distinction: What makes some of them securities while others are not,” Toomey said. “Why not publicly announce what characteristics make the cryptocurrency?”

Toomey referred to stable coins, crypto-assets founded with the goal of stability to govern exchanges and offer liquidity as non-securities. However, if they don’t have an “expectation of profit on the investment,” they don’t beat the Howey test for securities, and in Toomey’s book, they are not securities. 

“As Thurgood Marshall wrote in the Reves opinion, in defining the scope of the market that it — Congress wished to regulate — Congress painted a broad brush, and it actually included about 35 different things inside the definition of a security,” Gensler said.

“Senator, this, this congress could change the laws, but the laws that we have right now have a very broad definition of a security, including a note, including an investment contract, and the like.”

Without naming names, the senator had referenced last week’s news that Coinbase’s USDC savings product had come under fire from the SEC for unregulated security fears.

Coinbase, through CEO Brian Armstrong, took up arms via Twitter posts and claimed they had no idea why their money market bank loan product was being considered a security.

The SEC has been known to work privately with firms that aim to create securities or investment products.

How to get away with security

Though believing that some stable coins are fair game, in general, Gensler thinks his hands are tied: most cryptocurrencies are investment products.

“I agree with you that, that some of these tokens have been deemed to be commodities, many of them are securities, and the Supreme Court has weighed in a number of times you noted, the Howey Test,” Gensler said. 

The Howie test comes from a Supreme Court decision in 1946 between a Florida orange grove owner selling speculative land and the SEC. The SCOTUS ruled that Howie was violating the rules set down in the 1933 Securities act, defining an ‘”investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Under this ruling, if it is advertised to make money on money, it is a security. 

The Senator and Gensler brought up the Reves test, another securities law case decided in 1990 concerning an Arkansas co-op farm “investment” shares. The SCOTUS found the promissory notes were securities and thus violated the ’33 act.

However, after 60 years of innovation that had created many financial products, the Reves case had to be more technical. Basically, to cover all the new products, the SCOTUS stated that anything marketed like SEC-compliant security or resembled one would have to be SEC-compliant: the average investor expected that the SEC would check investment products for fraud. 

Gensler said he believes the Senate and House can change the laws, but he interprets the 1933 Securities to act as a broad set of rules that he must follow regarding security regulation.

He said that many things have become classified as securities at times, including whiskey barrels bought with speculative intent in the 1960s— which is true.

“I’m not negative or minimalist about crypto; I am technology-neutral, Gensler said. “I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework.”

In other news

Aside from arguing over cryptocurrency and retail investing, Gensler presented two goals for the SEC. One, to release new cyber security “hygiene” guidelines in the coming months for firms to follow in the age of ransomware hacking attacks.

Gensler agreed with Sen Jon Tester (D – MT), who said cyber security was a dire challenge facing American businesses like climate change. 

“I couldn’t agree with you more. So there are two lists we’re looking at: how are you managing your cyber risk because it’s a real risk, how are you governing and managing it, and what are your costs for cyber hygiene,” Gensler said. “Secondly is incident reporting, if you have a breach, and you’re paying ransomware and the like.”

Two, as Gensler made clear in a Wall Street Jornal Op-Ed Tuesday morning: the U.S. intends to increase oversite into the financial activities of Chinese companies tenfold.

Under new laws passed by the Senate, Chinese companies must open their books to U.S. audit within a new three-year timeframe. Gensler said that if they refuse, the companies will be barred from trade and U.S. stock exchanges.  

“The Securities and Exchange Commission may need to prohibit trading in about 270 China-related companies by early 2024.

The reason can be traced to the Enron and WorldCom accounting scandals,” Gensler wrote in an Op-Ed. “Congress passed the Sarbanes-Oxley Act in 2002, mandating inspections of public companies’ auditors by the Public Company Accounting Oversight Board. More than 50 foreign jurisdictions allow the board to “audit the auditors.” Two do not: China and Hong Kong.”

Gensler said last year Congress passed the Holding Foreign Companies accountable act, which prohibits trading a foreign-issued stock if the US oversight board can’t inspect or audit the firm. It does not have to be a US-based firm that performs the audit, but someone has to audit every three years, or you’re out. 



PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://www.lendacademy.com/senate-banking-hearing-grills-gensler-on-sec-regulation-crypto-retail-investing-and-more/

Continue Reading

Crowdfunding

Senate banking hearing grills Gensler on SEC regs, crypto, retail investing, and more

Published

on

Tuesday morning, the Senate Banking Committee held an oversight with the Securities Exchange Commission’s Chairman Gary Gensler.

A bipartisan group of senators questioned Gensler’s regulatory intentions on topics from cryptocurrency to retail investing.

Gensler began by speaking with board Chairman Sen. Sherrod Brown (D-OH), reporting his staff was researching the dangers of SPACS.

But as ranking member Sen. Pat Toomey (R- PA) took the talking stick, he went right into Payment for Order Flow (PFOF). 

“I worry you would favor the paternalistic push by some on the left to restrict investor freedom under the guise of protection while actually harming retail investors; such harm may result in the form of your opposition to Payment for Order Flow,” Toomey said.

“Banning Payment for Order Flow could very well have the effect of eliminating commission-free investing, which would be a great disservice to average investors.”

Toomey’s point comes from the idea that PFOF has enabled the best time ever to be a retail investor in America.

Through commission-free trading, no minimum balances, low or no-fee mutual funds ETFs, and user-friendly tech-like mobile apps, Toomey said investors could take part in the profits of Wall Street like never before.

Securities Exchange Commission’s Chairman Gary Gensler. | CSPAN

Payment for order flow

Gensler said his biggest worry about the equity market was competition and consolidation. While retail investing has taken off, the PFOF that enables it is ripe for conflict of interest: he said more than half of all PFOF trades go into one big pool. 

“Nearly half of the volume transacted is executed in “dark pools” or by wholesalers. I wonder whether this means that the consolidated tape — the so-called National Best Bid and Offer — fully reflects the full range of activity on exchanges,” Gensler said in testimony.

“As I have stated previously, I believe payment for order flow and exchange rebates may present a number of conflicts of interest.”

Retail investors have flocked to products like Robinhood, which offers fee-less and fractional investing in stocks, and securities, by selling their customer’s trades to partner market makers instead of “actually” posting them on the true securities markets.

The practice, pioneered by Bernie Madoff, printed $2.5 billion in 2020 for top trading firms like T.D. Ameritrade, Robinhood, and Charles Swab.

Feeless trading would disappear

The majority of fees collected come from options trades in small amounts of $.50 at a time. Without it, Toomey and others argue feeless trading would disappear overnight, and so would retail investing. 

In March, PFOF became a retail investor rallying cry when Robinhood shut down trading of Gamestop to cover a change in its own market maker deposit requirements.

To some, it looked like PFOF had enabled hedge funds to shut down orders that were losing them money by requiring Robinhood to foot the bill. But, ironically, PFOF is the only reason retail investors got into Gamestop in the first place. 

SenatorJack Reed (D-RI) went into PFOF, asking Gensler, “is the owner of these securities getting the best deal?”

“I think it may make our markets less efficient; retail traders may not be getting the best execution even if with a price improvement [feeless trading,]” Gensler said.

“If anyone on this Commission or this staff makes a trade on these platforms, it is 97 per cent chance that it does not go to an exchange; it goes to dark markets and secondary sale.”

As Gensler later went on to tell Senator Tim Scott (R-SC): the goal is to encourage more competition in the investing order market, not less. In addition, he hopes to find a way to shorten the settlement cycle, to leave traders less exposed. 

“Technology has driven down the cost of investing, but there’s still a cost left PFOF, even a couple of pennies out there is still a cost,” Gensler said.

“What I have raised with Jennifer Leete: we can we do better with more competition, rather than one reseller buying half the orders in America. I think we will try to drive it down to an even lower cost.”

Leete was appointed as Associate Director in Enforcement in the SEC in 2020, with 20 years of experience supervising cases against convicted trading order fraudsters at the SEC.

Cryptocurrency security regulation

As Toomey first brought up and jumped into during his question period, Gensler has recently made it clear he believed some cryptocurrency products were securities and needed to be regulated. The senator said he would like to see more public guidance. 

“So I’m frustrated by the lack of helpful SEC public guidance, explaining how you make this distinction: What makes some of them securities while others are not,” Toomey said. “Why not publicly announce what characteristics make the cryptocurrency?”

Toomey referred to stable coins, crypto-assets founded with the goal of stability to govern exchanges and offer liquidity as non-securities. However, if they don’t have an “expectation of profit on the investment,” they don’t beat the Howey test for securities, and in Toomey’s book, they are not securities. 

“As Thurgood Marshall wrote in the Reves opinion, in defining the scope of the market that it — Congress wished to regulate — Congress painted a broad brush, and it actually included about 35 different things inside the definition of a security,” Gensler said.

“Senator, this, this congress could change the laws, but the laws that we have right now have a very broad definition of a security, including a note, including an investment contract, and the like.”

Without naming names, the senator had referenced last week’s news that Coinbase’s USDC savings product had come under fire from the SEC for unregulated security fears.

Coinbase, through CEO Brian Armstrong, took up arms via Twitter posts and claimed they had no idea why their money market bank loan product was being considered a security.

The SEC has been known to work privately with firms that aim to create securities or investment products.

How to get away with security

Though believing that some stable coins are fair game, in general, Gensler thinks his hands are tied: most cryptocurrencies are investment products.

“I agree with you that, that some of these tokens have been deemed to be commodities, many of them are securities, and the Supreme Court has weighed in a number of times you noted, the Howey Test,” Gensler said. 

The Howie test comes from a Supreme Court decision in 1946 between a Florida orange grove owner selling speculative land and the SEC. The SCOTUS ruled that Howie was violating the rules set down in the 1933 Securities act, defining an ‘”investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Under this ruling, if it is advertised to make money on money, it is a security. 

The Senator and Gensler brought up the Reves test, another securities law case decided in 1990 concerning an Arkansas co-op farm “investment” shares. The SCOTUS found the promissory notes were securities and thus violated the ’33 act.

However, after 60 years of innovation that had created many financial products, the Reves case had to be more technical. Basically, to cover all the new products, the SCOTUS stated that anything marketed like SEC-compliant security or resembled one would have to be SEC-compliant: the average investor expected that the SEC would check investment products for fraud. 

Gensler said he believes the Senate and House can change the laws, but he interprets the 1933 Securities to act as a broad set of rules that he must follow regarding security regulation.

He said that many things have become classified as securities at times, including whiskey barrels bought with speculative intent in the 1960s— which is true.

“I’m not negative or minimalist about crypto; I am technology-neutral, Gensler said. “I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework.”

In other news

Aside from arguing over cryptocurrency and retail investing, Gensler presented two goals for the SEC. One, to release new cyber security “hygiene” guidelines in the coming months for firms to follow in the age of ransomware hacking attacks.

Gensler agreed with Sen Jon Tester (D – MT), who said cyber security was a dire challenge facing American businesses like climate change. 

“I couldn’t agree with you more. So there are two lists we’re looking at: how are you managing your cyber risk because it’s a real risk, how are you governing and managing it, and what are your costs for cyber hygiene,” Gensler said. “Secondly is incident reporting, if you have a breach, and you’re paying ransomware and the like.”

Two, as Gensler made clear in a Wall Street Jornal Op-Ed Tuesday morning: the U.S. intends to increase oversite into the financial activities of Chinese companies tenfold.

Under new laws passed by the Senate, Chinese companies must open their books to U.S. audit within a new three-year timeframe. Gensler said that if they refuse, the companies will be barred from trade and U.S. stock exchanges.  

“The Securities and Exchange Commission may need to prohibit trading in about 270 China-related companies by early 2024.

The reason can be traced to the Enron and WorldCom accounting scandals,” Gensler wrote in an Op-Ed. “Congress passed the Sarbanes-Oxley Act in 2002, mandating inspections of public companies’ auditors by the Public Company Accounting Oversight Board. More than 50 foreign jurisdictions allow the board to “audit the auditors.” Two do not: China and Hong Kong.”

Gensler said last year Congress passed the Holding Foreign Companies accountable act, which prohibits trading a foreign-issued stock if the US oversight board can’t inspect or audit the firm. It does not have to be a US-based firm that performs the audit, but someone has to audit every three years, or you’re out. 



PlatoAi. Web3 Reimagined. Data Intelligence Amplified.
Click here to access.

Source: https://www.lendacademy.com/senate-banking-hearing-grills-gensler-on-sec-regulation-crypto-retail-investing-and-more/

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