NH Legal Perspective: Volatility of financial markets challenges securities laws

This article, written by Jonathan Voegele, was originally published by the NH Union Leader and can be found here.

The last several months have seen much uncertainty and volatility in the financial markets. In a short time, Americans have seen predictions of recession while the Federal Reserve targets inflation and a heated labor market with aggressive hikes in interest rates to levels unseen since the mid-Aughts.

There remains healthy skepticism over cryptocurrency amid a digital currency exchange collapse, concerns over collapses of major banks, controversy over ESG “socially responsible” investment policies, and potential fallout from a major land war in Europe, all while AI language models dazzle, fizzle, name themselves, and even secretly brood. And these are only a few highlights of the last several months.

There is fear in many corners that there is no historical counterpart to predict whether securities laws can ably weather this potentially perfect storm of challenges, let alone the velocity at which these intense storms can brew. Like the Fed, securities regulators and even Congress seem always to be fighting last year’s war.

The mainstays of federal securities laws, for example, were instituted in a 1930s society much more familiar with Art Deco than Artificial Intelligence. The last significant overhaul of federal securities laws took place when nary a congressman could competently utter the word “blockchain,” and the most famous peer-to-peer platform was Napster, not Bitcoin.

Yet leave it to a lawyer to argue that these challenges are not entirely unprecedented. Our 90-year-old security laws and their judicially crafted common law may yet be up for the challenge of the ever-evolving nature of modern investments.

A federal court in New Hampshire recently reminded us that modern investment is much like an offer to purchase land in Florida. No, it wasn’t swampland, but part of an orange grove.

In the 1940s, the U.S. Supreme Court concluded such an offer, where it had certain characteristics such as an investment of money in a common enterprise with a reasonable expectation of profit derived from the efforts of others, was an investment contract subject to federal securities laws.

In a recent SEC enforcement proceeding, the U.S. District Court for the District of New Hampshire applied this nearly 80-year-old precedent to conclude that certain blockchain offerings bore these characteristics and were subject to federal regulators’ scrutiny.

Federalism, an even older but proven concept, may yield Americans even further protection. For example, New Hampshire has fairly modern state securities laws, having updated them in 2015. These laws focus more on providing investor protections relative to investment advisers and brokers. Together with federal securities laws, they offer investors potent remedies for unfair treatment and fraud.

Financial markets and investors alike always face some peril. Although securities laws invariably are created from visions of the past, alongside common law and modern state regulation perhaps they still offer a steady hand to guide us through these times with a balanced “trust, but verify” approach.