By now you’ve certainly read about the spectacular failure of the much-anticipated IPO of The We Company, the indirect parent of WeWork. To call the IPO ambitious might be an understatement. After all, the first substantive line in We’s prospectus read: “We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.” What to many was a real estate company bleeding enormous amounts of red ink ($1.9B in 2018) was in fact being described as a pioneer “space-as-a-service” company deserving of disruptive technology company valuations. Indeed.
As potential investors dug into We’s disclosure, enthusiasm for the opportunity quickly waned. At a high level, the company was seeking up to a $50B valuation while the most objectively comparable company, the parent of Regus (the more established, albeit less fashionable, short- and flex-term office company), was worth less than $5B. This discrepancy was particularly hard to justify given Regus’ consistent profitability and the fact that Regus operates nearly six times the amount of real estate as WeWork. Commentators also noted that We’s founder, Adam Neumann, like Zuckerberg, Musk, and previous unicorn jockeys, had cemented disproportionate control over the company by owning a class of super voting shares. This wasn’t unprecedented, of course, but it still seemed extreme. Neumann was also widely criticized for charging a license fee of nearly $6M for the name “We” after WeWork was rebranded The We Company. At best, the whole deal smacked of hubris, and at worst signaled to some the bursting of the unicorn bubble entirely.
Alas, We’s spectacular tailspin not only cost Neumann his CEO job, it has also caused enormous headaches for We’s principal backer, SoftBank Group, and its related Vision Fund. While it is too early to tell the extent to which We’s failed IPO will infect others, it is likely that advisors both to unicorn investors and unicorn entrepreneurs will lower their ambitions, at least for the time being.
POT COMPANIES ENGAGE WITH ANTITRUST REGULATORS
The Federal Trade Commission’s (FTC) online “Guide to Antitrust Laws” states that “[f]ree and open markets are the foundation of a vibrant economy. Aggressive competition among sellers in an open marketplace gives consumers—both individuals and businesses—the benefits of lower prices, higher quality products and services, more choices, and greater innovation.” Federal antitrust regulators, both the FTC and the Antitrust Division of the Department of Justice, routinely investigate allegations of collusion and other anticompetitive behaviors, as well as certain corporate mergers and acquisitions, all with the goal of promoting fair competition among industry participants. Antitrust laws are designed in essence to protect consumers.
In larger M&A transactions, participants are required to make a “premerger notification” (or “HSR filing” in industry speak) with the FTC and the Antitrust Division under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 to give federal antitrust regulators an opportunity to review the transaction from an antitrust perspective. If antitrust regulators take an interest in the transaction, the reviewing agency may issue a “second request” for additional information relating to the transaction, which requires the transacting parties to share information and delay the transaction until the antitrust regulators have received and reviewed the information. Second requests, which are time consuming and costly to comply with, are rarely issued in connection with HSR filings, and they indicate that the reviewing agency is concerned that the applicable transaction may have an impact on competition in the industry.
Until recently, any suggestion that federal antitrust regulators would be reviewing pot deals likely would have been met with howls of laughter. After all, why on earth would federal regulators be concerned about protecting consumers of a federally illegal product from price gouging? On June 19, 2019, however, Cresco Labs Inc. put out a press release to update progress on its over $800M pending acquisition of Origin House, announcing that it had received a second request to its HSR filing. Curiously, in that release Cresco’s CEO stated, “Consistent with other pending transactions in the cannabis industry, we have received a [second] request.” With that press release, Cresco made public what leading cannabis corporate lawyers had already been quietly confronting for weeks: that virtually all major pending cannabis acquisitions had unexpectedly received second requests to their HSR filings.
The world of disruptive innovation is always in motion, with the risks and potential rewards that accompany real change.
Many industry observers were undoubtedly concerned about the antitrust regulators’ sudden interest in reviewing cannabis HSR filings. What some may have then interpreted as an assault on the industry, however, actually appears to have been a legitimate effort by earnest regulators to review for antitrust purposes a rapidly consolidating industry into which the regulators had limited visibility and understanding. While the illegality almost certainly added a layer of awkwardness to their efforts, reports have been that the antitrust regulators are focused on learning about the cannabis industry as a whole and the potential competitive impacts of the specific deals at issue. In other words, even certain federal regulatory agencies are starting to treat cannabis companies like grown-ups.
A TRAIL IS BLAZED FOR PUBLIC CRYPTO TOKEN OFFERINGS
For several years, securities lawyers have wrestled with applying securities laws to offerings of cryptocurrencies and other crypto tokens. After putting a stop to the previously popular initial coin offerings (ICOs) in December 2017 with enforcement action and order against Munchee Inc. and ensuing enforcement actions, the Securities and Exchange Commission (SEC) wasn’t giving the industry much to celebrate until this summer.
In July 2019, the SEC qualified two token offerings under Regulation A+: Blockstack PBC and YouNow Inc. While these approved public offerings, the first SEC-blessed public offerings of crypto tokens, were understandably applauded by industry participants, we have not seen a flood of additional SEC-approved Reg A+ offerings in the following months. That more Reg A+ token offerings haven’t been recently cleared should be unsurprising to anyone reviewing the disclosure documents filed by Blockstack and YouNow. After all, the disclosure is incredibly robust and closely resembles an IPO prospectus, and both transactions were reported to have cost the issuers millions in fees and expenses.
In April and July 2019, the SEC also released two no-action letters related to consumptive tokens, first to TurnKey Jet Inc. (which was offering tokens for use on its air charter network) and then to Pocketful of Quarters Inc. (which was offering tokens for use on a gaming platform). In each case, the SEC permitted the sale of those tokens for consumptive use on the already developed platforms without requiring registration under federal securities laws.
While there will undoubtedly be further developments, it seems safe to say that the crypto landscape is starting to look a lot like the more traditional landscape. Public offerings will involve robust disclosure and significant costs, while earlier-stage capital formation will be accomplished through private placements and reliance on the usual private placement exemptions. Consumptive tokens that are not issued for capital-raising purposes on already developed networks may not be deemed a security, but tokens being sold for financing purposes will probably require the issuer to pay careful attention to securities compliance.
The world of disruptive innovation is always in motion, with the risks and potential rewards that accompany real change. Exciting to be sure, and not for the faint of heart.