July 21, 2022

Clients, Friends, Associates:

As we end the second quarter and enter the summer season, we would like to highlight some of the recent industry updates and occurrences we found to be interesting and impactful. While we try to keep these topics higher-level, please feel free to explore the links included and reach out to us if you have any related questions.

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CFM Items

We are pleased to announce the addition of Alex Yastremski to our firm as Partner to lead our Digital Asset Practice. We’d also like to highlight the addition of Frank J. Martin as Counsel and the promotion of Tony Wise to Partner. Additionally, we have hired Joe Burgess as Executive Director to continue our focus on operational excellence. Please join us in welcoming them all to our firm!

Our annual CoinAlts Fund Symposium is returning to San Francisco and will be held on November 3, 2022. Please mark the date on your calendar and stay tuned for further registration information. Attendance will be complimentary for clients of our firm and those of the other CoinAlts founding firms, MG Stover, Cohen & Company, and Harneys.

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SEC Matters

SEC Risk Alert on Material Non-Public Information Compliance Issues. The SEC recently released a risk alert summarizing the most common compliance deficiencies of both registered and unregistered investment advisers. Of note were (1) the lack of written policies to prevent the misuse of material non-public information (“MNPI”) and (2) the lack of compliance with the reporting requirements for “Access Persons” under the Code of Ethics Rule. All advisers should periodically revisit their written policies and procedures for the use of MNPI and registered investment advisers should review their Code of Ethics and establish reporting requirements for their Access Persons.

Enforcement Action for Misrepresenting Fees. The SEC instituted an enforcement action against a venture capital fund adviser and its CEO for misrepresenting their management fees as “industry standard 2 and 20” when they collected 10 years of management fees up front. This was misleading because it led investors to believe they would be charged an annual 2% management fee, rather than 20% of their total investment up front. The SEC also found that the adviser breached operating agreements by making inter-fund loans and cash transfers between funds. The adviser and its CEO agreed to a cease-and-desist order, returned funds, and paid penalties. In addition to confirming that the fund administrator reviews the offering documents and follows the mechanics for charging fees described therein, we recommend advisers closely review marketing materials with legal counsel or compliance consultants for any misleading or subjective statements.

OpenSea Insider Trading. A former high-ranking employee of OpenSea was recently indicted for wire fraud and money laundering in what the United States Attorney’s Office for the Southern District of New York characterized as the “first-ever digital asset insider trading scheme.” The former head of Product at OpenSea was in charge of selecting NFTs to feature on the website’s homepage and allegedly misappropriated that confidential information by purchasing those NFTs before they were promoted on OpenSea’s homepage.

While the alleged actions in the indictment are reminiscent of traditional insider trading under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), since NFTs are not yet categorized as securities under the Exchange Act, the prosecutors here wove allegations of traditional fraud and insider trading concepts into charges for wire fraud and money laundering. The prosecutorial creativity signals that despite lagging legislation, law enforcement is taking notice of the increasing fraudulent activity in the NFT space and is ready to tackle such unsavory business practices and provide greater consumer protection. While insider trading remains an unsettled area of law in the digital asset space, concepts of fraud are well established, malleable, and largely immune from claims that certain digital assets are not “securities.”

Adviser Liable for Late Audit Distribution. The SEC charged a registered investment adviser with Custody Rule and compliance violations for failing to complete an audit within 120 days of the private fund’s fiscal year end. The SEC found that the adviser failed to have required audits performed and failed to deliver audited financial statements to investors in certain funds from 2014 onward, and in certain other funds from 2018 onward. The adviser consented to a cease-and-desist order, a censure, a monetary penalty, and to provide a notice of the Order to past and current investors in the fund. This enforcement action serves as a reminder to all advisers to remain vigilant and stay on top of their auditors to complete and distribute the annual fund audit in a timely fashion.

SEC Doubles Size of Crypto Enforcement Unit. The SEC announced the allocation of 20 additional positions to a Crypto Assets and Cyber Unit (formerly the Cyber Unit) to protect investors in crypto markets from cyber-related threats. The expanded Crypto Assets and Cyber Unit will focus on investigating securities law violations related to crypto asset offerings, crypto asset exchanges, crypto asset lending and staking, decentralized finance, NFTs, and stablecoins. We think this is a step in the right direction; it is clear the SEC recognizes that the digital asset space is growing and that greater resources need to be brought to bear on the industry. 

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CFTC Items

Perpetual Futures and CFTC Regulation. Digital assets managers continue to inquire into the possibility of trading cryptocurrency futures contracts. With the Commodity Futures Trading Commission (“CFTC”) recognizing certain digital assets as commodities, proper registration with the CFTC is required (or an appropriate exemption from registration must be utilized) if managers plan to trade cryptocurrency futures on registered exchanges. Under the Commodity Exchange Act, many, if not all, derivatives based on digital assets must be traded on a Designated Contract Market (“DCM”). However, many managers prefer not to trade on DCMs due to the lack of volume and liquidity and instead seek to trade on offshore exchanges that offer higher volume and reduced margin requirements. We caution U.S. managers who are trading on such exchanges – there may be risks to engaging with such counterparties in foreign jurisdictions and such U.S. managers often are unable to make the representations required in the account opening paperwork or terms of service (e.g., that the trading activity will not occur in the U.S.). To our knowledge, the CFTC has yet to take any action against managers trading on such offshore exchanges; however, we believe it is only a matter of time. Managers should carefully diligence any offshore exchanges they may use and disclose any applicable risks to investors.

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Digital Asset Items

Coinbase’s Bankruptcy Disclosure. The industry was caught off guard when Coinbase filed its latest 10-Q filing in which it stated “custodially held crypto assets may be considered to be the property of a bankruptcy estate.” In essence, in the event of Coinbase’s bankruptcy, its customers’ crypto assets may not be returned, and such clients could be treated as general unsecured creditors, meaning they would not have a claim to specific crypto assets held with Coinbase and could only recover the value of their crypto assets to the extent the bankruptcy estate has assets remaining after more senior claims are satisfied. While the Coinbase founder and CEO subsequently tweeted that Coinbase’s statement was a response to SEC disclosure requirements and that “customers have strong legal protections…in a black swan event like this,” the bankruptcy risks that Coinbase disclosed remain a possibility, however remote. In addition, other crypto exchanges, as well as third party wallet providers and custodians, may be subject to similar bankruptcy risks even though they may not have an obligation to disclose such risks publicly like Coinbase. In light of Coinbase’s disclosures, managers who do not exclusively rely on self-custody or cold wallets should review their custody practices, policies, and procedures, as well as agreements with their service providers, to ensure they have taken all available steps to safeguard investor assets. Managers should also consider making additional risk disclosures in their fund offering documents or other investor communications to educate their investors on these potential bankruptcy risks.

Liability Issues for Investing in a DAO. Due to the emerging nature of, and the scarce legislation surrounding, Decentralized Autonomous Organizations (“DAOs”), operating, participating in, or investing in DAOs carries a heightened risk of liability as DAOs formed for the purpose of making a profit could be deemed general partnerships and therefore expose their participants to unlimited joint and several personal liability for the debts and obligations of such DAO. One recommendation to minimize exposure is to wrap the DAO in a liability blocker. As legislation related to, and use cases of, DAOs evolve and iterate, the need or effectiveness of liability blockers may change. Until then, managers should disclose this heightened risk to their investors and should consider only participating or investing in DAOs that are wrapped in a liability blocking entity such as a limited liability company.

Senators Introduce Bipartisan Crypto Regulatory Framework Bill. Sens. Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) recently introduced bipartisan legislation to regulate the cryptocurrency market. The Responsible Financial Innovation Act aims to create a clear standard for determining whether certain digital assets are commodities or securities. The bill would give the CFTC authority over digital asset spot markets, allowing the agency to regulate digital assets in the same way as more traditional commodities. The bill has been referred to the Senate Finance Committee for examination and is pending approval of the Senate and the House of Representative.

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Other Items

In-Kind Crypto Contributions / Redemptions. We are starting to see greater difficulty for managers of offshore funds to utilize in-kind crypto contributions and redemptions because of administrator and Anti Money Laundering (“AML”) officers’ unease. We expect this trend to generally continue until administrators and AML officers become more comfortable with verifying and authenticating in-kind crypto transactions, either with additional regulatory guidance or with innovative processes.

Investors with Connections to Russia. It may be simply anecdotal, but we are seeing more administrator inquiries regarding investors with ties to Russia who are flagged for potential sanctions issues. In these instances, we encourage clients to work with legal counsel and their administrator to analyze their specific facts and circumstances and determine an appropriate course of action.

NFTs. Although far removed from its headline status of 2021, the NFT ecosystem continues to evolve, and many groups are developing products for the sector that more closely mirror the traditional asset space. We anticipate continued growth in this area and the development of business, legal and regulatory norms.

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Compliance Calendar

As you plan your regulatory compliance timeline for the coming months, please keep the following dates in mind:

July 10, 2022

• Form 13H Quarterly Filing for Changes. Filing is for calendar quarter that ended June 30, 2022 and should be submitted within 10 days of quarter end.

July 15, 2022

• Form PF for Large Liquidity Fund Advisers. Filing is for calendar quarter that ended June 30, 2022.

July 31, 2022

• ERISA Schedule C of DOL Form 5500 Disclosure.

August 15, 2022

• Form 13F Quarterly Filing. Filing is for calendar quarter that ended June 30, 2022 and should be submitted within 45 days of quarter end.
• CTA Form PR. Filing is for calendar quarter that ended June 30, 2022 and should be submitted within 45 days of quarter end.

August 29, 2022

• Form PF for Large Hedge Fund Advisers. Filing is for calendar quarter that ended June 30, 2022.
• CPO-PQR Form. Filing is for calendar quarter that ended June 30, 2022 and should be submitted within 60 days of quarter end.

August 31, 2022

• Deadline to submit Annual FINRA Entitlement Certification for 2022. If not completed, FINRA accounts will be withdrawn.

Consult our complete Compliance Calendar for all 2022 critical dates as you plan your regulatory compliance timeline for the year. 

Please contact us with any questions or assistance regarding compliance, registration, or planning issues on any of the above topics.

Sincerely,

Karl Cole-Frieman, Bart Mallon, David Rothschild, Scott Kitchens, Alex Yastremski, & Tony Wise

Cole-Frieman & Mallon LLP is an investment management law firm known for providing innovative and collaborative legal solutions to clients with complex financial needs in both the traditional and digital asset spaces. Headquartered in San Francisco, CFM services a wide variety of groups, from start-up investment managers to multi-billion-dollar firms. The firm provides a full suite of legal services including: formation of hedge funds, private equity funds, and venture capital funds; adviser compliance and registration; counterparty documentation; equity financings and token offerings; SEC, CFTC, NFA and FINRA matters; seed deals; hedge fund due diligence; employment and compensation matters; and, routine business matters. The Firm also publishes the prominent Hedge Fund Law Blog, which focuses on legal issues that impact the hedge fund community. For more information, please add us on LinkedIn and visit us at colefrieman.com.

San Francisco, Calif. – July 14, 2022: Investment management law firm Cole-Frieman & Mallon LLP (“CFM”) is pleased to announce that Counsel Tony Wise has been promoted to Partner. Mr. Wise joined CFM in 2016 and advises asset managers in fund formation and regulatory matters. Mr. Wise specializes in funds that invest in cryptocurrency and the broader ecosystem, and more recently has focused on digital asset counterparty documentation. Mr. Wise helped Partner Scott Kitchens open CFM’s Denver office in 2019.

“We are proud to advance Tony to the role of Partner. He has undoubtedly earned it,” said Bart Mallon, Co-Managing Partner. “Tony has gained an exceptional standing within the investment industry due to his forward-thinking ability, our clients’ results, and his commitment to helping them achieve their financial business goals.”

“Since joining our firm, Tony has worked diligently on behalf of our clients’ investment interests within the digital asset space. His commitment to the success of our firm is a true value to our team and our clients,” said Co-Managing Partner Karl Cole-Frieman.

Mr. Wise added, “I truly enjoy providing guidance to our asset manager clients and am excited to continue expanding the firm’s digital asset-related legal services.”

About: Cole-Frieman & Mallon LLP is an investment management law firm known for providing innovative and collaborative legal solutions to clients with complex financial needs in both the traditional and digital asset spaces. Headquartered in San Francisco, CFM services a wide variety of groups, from start-up investment managers to multi-billion-dollar firms. The firm provides a full suite of legal services including: formation of hedge funds, private equity funds, and venture capital funds; adviser compliance and registration; counterparty documentation; equity financings and token offerings; SEC, CFTC, NFA and FINRA matters; seed deals; hedge fund due diligence; employment and compensation matters; and, routine business matters. The Firm also publishes the prominent Hedge Fund Law Blog, which focuses on legal issues that impact the hedge fund community. For more information, please add us on LinkedIn and visit us at colefrieman.com.

Press Release

San Francisco, June 1, 2022: Cole-Frieman & Mallon LLP (“CFM”), a boutique investment management law firm focusing on the digital asset space, has hired Alex Yastremski as a Partner to lead its Digital Asset Practice. Mr. Yastremski is a digital asset industry veteran with significant experience helping large and small companies with their go-to-market strategies. His practice is focused on start-ups through emerging growth companies, venture capital financings, equity issuances (including Web3 platforms and token launches), and other regulatory matters related to blockchain-related businesses. Prior to joining CFM, Alex served as Co-Chair of the Blockchain and Digital Currency Task Force of a large law firm and was General Counsel of DASAN Zhone Solutions and BitFury Group Ltd.

“We are obviously excited to expand the core CFM investment management practice with the addition of specific digital asset equity and financing practice,” said CFM Co-Founder and Co-Managing Partner Bart Mallon. “Alex has strong and varied experience with private companies, financial sponsors, investors, and entrepreneurs dealing with novel legal issues. His skill set is a perfect match for the needs of many CFM clients.”

Alex’s arrival comes at a time of notable growth for CFM. The CFM team includes over 35 professionals, serving over 1,500 clients and launching over 250 private funds per year, predominately in the digital asset space. The addition of Mr. Yastremski also highlights the expansion of the firm’s corporate and finance capabilities and showcases the growth of the firm.

Karl Cole-Frieman, also a CFM Co-Founder and Co-Managing Partner, added, “We could not be more delighted to have Alex join our many talented professionals. Our pioneering and best-in-class work with non-traditional asset classes, notably our work with cryptocurrency fund managers, continues to be our firm’s core strength.”

About: Cole-Frieman & Mallon LLP is an investment management law firm known for providing innovative and collaborative legal solutions to clients with complex financial needs in both the traditional and digital asset spaces. Headquartered in San Francisco, CFM services a wide variety of groups, from start-up investment managers to multi-billion-dollar firms. The firm provides a full suite of legal services including: formation of hedge funds, private equity funds, and venture capital funds; adviser compliance and registration; counterparty documentation; equity financings and token offerings; SEC, CFTC, NFA and FINRA matters; seed deals; hedge fund due diligence; employment and compensation matters; and, routine business matters. The firm also publishes the prominent Hedge Fund Law Blog, focusing on legal issues that impact the hedge fund community. For more information, please add us on LinkedIn and visit us at colefrieman.com.

Press Release

We are thrilled to announce that we are sponsoring the Bitcoin 2022 conference in Miami next week. The team from CFM will be attending the conference and many of the ancillary events and look forward to meeting with clients, friends, service providers, and some of the most critical minds in the digital asset space. 

Karl Cole-Frieman, Bart Mallon, Dave Rothschild, Tony Wise, Malhar Oza, and Dominic Althoff will all be there. 

We welcome you to engage with our team of industry-leading lawyers, so please get in touch with us if you want to catch up or schedule a meeting next week in Miami: https://resources.colefrieman.com/bitcoin2022

We wanted to take this opportunity to thank everyone who attended and participated in our 2022 compliance update hosted by Justin Schleifer, Co-Founder, President (Aspect Advisors), and Bart Mallon, Co-Managing Partner (Cole-Frieman & Mallon). Our discussion on March 3 touched on many essential topics for financial industry professionals to keep top of mind for the upcoming year. 

Some high points included:

Compliance Calendar.

• Imminent Deadlines & Filings
  • ADV and CRS – March 31
  • Form PF – April 30 (annual filers)
• Rule Implementation Dates
  • SEC Advertising Rule – November 2022
  • Proposed Private Fund Disclosures – Q2 2023
  • Proposed Cybersecurity Rules – Q2 2023
• Periodic Tasks
  • Annual review of policies and procedures
  • Business continuity test/review
  • Cybersecurity test
  • Customer/account reviews
  • Employee training
  • Code of ethics surveillance

SEC Marketing Rule Implementation. The new SEC Marketing rules will replace the existing regime of no-action letters and establish clear rules for fund managers. These rules will not fundamentally change the spirit of the current regime and instead clarify specifics on today’s issues such as social media use, blog posts, testimonials, and others. The new rules are not expected to impact the investment management industry significantly. Still, fund managers will need to update policies and procedures and review current advertising materials to ensure compliance with the new rules.

Proposed Private Fund Disclosure Rules. The SEC has proposed new rules for private fund disclosures that seek to improve transparency for types of information that investors receive to aid them in making informed decisions. As it stands, the proposals could profoundly impact private fund operations and the relationship between managers and investors regarding investments. The effects would be felt by large fund managers who receive institutional investments. The institutional investor has the leverage to ask managers for preferential rights and other forms of favorable treatment. The SEC is reviewing proposals, and experts believe that some version of the rules will likely be implemented in 2023.

Proposed Cybersecurity Rules. In recent years, there has been a push from the SEC and other financial regulators to improve cybersecurity, so it comes as no surprise that the SEC has formally proposed a set of rules to govern the matter. Like other policy and procedure requirements, many of the new rules lack specifics, meaning that individual firms will need to determine what they view as necessary to include to maintain compliance.

NFTs. From the past six months, everyone’s favorite buzzword has grown in prominence within the investment management industry following the launch of NFT-exclusive private investment funds. Like other digital assets, the primary concerns for managers are custody and the general compliance of the assets. NFTs have also raised novel valuation questions as experts seek ways to appraise the assets in ways beyond their trading price.

DAOs. The emergence of DAOs as legal entities has raised two critical items to follow in 2022. First, DAOs have sought to create real-world investment products, raising questions about how private fund managers can allow a DAO to invest in the fund. Second, DOAs have inquired about launching their private investment fund products, which presents unique legal and compliance challenges that need to be tackled.

Offshore Exchanges. A popular question from fund managers in the digital asset space regards opening accounts at offshore exchanges legally. To date, there is no easy answer, and attempts to do so must be conducted carefully on a client-by-client basis. There will be instances where opening an offshore exchange account is impossible or cost-prohibitive.

BlockFi’s Settlement. The SEC succeeded in sending shockwaves through the digital asset space after it agreed to a $100 million settlement with BlockFi over BlockFi’s interest product. BlockFi has decided to work with the SEC to register the product. Still, experts are unsure of how this will be done and wonder if this settlement will affect the desire of other market participants to develop new products. Furthermore, this settlement reflects the SEC’s troubling pattern of regulating by enforcement instead of publishing new rules and guidance. It also shines a light on how the SEC views these products as securities and could be the first step in considering specific lending-focused smart contracts to be securities.

Crypto Best Practices. There are essential best practices that fund managers in the digital asset space need to be aware of, especially managers experienced in traditional asset classes:

1. It is essential to conduct and document diligence on counterparties and vendors. Vendors in the digital asset space are often new and unproven, in contrast to the established vendors of traditional asset classes.
2. Fund managers must have a reasonable basis for custody providers and custody solutions. Nonetheless, while the SEC views custody of digital assets as being out of the ordinary, they have primarily been receptive to new solutions.
3. Be aware of the potential to receive MNPI.

Unlike traditional asset classes, there are fewer mechanisms for publishing company information to make it public. It is essential that employees understand the meaning of MNPI and how it impacts their business.

Big Predictions for 2022. Justin predicts that the SEC will bring another significant enforcement action that matches the BlockFi action in scale. The agency wants to further apply traditional securities law to digital assets, which means we could see another large settlement or a case fought in public court to set a precedence within the industry. Bart predicts increased activity from DAOs and potentially a significant breakthrough with DAOs in the next six months.

Regards,

Bart Mallon & Justin Schleifer

Aspect Advisors LLC

Aspect Advisors LLC is modern regulatory consultant providing customized compliance solutions to entrepreneurs. The firm has a focus on fintech companies, broker-dealers, and investment managers (hedge fund, VC, PE, RIA, etc).  We provide compliance and back-office solutions engineered to decrease worry and save time and resources. Among other items, the firm helps clients with regulatory registration, drafting compliance policies and procedures, conducting annual reviews, and other bespoke items.

Cole-Frieman & Mallon LLP

Cole-Frieman & Mallon LLP is one of the top investment management law firms in the United States, known for providing top-tier, innovative, and collaborative legal solutions for complex financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP services both start-up investment managers, as well as multi-billion-dollar firms. The firm provides a full suite of legal services to the investment management community, including hedge fund, private equity fund, venture capital fund, mutual fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog, which focuses on legal issues that impact the hedge fund community. For more information, please add us on LinkedIn and visit us at colefrieman.com.

Clients, Friends, Associates:

As we near the end of 2021, we have developed a checklist to help managers effectively oversee the business and regulatory landscape for the coming year. We have also highlighted some recent industry updates that we believe may impact our clients. While we strive to present an informative, albeit brief, overview of these topics, we are also available should you have any related questions.

This update includes the following:

• Annual Compliance & Other Items
• Annual Fund Matters
• Annual Management Company Matters
• Regulatory & Other Items from 2021
• 2022 Compliance Calendar

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Annual Compliance & Other Items

Annual Privacy Policy Notice. On an annual basis, Securities and Exchange Commission (“SEC”) registered investment advisers (“SEC RIAs”) are required to provide natural person clients with a copy of the firm’s privacy policy if: (i) the SEC RIA has disclosed nonpublic personal information other than in connection with servicing consumer accounts or administering financial products; or (ii) the firm’s privacy policy has changed. The SEC has provided a model form and accompanying instructions for firm privacy policies.

Annual Compliance Review. The Chief Compliance Officer (“CCO”) of a registered investment advisor (“RIA”) must conduct a review of the adviser’s compliance policies and procedures annually. This annual compliance review should be in writing and presented to senior management. CCOs should consider additions, revisions, and updates to the compliance program as may be necessary. We recommend firms discuss the annual review with their outside counsel or compliance firm to obtain guidance about the review process and a template for the assessment. Conversations regarding the annual review may raise sensitive matters, and advisers should ensure that these discussions are protected by attorney-client privilege. Advisers that are not registered may still wish to review their procedures and/or implement a compliance program as a best practice.

Form ADV Annual Amendment. RIAs or managers filing as exempt reporting advisers (“ERAs”) with the SEC or a state securities authority must file an annual amendment to their Form ADV within 90 days of the end of their fiscal year. For most managers, the Form ADV amendment will be due on March 31, 2022. RIAs must provide a copy of the updated Form ADV Part 2A brochure and Part 2B brochure supplement (or a summary of changes with an offer to provide the complete brochure) to each “client” and, if applicable, Part 3 (Form CRS: Client Relationship Summary) to each “retail investor” with which the RIA has entered into an investment advisory contract. Note that for SEC-registered advisers to private investment vehicles, a “client” for purposes of this rule refers to the vehicle(s) managed by the adviser and not the underlying investors. State-registered advisers need to examine their states’ regulations to determine who constitutes a “client.” For purposes of the Form ADV Part 3, a “retail investor” means a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family, or household purposes.

Switching to/from SEC Regulation.

SEC Registration. Managers who no longer qualify for SEC registration as of the time of filing the annual Form ADV amendment must withdraw from SEC registration within 180 days after the end of their fiscal year (June 30, 2022, for most managers), by filing a Form ADV-W. Such managers should consult with legal counsel to determine whether they are required to register in the states in which they conduct business. Managers who are required to register with the SEC as of the date of their annual amendment must register with the SEC within 90 days of filing the annual amendment (June 30, 2022, for most managers, assuming the annual amendment is filed on March 31, 2022).

Exempt Reporting Advisers. Managers who no longer meet the definition of an ERA will need to submit a final report as an ERA and apply for registration with the SEC or the relevant state securities authority, as applicable, generally within 90 days after the filing of the annual amendment (June 30, 2022, for most managers, assuming the annual amendment is filed on March 31, 2022).

Custody Rule Annual Audit.

SEC RIAs. SEC RIAs must comply with specific custody procedures, including: (i) maintaining client funds and securities with a qualified custodian; (ii) having a reasonable basis to believe that the qualified custodian sends an account statement to each advisory client at least quarterly; and (iii) undergoing an annual surprise examination conducted by an independent public accountant.

SEC RIAs to pooled investment vehicles may avoid both the quarterly statement and surprise examination requirements by having audited financial statements prepared for each pooled investment vehicle in accordance with generally accepted accounting principles (“GAAP”) by an independent public accountant registered with the Public Company Accounting Oversight Board (“PCAOB”). Audited financial statements must be sent to investors in the fund within 120 days after the fund’s fiscal year-end (or for fund-of-fund clients, within 180 days after fiscal year-end). SEC RIAs should review their internal procedures to ensure compliance with the custody rules.

California RIAs. California-registered investment advisers (“CA RIAs”) that manage pooled investment vehicles and are deemed to have custody of client assets are also subject to independent party surprise examinations. However, CA RIAs can avoid these additional requirements by engaging a PCAOB-registered auditor to prepare and distribute audited financial statements to all beneficial owners of the pooled investment vehicle, and the Commissioner of the California Department of Financial Protection and Innovation (“DFPI”). Those CA RIAs that do not engage an auditor must, among other things: (i) provide notice of such custody on the Form ADV; (ii) maintain client assets with a qualified custodian; (iii) engage an independent party to act in the best interest of investors to review fees, expenses, and withdrawals; and (iv) retain an independent certified public accountant to conduct surprise examinations of assets.

Other State RIAs. Advisers registered in other states should consult their legal counsel about those states’ specific custody requirements.

California Minimum Net Worth Requirement and Financial Reports.

CA RIAs with Discretion. Every CA RIA (other than those also registered as broker-dealers) that has discretionary authority over client funds or securities, regardless of if they have custody, must maintain a net worth of at least $10,000 (CA RIAs with custody are subject to heightened minimum net worth requirements, discussed further below).

CA RIAs with Custody. Generally, every CA RIA (other than those also registered as broker-dealers) that has custody of client funds or securities must maintain a minimum net worth of $35,000. However, a CA RIA that: (i) is deemed to have custody solely because it acts as the general partner of a limited partnership, or a comparable position for another type of pooled investment vehicle; and (ii) otherwise complies with the California custody rule described above is exempt from the $35,000 minimum (and instead is required to maintain the $10,000 minimum).

Financial Reports. Every CA RIA subject to the above minimum net worth requirements must file certain reports with the DFPI. In addition to annual reports, CA RIAs may be required to file interim reports or reports of financial condition if they fall below certain net worth thresholds.

Annual Re-Certification of CFTC Exemptions. Commodity pool operators (“CPOs”) and commodity trading advisers (“CTAs”) currently relying on certain exemptions from registration with the Commodity Futures Trading Commission (“CFTC”) are required to re-certify their eligibility within 60 days of the calendar year-end. A common example includes the 4.13(a)(3) exemption also known as the “de minimis” exemption. CPOs and CTAs currently relying on relevant exemptions should consult with legal counsel to evaluate whether they remain eligible to rely on such exemptions.

CPO and CTA Annual Updates. Registered CPOs and CTAs must prepare and file Annual Questionnaires and Annual Registration Updates with the National Futures Association (“NFA”), as well as submit payment for annual maintenance fees and NFA membership dues. Registered CPOs must also prepare and file their fourth-quarter report for each commodity pool on Form CPO-PQR, while CTAs must file their fourth-quarter report on Form CTA-PR. Unless eligible to claim relief under Regulation 4.7, registered CPOs and CTAs must update their disclosure documents periodically, as they may not use any document dated more than 12 months prior to the date of its intended use. Disclosure documents that are materially inaccurate or incomplete must be promptly corrected, and redistributed to pool participants.

Trade Errors. Managers should ensure that all trade errors are properly addressed pursuant to the manager’s trade errors policies by the end of the year. Documentation of trade errors should be finalized, and if the manager is required to reimburse any of its funds or other clients, it should do so by year-end.

Soft Dollars. Managers that participate in soft dollar programs should make sure that they have addressed any commission balances from the previous year.

Schedule 13G/D and Section 16 Filings. Managers who exercise investment discretion over accounts (including funds and separately managed accounts) that are beneficial owners of 5% or more of a registered voting equity security must report these positions on Schedule 13D or 13G. Passive investors are generally eligible to file the short-form Schedule 13G, which is updated annually within 45 days of the end of the year. Schedule 13D is required when a manager is ineligible to file Schedule 13G and is due 10 days after acquiring more than 5% beneficial ownership of a registered voting equity security. For managers who are also making Section 16 filings, this is an opportune time to review your filings to confirm compliance and anticipate needs for the first quarter.

Section 16 filings are required for “corporate insiders” (including beneficial owners of 10% or more of a registered voting equity security). An initial Form 3 is due within 10 days after becoming an “insider”; Form 4 reports ownership changes and is due by the end of the second business day after an ownership change; and Form 5 reports any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting and is due within 45 days after the end of each fiscal year.

Form 13F. A manager must file a Form 13F if it exercises investment discretion with respect to $100 million or more in certain “Section 13F securities” within 45 days after the end of the year in which the manager reaches the $100 million filing threshold. The SEC lists the securities subject to 13F reporting on its website.

Form 13H. Managers who meet one of the SEC’s large trader thresholds (generally, managers whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month) are required to file an initial Form 13H with the SEC within 10 days of crossing a threshold. Large traders also need to amend Form 13H annually within 45 days of the end of the year. In addition, changes to the information on Form 13H will require interim amendments following the calendar quarter in which the change occurred.

Form PF. Managers to private funds that are either registered with the SEC or required to be registered with the SEC and who have at least $150 million in regulatory assets under management (“RAUM”) must file a Form PF. Private advisers with less than $1.5 billion in RAUM must file Form PF annually within 120 days of their fiscal year-end. Private advisers with $1.5 billion or more in RAUM must file Form PF within 60 days of the end of each fiscal quarter.

Form MA. Investment advisers that provide advice on municipal financial products are considered “municipal advisors” by the SEC and must file a Form MA annually, within 90 days of their fiscal year-end.

SEC Form D. Form D filings for most funds need to be amended annually, on or before the anniversary of the most recently filed Form D. Copies of Form D are publicly available on the SEC’s EDGAR website.

Blue Sky Filings. On an annual basis, a manager should review its blue sky filings for each state to make sure it has met any initial and renewal filing requirements. Several states impose late fees or reject late filings altogether. Accordingly, it is critical to stay on top of filing deadlines for both new investors and renewals. We also recommend that managers review blue sky filing submission requirements. Many states now permit blue sky filings to be filed electronically through the Electronic Filing Depository (“EFD”) system, and certain states will now only accept filings through EFD.

IARD Annual Fees. Preliminary annual renewal fees for state-registered and SEC-registered investment advisers are due on December 13, 2021. Failure to submit electronic payments by the deadline may result in registrations terminating due to a “failure to renew.” If you have not already done so, you should submit full payment into your Renewal Account by E-Bill, check, or wire as soon as possible.

Pay-to-Play and Lobbyist Rules. SEC rules disqualify investment advisers, their key personnel, and placement agents acting on their behalf from seeking to be engaged by a governmental client if they have made certain political contributions. State and local governments have similar rules, including California, which requires internal sales professionals who meet the definition of “placement agents” (people who act for compensation as finders, solicitors, marketers, consultants, brokers, or other intermediaries in connection with offering or selling investment advisory services to a state public retirement system in California) to register with the state as lobbyists and comply with California lobbyist reporting and regulatory requirements. Note that managers offering or selling investment advisory services to local government entities must register as lobbyists in the applicable cities and counties. State laws on lobbyist registration differ significantly, so managers should carefully review reporting requirements in the states in which they operate to make sure they comply with the relevant rules.

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Annual Fund Matters

New Issue Status. On an annual basis, managers need to confirm or reconfirm the eligibility of investors that participate in initial public offerings, or new issues, pursuant to both Financial Industry Regulatory Authority, Inc. (“FINRA”) Rules 5130 and 5131. Most managers reconfirm investor eligibility via negative consent (i.e., investors are informed of their status on file with the manager and are asked to notify the manager of any changes), whereby a failure to respond by any investor operates as consent to its current status.

ERISA Status. Given the significant problems that can occur from not properly tracking ERISA investors in private funds, we recommend that managers confirm or reconfirm on an annual basis the ERISA status of their investors. This is particularly important for managers that track the underlying percentage of ERISA funds for each investor, with respect to each class of interests in a pooled investment vehicle.

Wash Sales. Managers should carefully manage wash sales for year-end. Failure to do so could result in book/tax differences for investors. Certain dealers can provide managers with swap strategies to manage wash sales, including Basket Total Return Swaps and Split Strike Forward Conversion. These strategies should be considered carefully to make sure they are consistent with the investment objectives of the fund.

Redemption Management. Managers with significant redemptions at the end of the year should carefully manage unwinding positions to minimize transaction costs in the current year (that could impact performance) and prevent transaction costs from impacting remaining investors in the next year. When closing funds or managed accounts, managers should pay careful attention to the liquidation procedures in the fund constituent documents and the managed account agreement.

NAV Triggers and Waivers. Managers should promptly seek waivers of any applicable termination events specified in a fund’s International Swaps and Derivatives Association (“ISDA”) or other counterparty agreement that may be triggered by redemptions, performance, or a combination of both at the end of the year (NAV declines are common counterparty agreement termination events).

Fund Expenses. Managers should wrap up all fund expenses for 2021 if they have not already done so. In particular, managers should contact their outside legal counsel to obtain accurate and up to date information about legal expenses for inclusion in the NAV for year-end performance.

Electronic Schedule K-1s. The Internal Revenue Service (“IRS”) authorizes partnerships and limited liability companies taxed as partnerships to issue Schedule K-1s to investors solely by electronic means, provided the partnership has received the investors’ affirmative consent. States may have different rules regarding electronic K-1s, and partnerships should check with their counsel whether they may be required to send hard copy state K-1s. Partnerships must also provide each investor with specific disclosures that include a description of the hardware and software necessary to access the electronic K-1s, how long the consent is effective, and the procedures for withdrawing the consent. If you would like to send K-1s to your investors electronically, you should discuss your options with your service providers.

“Bad Actor” Recertification Requirement. A security offering cannot rely on the Rule 506 safe harbor from SEC registration if the issuer or its “covered persons” are “bad actors.” Fund managers must determine whether they are subject to the bad actor disqualification any time they are offering or selling securities in reliance on Rule 506. The SEC has advised that an issuer may reasonably rely on a covered person’s agreement to provide notice of a potential or actual bad actor triggering event pursuant to contractual covenants, bylaw requirements, or undertakings in a questionnaire or certification. However, if an offering is continuous, delayed or long-lived, issuers must periodically update their factual inquiry through a bring-down of representations, questionnaires, and certifications, negative consent letters, reexamination of public databases or other means, depending on the circumstances. Fund managers should consult with counsel to determine how frequently such an update is required. As a matter of practice, most fund managers should perform these updates at least annually.

U.S. FATCA. Funds should monitor their compliance with the U.S. Foreign Account Tax Compliance Act (“FATCA”). Generally, U.S. FATCA reports are due to the IRS on March 31, 2022, or September 30, 2022, depending on where the fund is domiciled. However, reports may be required by an earlier date for jurisdictions that are parties to intergovernmental agreements (“IGAs”) with the U.S. Additionally, the U.S. may require that reports be submitted through the appropriate local tax authority in the applicable IGA jurisdiction, rather than the IRS. Given the varying U.S. FATCA requirements applicable to different jurisdictions, managers should review and confirm the specific U.S. FATCA reporting requirements that may apply. As a reminder, we strongly encourage managers to file the required reports and notifications, even if they already missed previous deadlines. Applicable jurisdictions may be increasing enforcement and monitoring of FATCA reporting and imposing penalties for each day late.

CRS. Funds should also monitor their compliance with the Organisation for Economic Cooperation and Development’s Common Reporting Standard (“CRS”). All “Financial Institutions” in the British Virgin Islands (“BVI”) and the Cayman Islands must register with the respective jurisdiction’s Tax Information Authority and submit various reports with the applicable regulator via the associated online portal. Managers to funds domiciled in other jurisdictions should also confirm whether any CRS reporting will be required in such jurisdictions and the procedures required to enroll and file annual reports. We recommend managers contact their tax advisors to stay on top of the U.S. FATCA and CRS requirements and avoid potential penalties.

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Annual Management Company Matters

Management Company Expenses. Managers who distribute profits annually should attempt to address management company expenses in the year they are incurred. If ownership or profit percentages are adjusted at the end of the year, a failure to manage expenses could significantly impact the economics of the partnership or the management company.

Employee Reviews. An effective annual review process is vital to reduce the risk of employment-related litigation and protect the management company in the event of such litigation. Moreover, it is an opportunity to provide context for bonuses, compensation adjustments, employee goals, and other employee-facing matters at the firm. It is never too late to put an annual review process in place.

Compensation Planning. In the fund industry, and the financial services industry in general, the end of the year is the appropriate time to make adjustments to compensation programs. Because much of a manager’s revenue is tied to annual income from incentive fees, any changes to the management company structure, affiliated partnerships, or any shadow equity programs should be effective on the first of the year. Partnership agreements and operating agreements should be appropriately updated to reflect any such changes.

Insurance. If a manager carries director and officer or other liability insurance, the policy should be reviewed annually to ensure that the manager has provided notice to the carrier of all claims and all potential claims. Newly launched funds should also be added to the policy as necessary.

Other Tax Considerations. Fund managers should assess their overall tax position and consider several steps to optimize tax liability. Managers should also be aware of self-employment taxes, which can potentially be minimized by structuring the investment manager as a limited partnership. Several steps are available to optimize tax liability, including: (i) changing the incentive fee to an incentive allocation; (ii) use of stock-settled stock appreciation rights; (iii) if appropriate, terminating swaps and realizing net losses; (iv) making a Section 481(a) election under the Internal Revenue Code of 1986, as amended (“Code”); (v) making a Section 475 election under the Code; and (vi) making charitable contributions. Managers should consult legal and tax professionals to evaluate whether any of these options are appropriate.

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Regulatory & Other Items from 2021

SEC Updates.

SEC Issues Risk Alert on Investment Advisers’ Fee Calculations. The SEC’s Division of Examinations has recently completed a review of 130 SEC-RIAs and published its findings in this November 2021 Risk Alert. The review focused on three key areas: (i) the accuracy of fees charged by investment advisers; (ii) the accuracy and adequacy of investment adviser disclosures; and (iii) the effectiveness of investment advisers’ compliance programs and the accuracy of their books and records. The risk alert notes key mistakes such as the failure to maintain written billing policies and inaccurate financial statements caused by errors in accounting procedures. Though mistakes such as these are not new to the industry, this report provides a reminder to investment advisers to consistently review and improve their policies and disclosures pertaining to client fees.

SEC Proposes Revisions to Electronic Recordkeeping Requirements. The SEC has published proposed amendments to electronic recordkeeping rules applicable to broker-dealers, as well as security-based swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”) that are not also registered as broker-dealers (collectively, “SBS Entities”). Currently, broker-dealers, are required to maintain electronic records in a “non-rewritable, non-erasable format” while SBS Entities are not subject this requirement. However, the new proposal provides for an audit trail alternative whereby records may be preserved “in a manner that permits the recreation of an original record if it is lost, over-written or erased.” Under the new rule, SBS Entities without a prudential regulator would also be required to utilize one of the two authorized recordkeeping methods. The proposed amendment, if enacted, would apply only to newly created records and not to records created prior to the amendment. Applicable entities should keep an eye out for the final rule to ensure their electronic recordkeeping policies and procedures are appropriately updated.

SEC Proposes Substantial Reporting and Disclosure of Securities Lending Information. The SEC has published and requested comment on proposed Rule 10c-1 under the Exchange Act. The proposed rule would require all lenders of securities to provide certain information and material terms related to securities lending transactions. The proposal covers loans of any “security” as defined in Section 3(a)(10) of the Exchange Act, applying to both equity and debt securities. The reporting requirements would also apply to “lending agents,” in situations where securities are lent through an intermediary, and any broker dealers acting as “reporting agents” . Certain of the information provided, including, but not limited to, the legal name and legal entity identifier of the issuer, the securities’ ticker symbol, and the date and time the loan was effected, would be made public. Questions remain regarding the scope of the information to be collected, as well as how lending of certain digital assets that are classified as “securities” may be impacted by this proposal. There are various activities that involve the lending of digital assets, such as yield farming, which could be subject to the proposed rule. The SEC has not yet commented on the effect of Rule 10c-1 on digital asset lending, but we will continue to monitor this matter for any updates or related guidance.

New Qualified Client Standard in Effect. As a reminder, the SEC revised dollar thresholds for Qualified Clients went into effect August 16, 2021. The “net worth” threshold increased from $2,100,000 to $2,200,000 and the dollar amount for the “assets-under-management” test was raised from $1,000,000 to $1,100,000. Please refer to our previous update for more information.

SEC Adopts Marketing Rule. As a reminder, the SEC adopted new marketing rules for investment advisers that will drastically overhaul and replace the prior cash solicitation and advertising rules applicable to investment advisers, their marketing materials, and their advertising practices to replace. The compliance period for these new marketing rules begins on November 4, 2022. Please refer to our previous update for more information.

Digital Asset Updates.

The President’s Working Group on Financial Markets Issues Risk Assessment on Stablecoins. An interagency report released on November 1, 2021 outlines the risks that stablecoins pose to the safety and efficiency of the financial market, as well as recommendations for congressional and agency action intended to address such risks. The primary concerns raised are: (i) the loss of value; (ii) payment system risks; and (iii) systemic risks, such as rapid scaling or failures by key participants. The recommendations include requiring stablecoin issuers to be insured as depository institutions, implementation of federal oversight regimes for digital wallet providers, limiting stablecoin issuers’ and digital wallet providers’ ability to affiliate with commercial entities, and limiting their use of users’ transaction data. The report further recommends that federal agencies, including the SEC, CFTC, and the Financial Crimes Enforcement Network (“FinCEN”), use their oversight power where appropriate and that the Financial Stability Oversight Council (“FSOC”) designate certain stablecoin arrangement activities as, or as likely to become, systemically important payment, clearing, and settlement (“PCS”) activities, enabling agencies to establish appropriate risk-management standards for institutions engaging in PCS activities.

The Treasury Issues Reports Addressing Threats Linked to Virtual Currency Transactions and Ransomware Payments. The U.S. Department of the Treasury’s (“Treasury”) Office of Foreign Assets Control (“OFAC”) issued guidance on October 15, 2021 regarding the application of sanctions laws to virtual currency activity and best practices for compliance with such sanctions regulations. OFAC also issued an updated advisory report discouraging private companies and individuals from making ransomware or extortion payments and highlighting risks to companies that facilitate such payments on behalf of the victim, such as the risk of directly or indirectly engaging in a prohibited transaction with individuals or entities on OFAC’s Specifically Designated Nationals and Blocked Persons List. OFAC recommends companies implement sanctions compliance programs to mitigate exposure to related violations, and notes that such programs are taken into consideration in the event of a violation.

South Korea to Introduce 20% Tax on Crypto Trading Profits. As a reminder, South Korea will implement a 20% capital gains tax on Bitcoin (BTC) and cryptocurrency profits starting January 1, 2022.

Offshore Updates.

BVI’s New Data Privacy Law in Effect. A new BVI statute, the Data Protection Act, 2021 (“DPA”) went into effect on July 9, 2021. The DPA applies to all BVI companies, limited partnerships, other entities, such as data controllers and non-BVI entities that use data processing equipment in the BVI or use the BVI for data transmission. The DPA is modeled after the European Union’s General Data Protection Regulation (“GDPR”) and requires an individual or entity’s consent prior to data processing. Additionally, the law requires that data controllers implement data protection safeguards before they transfer personal data out of the BVI. Altogether, the DPA aligns with the international movement towards stringent data privacy laws as governments seek more accountability from companies managing personal data. Managers with BVI funds should consult offshore counsel to ensure compliance with the DPA.

Other Matters.

Treasury Form SHC Due by Owners of Foreign Securities on December 31, 2021. Investment advisers, managers, administrators, and fund sponsors that are involved in master-feeder structures established both inside and outside of the U.S. should report such interests to the Treasury by filing a Form SHC no later than December 31, 2021. This includes a U.S. feeder fund, created by a U.S. investment manager / fund sponsor (“IM / FS”) entity, that holds, as a portfolio investment, interests in a foreign master fund. The portfolio investment by the U.S. feeder fund will need to be reported by the IM / FS as the representative of the U.S. feeder. Conversely, if the IM / FS is a foreign entity, the U.S. feeder fund will need to self-report the ownership interest in the foreign master fund as ownership of foreign equity on the Form SHC. The Treasury provides further directions regarding how to know if you must report ownership of such foreign securities.

European Union Announces Delay of Sustainable Finance Disclosure Regulation (“SFDR”) Rollout. As a reminder, the EU’s SFDR will now be implemented on July 1, 2022, instead of January 1, 2022. The SFDR is a series of disclosure requirements for asset managers intended to increase the transparency of a fund’s sustainability and environmental impact. Please refer to our previous update for more information.

California Lenders’ License Update. As a reminder, the DFPI announced that starting on October 1, 2021 applications under California Financing Law (“CFL”) must be submitted through the Nationwide Multistate System and Registry (“NMLS”). Existing licenses must be transitioned onto NMLS by December 31, 2021. Please refer to our previous update for more information.

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Compliance Calendar

Please note the following important dates as you plan your regulatory compliance timeline for the coming months: 

Deadline	Filing
December 13	Deadline for paying annual IARD charges and state renewal fees, through IARD.
December 16	Cayman Islands FATCA and CRS reporting deadlines.
December 26	Last day to submit form filings via IARD prior to year-end.
December 31	Review RAUM to determine 2021 Form PF filing requirement.
December 31	Small and mid-sized registered CPOs must submit a pool quarterly report (CPO-PQR).
December 31	Cayman funds regulated by CIMA that intend to de-register (i.e. wind down or continue as an exempted fund) should do so before this date to avoid 2022 CIMA fees.
January 11	Amended Form 13H filing due if any information on the previously filed Form 13H became inaccurate during the prior quarter.
January 15	Quarterly Form PF due for large liquidity fund advisers (if applicable).
January 31	“Annex IV” AIFMD filing.
February 16	Quarterly Form 13F due.
February 16	Annual Form 13H updates due.
March 1	Quarterly Form PF due for larger hedge fund advisers (if applicable).
March 1	Deadline for annual affirmation of CFTC exemptions.
March 31	Deadline to update and file Form ADV Parts 1, 2A &2B.
March 31	Cayman Islands CRS Compliance Form deadline.
Periodic	Fund Managers should perform “Bad Actor” certifications annually.
Periodic	Form D and Blue Sky Filings should be current.
Periodic	CPO/CTA Annual Questionnaires must be submitted annually, and promptly upon material information changes, through NFA Annual Questionnaire system.

Please contact us with any questions or for assistance with any of the above topics.

Sincerely,

Karl Cole-Frieman, Bart Mallon, Lilly Palmer, David Rothschild, & Scott Kitchens

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Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive, and cost-effective legal solutions for financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP services both start-up investment managers, as well as multi-billion-dollar firms. The firm provides a full suite of legal services to the investment management community, including hedge fund, private equity fund, venture capital fund, mutual fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog, which focuses on legal issues that impact the hedge fund community. For more information, please add us on LinkedIn and visit us at colefrieman.com.

As of November 8, 2021, FINRA issued Preliminary Statements for the 2022 IARD Renewal Program. You should have received an email from FINRA reminding you of the annual renewal fee due in December. The IARD Renewal Program is essentially where FINRA assists with the collection and disbursement of system processing and jurisdiction-related renewal fees. Please note that the renewal fee varies by jurisdiction/registration, but the exact amount will be reflected in your Preliminary Statement in the E-bill tab.

Please note that full payment of registration renewal fees will be due on or before December 13, 2021. You are responsible for logging into your firm’s FINRA account and making this payment, and we are happy to walk you through the process if you have any questions. If the renewal fee is not paid in a timely manner, the firm’s Form ADV will be withdrawn for failure to comply with the fee requirement. If you have any questions or concerns, please feel free to contact us for assistance.

Clients, Friends, Associates:

As we officially say goodbye to summer and enter the fall season, we would like to highlight some of the recent industry updates and occurrences that we found to be both interesting and impactful. While we strive to present an informative, albeit brief, overview of these topics to allow you to stay on top of the business and regulatory landscape in the coming months, we are also available should you have any related questions.

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SEC Matters

New Qualified Client Standard in Effect. The Securities and Exchange Commission’s (the “SEC”) revised dollar thresholds for Qualified Clients (as such term is defined in Rule 205-3 under the Investment Advisers Act of 1940) became effective on August 16, 2021. Specifically, the “net worth” threshold has been increased from $2,100,000 to $2,200,000 and the dollar amount for the “assets-under-management” test has been raised from $1,000,000 to $1,100,000. As a reminder, investment advisers in many jurisdictions, including SEC registered investment advisers (“RIAs”), are prohibited from charging performance fees and incentive allocations to investors who are not Qualified Clients. The new standard will not be applied retroactively to contractual relationships existing prior to the effective date of the Order, provided that if a new person or entity becomes a party to the contract, the new standard will apply with regard to that person or entity.

SEC Brings Action for Personal Information Exposures. The SEC settled three actions against eight firms after hackers exposed deficiencies in the firms’ cybersecurity policies and procedures. Each firm was charged with violating Rule 30(a) of Regulation S-P (the “Safeguards Rule”). The Safeguards Rule calls for SEC RIAs to adopt written policies and procedures to secure personal information and prevent unauthorized access. The SEC found that the firms either (i) failed to adopt the required policies and procedures or (ii) failed to follow their own internal cybersecurity policies and procedures. In addition, the SEC found two firms provided misleading notifications to clients regarding the length of time between when the breach was discovered and when notice was provided. Each firm in question has agreed to cease and desist from future violations, to be censured, and to pay fines. The SEC’s message was clear—written policies and procedures are insufficient to avoid liability if those policies are ignored or clients and customers are misled.

FINRA Member Fined for Failure to Retain Text Messages. In July 2021, a United Kingdom-based firm settled with the Financial Industry Regulatory Agency (“FINRA”) after FINRA alleged the firm failed to preserve “business-related text messages” sent between employees and customers. The settlement agreement states that employees used their personal cell phones to discuss business matters internally and with customers and failed to forward the messages to higher management and the compliance team for review and retention. This conduct violates Rule 17a-4 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), which requires certain exchange members, brokers, and dealers to preserve all business records for three years. The violations were brought under FINRA’s purview through FINRA Rule 4511, which mandates that such exchange member, broker, or dealer’s record retention policy must adhere to the rules established in the Exchange Act. The blurring of business and personal communications through the use of texting and other instant messaging platforms, while convenient, adds a new layer of complexity regarding the preservation of business records. These actions emphasize the importance of investment advisers maintaining internal policies on the use of messaging platforms as a form of business communication and implementing appropriate retention methods.

SEC Brings Enforcement Action for Securities Fraud Against an Alternative Data Provider. Alternative data provider App Annie Inc. (“App Annie”) and its CEO have agreed to settle with the SEC following charges of securities fraud. App Annie is a seller of market data on mobile app performance such as number of downloads, usage rates and revenue figures (also referred to as “alternative data”). The Commission’s Order states App Annie’s “Terms of Service” provided certain limitations on how App Annie could compile and use its subscribers alternative data—specifically, App Annie represented that it would aggregate the data it received, thereby making the data “non-identifiable.” However, App Annie used non-aggregated data in contravention of its Terms of Service, and manually altered app performance estimates in order to increase the accuracy of the estimates it provided. In addition, App Annie assured potential and existing trading firm subscribers that it had safeguards in place to prevent the sharing and selling of material non-public information (“MNPI”), but failed to properly implement such internal controls. This conduct violates SEC rules for manipulative and deceptive practices (Rule 10b-5). The terms of App Annie’s settlement require the company to pay a $10 million fine and cease the creation of non-aggregated estimates. This and other recent SEC statements have shown the SEC’s increased focus on how alternative data is used in investment research and underscores the importance of advisers performing adequate due diligence on their data vendors to ensure the data they receive does not contain MNPI, rather than solely relying on representations made by such data vendors.

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Digital Asset Matters

Emergence of NFTs as an Area to Watch. Non-fungible tokens (“NFTs”) have seen a massive surge in interest over the course of the last year, with large companies, including the Fox Corporation, who invested $100 million into a creators’ fund for NFTs, and Google Cloud, who recently partnered with the operator of a NFT marketplace network, entering the market. However, with the growth in interest in the sector, the opportunities for malicious actors to profit has also increased, with certain marketplaces seeing an increase in wash sales and OpenSea, one of the largest NFT marketplaces, recently announcing that they have accepted the resignation of an employee who used inside information to profit on the purchase and sale of NFTs from his personal account. As the NFT ecosystem continues to grow, we are likely to see increased attention from regulators as they seek to protect investors.

Coinbase Files to become Futures Commission Merchant. On September 15, Coinbase Financial Markets Inc, a subsidiary of Coinbase Global, Inc. (“Coinbase”) filed an application with the National Futures Association (“NFA”) to register as a Future Commission Merchant. Coinbase announced their application via tweet, stating their next step is to “broaden our offerings and offer futures and derivatives trading on our platforms.” Other platforms offer futures and derivatives for cryptocurrencies, but if successful in their application, Coinbase would be one of the first cryptocurrency-specific exchanges to register as a Future Commission Merchant.

Amid Increased Regulatory Attention on Stablecoins, Coinbase Abandons Lend Product. Janet Yellen, the U.S. Secretary of the Treasury, spoke to regulators in late July, stating the U.S. government needs to establish rules for stablecoins, a rapidly growing class of cryptocurrencies that peg their value to an asset, often fiat currencies. As reported by Reuters early in September, the U.S. Treasury has begun discussions with financial industry executives to discuss potential regulation of stablecoins.

The SEC threatened a lawsuit against Coinbase if it continued to launch its Lend product, which would have offered interest on deposits of the stablecoin USDC. In recent weeks, Coinbase shared through its blog that it had attempted to discuss the matter directly with the SEC, but those discussions have not been productive. Coinbase’s CEO, Brian Armstrong, suggested in a series of tweets that the SEC has been unwilling to engage with Coinbase to offer guidance or clarify its position. In addition, the New Jersey Bureau of Securities has issued a Cease and Desist Order against BlockFi, Inc. (“BlockFi”) for its BlockFi Interest Account, alleging that they are engaging in the sale of unregistered securities in the form of cryptocurrency interest-earning accounts, and the Texas Securities Board has filed a Show-Cause Order alleging the same. While BlockFi offers interest on stablecoins and more traditional cryptocurrencies such as Bitcoin and Ethereum, it is clear their stablecoin interest accounts are part of the focus of the regulators as they each mentioned the interest rate offered on the Gemini dollar (GUSD) specifically in their Orders. While the BlockFi Orders are pending resolution and it is not yet known whether Coinbase plans to launch Lend in the future or to scrap the project entirely, it is clear that products offering interest on stablecoins and stablecoins in general are going to face increased regulatory scrutiny in the coming months.

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CFTC Matters

Update to NFA Branch Office Inspection Requirement and Physical Examination Requirement. In March 2020, the NFA issued Notice to Members I-20-12 exempting temporary work from home locations from being deemed a branch office of the registrant, thus exempting such locations from the substantive provisions of NFA Interpretative Notice 9002. Effective September 23, 2021, the NFA permanently codified this guidance (and allowed I-20-12 to expire) by revising NFA Interpretive Notice 9002, excluding from the concept of “branch office” “any location where one or more associated persons (“APs”) from the same household live or rent/lease (e.g., a shared or co-work space)” so long as certain requirements are met:

• the exempt location is not held out to the public as an office of the Member;
• the relevant APs do not meet in-person with customers at the exempt location;
• the relevant APs do not physically handle customer funds at the exempt location; and
• any CFTC or NFA required records created at the non-branch office location are accessible for inspection at the Member firm’s main or applicable listed branch office as required under CFTC and NFA rules.

In Notice to Members I-21-25, the NFA also extended through the end of 2021 its temporary relief of the requirement that a Member conduct an annual physical inspection of each of its branch offices. Although Members are still required to conduct an annual inspection of each branch office, Members may conduct such inspection remotely. Further, the NFA will also allow Members to conduct a remote inspection in 2022 if that Member’s “risk assessment indicates it is appropriate to do so,” and such assessment should explicitly take into account if no physical inspection has occurred during the prior two years.

Collectively, these modifications to NFA’s rules should, in the short-term, continue to permit NFA Members to prioritize COVID safety, while, in the long-term, allow NFA Members greater flexibility in offering remote work opportunities to their APs.

NFA Orders NY Introducing Broker to Pay Fines. A New York City Introducing Broker (“IB”) has been ordered to pay a $150,000 fine after the Business Conduct Committee (“BCC”) of the NFA uncovered a series of alleged record-keeping violations. The BCC Complaint stated the IB failed to meet NFA and CFTC compliance standards for “full, complete, and systemic records” pertaining to the IB’s commodity interest dealings. Specifically, the IB had limited their voice recording retention period to 96 hours for Associated Persons (“APs”) dealing in future and securities transactions. The Complaint further alleged that the IB failed to supervise record keeping activities and AP communications because the recording violations went undetected for 18 months. This action underscores the importance for NFA Members to not only implement, but also regularly test the effectiveness and adequacy of required policies and procedures.

CFTC Market Risk Advisory Committee Submits SOFR First for Consideration. The Commodities and Futures Trading Commission (“CFTC”) Market Risk Advisory Committee (“MRAC”) adopted SOFR First, a new market practice intended to transition trading conventions from LIBOR to Secured Overnight Financing Rate (“SOFR”). SOFR First was designed in response to recent global financial and banking supervisory guidance calling for market participants to move away from LIBOR, including, notably, “that banks cease entering new contracts that reference USD LIBOR post December 31, 2021.” The first two phases, related to linear swaps and cross currency swaps, were introduced on July 26 and September 21, respectively. To date, MRAC has not announced the rollout for phases three and four, which address non-linear derivatives and exchange traded derivatives. Interested parties should review the MRAC’s SOFR First Recommendation (found within the above hyperlink) which includes guidance on the types of products covered and best practices. In addition, as the LIBOR benchmark is phased out, fund managers should review their inventory of contracts to appropriately identify and amend LIBOR references. We recommend that you discuss the effective date of any contractual transitions and the specific remediation approach with your counsel.

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Offshore Matters

CIMA Issues Reminder to AML Officers. The Cayman Islands Monetary Authority (the “Authority”) has reiterated its expectation that relevant financial businesses adhere to the country’s Anti-Money Laundering Regulations (2020 Revision) (“AMLR”). Specifically, the Authority noted that “all Licensees and Registrants…are expected and required to ensure that their Anti-Money Laundering Compliance Officers (“AMLCOs”), Money Laundering Reporting Officers (“MLROs”) and their Deputies (together, the “AML Officers”) are aware of their respective duties and responsibilities as set out in the” AMLR. Such responsibilities include (i) the ability to dedicate sufficient time to effectuate their respective functions, (ii) the requisite foundational knowledge of the underlying business transactions needed to identify opportunities for money-laundering, terrorist financing, and other prohibited activity, and (iii) the need for adequate internal policies and procedures—even in situations where the AML Officer role is outsourced to an external third party. AML Officers are required by Cayman law to be management-level natural persons who report directly to a company’s Board of Directors or equivalent thereof. Companies must provide AML Officers with the access necessary to assess suspicious conduct and the authority to make final decisions on filing suspicious activity reports. Managers with Cayman funds should ensure that (i) the appropriate AML Officer roles are filled, (ii) such appointees have the necessary knowledge, expertise, and time to effectively carry-out their responsibilities, and (iii) internal policies and procedures are in place.

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Other Matters

California Lenders’ License Update. The California Department of Financial Protection and Innovation (“DFPI,” formerly known as the Department of Business Oversight) announced that starting on October 1, 2021 applications under California Financing Law (“CFL”) must be submitted through the Nationwide Multistate System and Registry (“NMLS”). Existing licenses such as company or branch licenses must be transitioned onto NMLS by December 31, 2021. Managers with CFL licenses should begin transitioning onto the NMLS if they have not already done so.

European Union Announces Delay of Sustainable Finance Disclosure Regulation (“SFDR”) Rollout. The EU’s SFDR will now be implemented on July 1, 2022, instead of January 1, 2022. The SFDR is a series of disclosure requirements for asset managers intended to increase the transparency of a fund’s sustainability and environmental impact. The 13 new standards (informally referred to as SFDR Level 2) are still in the drafting stage, but the EU plans to issue formal guidance in January 2022. Given its likely far-reaching and significant impact on the financial investment industry, SFDR Level 2’s rollout will be an important regulatory topic to keep an eye on.

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Compliance Calendar

Please note the following important dates as you plan your regulatory compliance timeline for the coming months:

Deadline	Filing
October 12	Amendment to Form 13H due if there were changes during Q3.
October 15	SEC deadline to file quarterly Form PF for Large Liquidity Fund Advisers, through PFRD.
October 30	SEC registered advisers must collect Transaction Reports from access persons for their personal securities transactions.
October 30	Registered CPOs must distribute (i) monthly account statements to pool participants (pools with net asset value of more than $500,000) and (ii) quarterly account statements to pool participants (pools with net asset value less than $500,000 or CPOs claiming the 4.7 exemption).
November 8	Investment adviser firms may view, print and pay preliminary notice filings for all appropriate states, through IARD.
November 15	NFA deadline to file Form PR for registered CTAs, through NFA EasyFile.
November 15	SEC deadline to file Form 13F for 3rd Quarter 2021.
November 29	SEC deadline to file quarterly Form PF for Large Hedge Fund Advisers, through PFRD.
November 29	CPO-PQR Form due for CPOs, through NFA EasyFile.
December 13	Deadline for paying annual IARD charges and state renewal fees, through IARD.
December 31	Cayman funds regulated by CIMA that intend to de-register should do so before this date to avoid 2022 CIMA fees.
Periodic	Fund Managers should perform “Bad Actor” certifications annually.
Periodic	Form D and Blue Sky Filings should be current.
Periodic	CPO/CTA Annual Questionnaires must be submitted annually, and promptly upon material information changes, through NFA Annual Questionnaire system.

Please contact us with any questions or for assistance with any of the above topics.

Sincerely,

Karl Cole-Frieman, Bart Mallon, Lilly Palmer, David Rothschild, & Scott Kitchens

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Cole-Frieman & Mallon LLP is a premier boutique investment management law firm, providing top-tier, responsive, and cost-effective legal solutions for financial services matters. Headquartered in San Francisco, Cole-Frieman & Mallon LLP services both start-up investment managers, as well as multi-billion-dollar firms. The firm provides a full suite of legal services to the investment management community, including hedge fund, private equity fund, venture capital fund, mutual fund formation, adviser registration, counterparty documentation, SEC, CFTC, NFA and FINRA matters, seed deals, hedge fund due diligence, employment and compensation matters, and routine business matters. The firm also publishes the prominent Hedge Fund Law Blog, which focuses on legal issues that impact the hedge fund community. For more information, please add us on LinkedIn and visit us at colefrieman.com.

Our law firm, Cole-Frieman & Mallon, has been a leader in helping fund managers form private investment funds focused on the digital asset space. We’ve seen the space mature from 2014 when programs were focused on long tokens, to later investment strategies that included long/short, jurisdictional and exchange arbitrage, VC-focused or hybrid, to the more recent focus on staking, yield-farming, long NFTs, etc. What these changing strategies show are two things: (1) the crypto space will continue to incorporate traditional investment management strategies as it iterates to find the most compelling investment scenarios and (2) the future of finance will also include crypto-centric strategies that cannot be achieved through traditional markets. The crypto space is dynamic and advances without the constraints of traditional markets. However, the crypto space, like the rest of the world we live in, requires energy to move forward. The time is now for the crypto industry to focus on how the next generation of blockchains (and infrastructure to support those blockchains) will coexist with a society that is starved for energy-efficient industry. This focus on energy consumption is vital and will have numerous consequences for the space moving forward. And because the crypto industry is so dynamic, led by visionary actors, we expect to see great movements in how the industry thinks about and uses energy in the future.

Bart Mallon

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Overview of Energy Issues Related to Crypto Mining

By Emily Irigoyen & Bart Mallon

In this post, we will explore energy consumption and its relation to cryptocurrency as well as discuss the factors that will shape this relationship moving forward. This article also provides insight into the different influences of various stakeholders in the digital asset space and identifies other important aspects that will guide the development of the industry going forward.

Proof of Work (PoW) versus Proof of Stake (PoS)

Depending on which protocol for validating transactions a particular blockchain uses, the energy intensity of its mining will vary. This is because cryptocurrencies that run on Proof of Work (PoW), such a Bitcoin, require substantial amounts of computer power and energy to mine versus Proof of Stake (PoS) which is more energy efficient. While these aren’t the only protocols that exist in the crypto space, these are the most well-known, and highlight a stark difference in a cryptocurrency’s expected energy consumption.

What are Miners Doing?

There are various groups who oppose crypto adoption because of the perceived negative environmental impacts of crypto mining. While it is true the mining process can be energy-intensive, the practical value of crypto and the diverse ways that mining facilities have been incorporating green practices into their business models, have transformed environmental concerns into a nuanced set of issues that deserve exploration.

When discussing mining’s environmental impact, the notion of high energy consumption and negative environmental externalities are often erroneously conflated. While some cryptocurrency mining operations use substantial amounts of energy, such as Bitcoin, the nature of the energy source used will ultimately determine a miner’s environmental impact. As evidenced by our own interactions with crypto miners, many operations are currently or, in the process of, implementing more sustainable fuel sources. By using renewable energy sources to power their operations, these miners are minimizing their negative environmental impact in comparison to operations based solely on fossil fuels.

Furthermore, while mining facilities abandon China, the hashrate in the United States continues to increase steadily. This phenomenon reflects a recent trend in mining facilities’ international expansion, with a particular focus on US areas that boast cheap renewable energy and pro-crypto politicians, such as Texas. The former grants them a huge reputation boost, as facilities based in renewable energy sources cause significantly less environmental harm than those based in fossil fuels, and the latter allows facility owners to stay secure in the knowledge that state and county regulations will remain lax for the foreseeable future.

Some mining facilities have also taken extra steps to engage in grid balancing, a process by which the facility — in conjunction with their local utility company — can ensure the stability of the power grid. Grid balancing ensures electricity supply meets electricity demand. Large mining facilities can take part in this process by shutting down their operations for small periods of time when the grid is experiencing a surge of demand. This prevents blackouts and can bolster the push for renewable energy, as more balanced grids mean fewer that must rely on increased fossil fuel consumption to respond to demand peaks. Essentially, when large electricity consumers such as crypto miners change their usage as needed, renewable energy can handle more of the grid’s electricity needs.

Is High Energy Use for Mining Any Less Valid Than Other Energy-Intensive Operations?

Almost all business activity consumes energy. In the same way commercial landlords power their warehouses and offices, so too crypto companies use energy to power their mining centers. This perspective contends crypto mining’s energy use is no more inherently wasteful or less legitimate than that of any other business operation. The flaw in this argument is the scale to which crypto mining has grown and will continue to grow, along with its extremely high energy consumption in comparison to other businesses. According to the University of Cambridge Bitcoin Electricity Consumption Index, the global bitcoin network annually consumes approximately 80 terawatt-hours of electricity, which is roughly equal to the annual output of 23 coal-fired power plants. While the scale of this electricity consumption cannot be ignored, it must be understood in the context of crypto mining’s growing reliance and impact on availability of renewables. Cryptocurrency mining could be a driver encouraging adoption of renewable sources until they become the predominant source of electricity generation.

ESG, the SEC and (Potential Future) Institutional Mandates

It’s clear that the demand for ESG investments is increasing and is currently on the forefront of the SEC’s agenda. In response, more institutional investors are committing to ESG investments, which in turn, has or will encourage cryptocurrency miners to follow in this direction.

This desire to offer more sustainable cryptocurrency has manifested in large private sector initiatives that focus on decarbonizing the cryptocurrency industry, such as the Crypto Climate Accord. These forms of risk management have shaped the crypto mining space environmentally and allow us to better predict how crypto mining will evolve in the future. Naturally, as the demand for ESG cryptocurrency increases — as well as the desire to get in front of regulatory uncertainty grows — more mining facilities will green their operations.

Currently, the main barrier that miners face is ensuring that both regulators and the public at large take note of their ESG initiatives and sustainability protocols. Since environmental critiques of the crypto mining industry have been incorporated so heavily into the national narrative surrounding cryptocurrency, many mining and general crypto users have been working together to publicize information that highlights their evolving green initiatives and the many benefits that crypto mining can provide. This has taken the form of both sustainable initiatives and intense lobbying, which brings us to our next point.

Issues That Will Influence This Discussion Going Forward

While the future of the crypto industry will be influenced by everything we discussed above. We also predict the following will increasingly affect the development of the industry in the coming years:

• Lobbying the Government for Less Regulation & More Renewable Energy. As shown by the recent stalling of the 2021 Infrastructure Bill because of the crypto tax provision, lobbying pressure in the cryptocurrency community in unified and persistent. In the future, we can expect a larger lobbying contingent, and we can expect Representatives and Senators fighting for interests that affect their states. This is especially true in states like Texas where politicians are particularly friendly to crypto miners and business, boasting both lax state regulations and large renewable energy capacity to attract miners fleeing from Chinese regulatory scrutiny. Despite potential movement on the federal level, some states are going to fight hard to ensure bitcoin mining continues to flourish in their states so that they can continue to reap the current (and future) tax revenue.
  
  Lobbying for more and cheaper renewable energy in the US will also benefit the crypto market and has already started to manifest itself in the new Infrastructure Bill. The new bill proposes a $73 billion government investment to rebuild the electric grid, build thousands of miles of new power lines, and expand renewable energy. As the US naturally moves to a cleaner power grid, it’s expected crypto miners will gradually follow.

• International Crackdowns Affecting Bitcoin Value and Mining Hubs. Previously a major hub for bitcoin mining, China’s latest crackdowns on bitcoin mining and cryptocurrency exchanges have created space for other countries to become bigger players in the bitcoin arena. This explains why countries like the US have had an increasing number of bitcoin miners move their operations in their jurisdiction. While China justifies their harsher regulation in the name of their 2060 carbon neutrality plans, their regulatory scrutiny has also pushed many bitcoin miners towards countries with less renewable energy capacity, such as neighboring Kazakhstan, a former Soviet republic that is primarily dependent on coal and gas. This demonstrates how China’s actions may be hampering Bitcoin’s transition to cleaner energy sources, thus creating a larger carbon emissions problem. While some former Chinese miners that are now based elsewhere internationally are implementing greener operations in their new locations, it’s unclear whether these miners are outnumbered by miners who were forced out of China into countries with even less access to renewables. Also, it seems that China’s actions weren’t solely based on their national environmental plan, but also aimed to weaken Bitcoin in general so that the digital Yuan, their national digital currency, can run without competition. This greenwashing tactic has worked — China’s actions have brought Bitcoin’s value down substantially while also allowing them to claim their regulations are in response to their environmental concerns. This instance further demonstrates the impact stringent regulations in key mining countries can have on the crypto markets.

• Elon Musk’s Comments on Cryptocurrency. On July 21, at the B-Word conference hosted by the Crypto Council for Innovation, Musk claimed that Tesla will once again receive Bitcoin as tender once it is clear Bitcoin’s mining operations and exchange are powered by 50% or more of renewable energy and is steadily growing its renewable energy sources. This announcement correlated to a rise in the price of bitcoin and comes after Musk’s original statement in May on Twitter that said Tesla would suspend vehicle purchases using Bitcoin citing environmental concerns. This statement dropped the value of bitcoin within minutes and demonstrates the power Elon Musk and the Tesla brand have on the perceived worth of cryptocurrency. If a tweet by Elon Musk can cause immediate volatility to crypto prices, investors and crypto advocates alike should take note of his future remarks.

• Cryptocurrencies Moving Towards More Energy-Efficient Protocols. As Ethereum transitions from the consensus mechanism of Proof of Work (PoW) to Proof of Stake (PoS), it is expected that more digital assets will move towards “greener” protocols. Ethereum has already noted the benefits of their new protocol, such as its increased energy-efficiency, which signals to us that other protocol developers in the crypto space will also be mindful of energy consumption when creating their consensus mechanisms.

Conclusion

Because energy is such a broad topic in the crypto space, and encompasses so many parts, it is difficult to neatly address all of the factors that shape energy’s role in the crypto movement. Obviously, the people leading crypto are part of a generation that is focused on the environmental impact of their behaviors. This form of self-imposed environmental regulation, combined with the external pressure from other stakeholders concerned about crypto’s energy use, will not only affect the value and sustainability of cryptocurrency in the long term, but also potentially inform broader discussions of renewable energy capacity generally.

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Emily Irigoyen is an EDICT intern at Cole-Frieman & Mallon LLP. She is currently a senior at Vanderbilt University majoring in environmental sociology and will be attending Harvard Law School after graduation.

Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first digital currency-focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.