Sec Lit IQ: MoFo’s Quarterly Federal Securities Litigation and Delaware Corporate Litigation Newsletter (Q2 2025)

In our latest edition of MoFo’s quarterly federal securities and Delaware corporate litigation newsletter, we provide a rundown of select developments from the second quarter of 2025.

The SEC’s New Crypto Guidance

On July 1, 2025, the SEC’s Division of Corporation Finance (“staff”) released new guidance regarding the offering of crypto exchange traded products and disclosure requirements applicable to crypto products. This represents the Division’s most detailed guidance to date for crypto asset products and reflects the efforts of the SEC’s new Crypto Task Force.[1] 

The new guidance aims to help issuers tailor their disclosures for the unique nature of crypto asset products and specifically covers point-by-point the information that should be disclosed on a section-by-section basis.

The guidance also offers clues about potential changes in the SEC’s position on crypto. As early as 2018, the SEC has brought enforcement actions against “free” initial coin offerings, commonly termed “airdrops,” as securities offerings violating Section 5 of the Securities Act of 1933.[2] The SEC reasoned that offering tokens for free qualified as a sale of a security because issuers received “online marketing” and “a public trading market” in exchange for the tokens.[3] Buried within the new “prospectus summary” guidance, the staff indicates that “airdrops” may be considered a routine activity for digital asset firms. This casual mention of “airdrops” indicates a potential softening of the SEC’s treatment of airdrops as securities offerings. The new guidance, issued by staff within the Division of Corporate Finance, signals how the Commission’s views on this topic may be evolving with the Crypto Task Force.

Although change is in the air, not everything is up for grabs. On July 9, 2025, Commissioner Hester Peirce, who heads the Crypto Task Force, released a statement, cautioning that tokenization does not “magic[ally]” alter “the nature of the underlying asset.”[4] Commissioner Peirce outlined how “tokenized” securities are still considered securities and must comply with federal securities laws, citing an April 10, 2025 statement by the Division of Corporate Finance.[5] Commissioner Peirce concluded her statement with a recommendation that market participants meet with the Commission regarding tokenized products.[6]

The SEC’s new posture towards crypto assets has yet to be fully developed by the Crypto Task Force. But the Division of Corporate Finance’s guidance on crypto asset exchange traded products, and clarification by Commissioner Peirce regarding tokenized securities, lays the groundwork for further changes ahead.  For more details on this development, read our client alert.

Senate Banking Committee Unveils New Crypto Market Structure Principles

On June 24, 2025, the Senate Committee on Banking, Housing, and Urban Affairs unveiled new market structure principles (the “Principles”) intended to guide future legislation regulating digital assets. The Senate Committee weighed in on the tricky distinction between digital asset securities—regulated by the Securities and Exchange Commission—and digital asset commodities—regulated by the Commodities and Futures Trading Commission.

Digital assets, including cryptocurrencies like Bitcoin, have long posed challenges for regulators because they reflect elements of both securities and commodities. Efforts to regulate digital assets as securities have, to date, been criticized as overreaching “regulation by enforcement.” Industry insiders have complained about the lack of clarity and have touted their willingness to abide by clear, reasonable regulations.

The Principles reflect several key priorities for the Committee and reflect a friendlier attitude towards digital assets than regulators have shown to date. First, there is a goal to clearly delineate regulatory authority to prevent an all-encompassing regulator from emerging. This reflects longstanding concerns that the SEC’s Division of Enforcement, in particular, had emerged as a stringent regulator of the cryptocurrency space.

Second, the Principles call for the modernization of regulations to foster innovation. This is an alternative to the SEC’s approach, which often relied on the Howey test[7] to determine which digital assets could rightfully be called securities. The Principles move away from the SEC’s previous approach to digital asset regulation and call for a new registration exemption for digital asset fundraising as well as revisions to “burdensome registration requirements.” Rather than trying to fit digital assets into existing frameworks, the Principles consider tokenization “an evolution of financial infrastructure.”

Third, the Principles recognize broader uses of blockchain technology. Not all uses of blockchain are financial in nature: The Principles cite one example of distributed ledger technology that could be used to manage health data, although no other specific uses were discussed.

At the same time, the Principles also aim to protect “those who purchase or trade digital assets.” Fraudulent issuers persist and pose risks for consumers and intermediaries.

Backers, including Senate Banking Committee Chairman Tim Scott, have called for legislation implementing the Principles. Moreover, although the Principles may reflect the Senate majority’s attitude towards digital assets, other members of the Committee, like Senator Elizabeth Warren, continue to call for stronger regulations. Digital asset developers and intermediaries should stay aware of developments in the law, as the landscape remains fluid and federal and state agencies may look to the Principles when developing their own regulatory schemes.

Second Circuit Confirms That Plaintiffs Must Plausibly Allege Beneficial Ownership in Order to Sue Under Section 16(b).

On May 23, 2025, the Second Circuit rejected a novel theory of liability for short-swing profits under Section 16 of the Securities Exchange Act of 1934 in a share buyback context.

Section 16(b) imposes strict liability for trading by corporate insiders, including by controlling shareholders. However, due to its strict liability penalty, Section 16(b) has narrowly drawn limits. The elements of a traditional Section 16(b) claim require (1) a purchase and (2) a sale of securities (3) by an insider (4) within a six-month period. Further, the two transactions must involve substantively identical equity securities and there must be a realized profit. Without profit, there is no liability under Section 16(b). The sole remedy for Section 16(b) violations is disgorgement of all profits by the offending insider.

In Roth on behalf of Estée Lauder Companies Incorporated v. LAL Family Corporation, the Plaintiff-Appellant, Andrew Roth, alleged that controlling shareholders violated Section 16(b) by pairing share sales made by controlling shareholders with share repurchases, or buybacks, by the controlled corporations.[8] The Second Circuit’s ruling addressed two district court cases. In the first, Roth alleged that the controlling shareholder of Estée Lauder Companies Inc. sold 2 million shares of Estée Lauder stock, which Estée Lauder then repurchased over the course of several months within the statutory period. The second case concerned Altice USA, Inc., in which a controlling shareholder sold nearly 4 million shares of Altice’s common stock, after which Altice repurchased the shares within the statutory window.

The court addressed several problems with Roth’s theory.

Beneficial Ownership. The court reasoned that defendants lacked beneficial ownership of the repurchased equity securities. Instead, the repurchased shares were transformed into treasury shares and became distinctly situated apart from shares purchased on the market. Because this transformation happens immediately upon repurchase, and treasury shares are considered valueless, and there is no beneficial ownership of the repurchased shares.

Pairing. The court also found that the security transactions were not pairable. The court rejected Roth’s theory that share repurchases have the same economic effect as purchases of outstanding shares. As mentioned, the court found that share repurchases remove shares from circulation and that a repurchase is distinct in nature from a purchase of outstanding shares. As a matter of law, repurchased shares are treated as treasury shares, which has the effect of terminating one half of the pairable transactions.

Profit. The court also found that there was no profit from the non-pairable transactions. In an ordinary share purchase, there is either a profit or loss. However, because the transactions here did not involve substantively identical securities, the court found that there was no comparable cost basis against which to discern any excess profits.

Disgorgement and Strict Liability. The court provided guidance on future approaches to similar theories and indicated that future theories will face similar hurdles. The court found that the SEC and courts have concluded that Section 16(b) does not concern an issuer’s transactions in its own shares. Lastly, the court considered the ramifications of Roth’s theory and concluded that because there are insiders without knowledge of stock repurchases, Roth’s theory would make Section 16(b) a “trap sprung with every transaction.”

The Second Circuit’s opinion is a forceful endorsement of longstanding Section 16(b) precedents. The court assessed Roth’s various theories and thoroughly rejected each of them. Although Section 16(b)’s future seems certain and predictable, Roth suggests that private securities plaintiffs will continue to identify novel and aggressive theories of recovery. Moreover, although the Second Circuit rejected Roth’s theory, other federal courts may be more amenable to finding liability against controlling shareholders in share buyback plans.

The Fourth Circuit Enforces a “Bump Up” Exclusion, Withholding Indemnification of a $90 Million Shareholder Class Action Settlement. 

On May 28, 2025, the Fourth Circuit added further complexity to the increasingly contested issue of “bump up” exclusions in directors & officers (D&O) insurance policies in Towers Watson & Company v. National Union Fire Insurance Company of Pittsburgh, PA.[9]  The court affirmed that the policy’s bump up exclusion precluded coverage for the parties’ $90 million class action settlement, including for attorneys’ fees.[10] 

A bump up exclusion bars coverage for claims arising out of the alleged payment by the insured of an inadequate price for the purchase of its own securities.[11]  In other words, a D&O insurance policy with such a provision will not cover losses stemming from any settlements or judgments that effectively increase or “bump up” the price paid for a company’s equity shares.[12]  In recent years, bump up exclusions have become a particular focal point for shareholder actions connected to mergers and acquisitions.[13]  During the sale or purchase of a public company, shareholders of the target company will often file a lawsuit against the deal for selling the company at a below-market price.[14]  If the suit results in a judgment or settlement that gives the shareholders more value for the sale, the company will not be covered for that judgment or settlement if it is insured by a policy with a bump up provision.[15]

After its acquisition by Willis Group Holdings through a reverse triangular merger, Towers Watson was sued by its former shareholders in two separate class actions, one asserting securities law claims in Virginia federal court and another asserting state law claims in Delaware chancery court.[16]  The cases settled for a total of $90 million, with $75 million for the federal plaintiffs and $15 million going to the Delaware plaintiffs.[17]  While these actions were ongoing, Towers Watson sought coverage under its D&O insurance policy, which contained a “bump up” provision.[18]  While Tower Watson’s insurer, National Union, provided for its defense, the carrier denied indemnity coverage for any judgments or settlements, triggering a suit.[19]

Towers Watson’s policy with National Union contained a bump up exclusion that, in the event of a claim alleging that the price or consideration paid for the company’s acquisition is “inadequate,” precluded coverage for losses of “any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased.”[20]

Applying state contract law, the Fourth Circuit interpreted the terms “represent” and “effectively increase,” when read together, to indicate “the real result of the situation, not the theoretical one.”[21]  If the “real result” of the settlements is that “the shareholders receive additional consideration for their relinquished shares, this condition is satisfied.”[22]  The court opined that was “exactly” what happened: the Towers Watson shareholders “sought to rectify” the devaluation of their shares from the merger through their lawsuits.[23]  In other words, “they sought what was effectively an increase (or ‘bump up’) in the consideration paid for their shares.”[24]  Thus, the “real result” of the settlements they received “constituted– i.e. ‘represented’– precisely such a bump up.”[25]

Additionally, by applying the common fund doctrine, the Fourth Circuit also ruled that the settlement money allocated towards attorneys’ fees fell within the exclusion, denying indemnity for that portion as well.[26] The common fund doctrine allows courts to award reasonable attorneys’ fees to parties that recover a common fund for the benefit of those other than just themselves from the fund as a whole.[27]  According to the court, “the logistics of the settlement and attorneys’ fees arrangement,” in which attorneys’ fees are awarded out of a common settlement fund, as is typical, made the common fund doctrine’s application appropriate.[28]

The Towers Watson decision appears to run counter to other recent cases in which courts have refused to enforce such bump up provisions.  For example, in Harman International Industries, Incorporated v. Illinois National Insurance Company, decided on January 7, 2025, the Delaware Superior Court held that a similar “bump up” exclusion did not preclude coverage for settlements arising out of a reverse triangle merger between Harman and Samsung Electronics America.[29]  In part, the Delaware court observed that, because Harman’s shareholders alleged inadequate disclosures under Section 14(a) of the Securities Exchange Act, a settlement cannot represent a bumped up price or consideration.[30]  The Fourth Circuit explicitly rejected this contention, instead looking to the “real result” of settlements.[31]  These developments suggest that federal and state courts may be diverging on whether shareholder class action settlements sprouting from M&A deals fall within bump up exclusions.

As bump up exclusions become more frequently litigated, public companies facing potential shareholder lawsuits from M&A deals may be more vulnerable to bump up exclusions in their D&O coverage than previously thought.

[1] In February 2025, the SEC formed a new Crypto Task Force led by Commissioner Hester Peirce. The Crypto Task Force has a stated aim of helping to create a regulatory framework for the crypto industry. Part of the Task Force’s initial goals include addressing crypto asset exchange traded products, among other topics. Hester Peirce, Commissioner, Sec. & Exch, Comm’n., The Journey Begins (Feb. 4. 2025), https://www.sec.gov/newsroom/speeches-statements/peirce-journey-begins-020425.

[2] See In the Matter of Tomahawk Exploration LLC & David Thompson Laurance, Securities Act Release No. 10530, Exchange Act Release No. 83839, 2018 WL 3854604 at *7 (Aug. 14, 2018).

[3] Id. at *8.

[4] Hester Peirce, Commissioner, Sec. & Exch. Comm’n., Enchanting, but Not Magical: A Statement on the Tokenization of Securities (July 9, 2026), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-tokenized-securities-070925.

[5] Id.

[6] Id.

[7] SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

[8] 138 F.4th 696 (2d Cir. 2025).

[9] 138 F. 4th 786 (4th Cir. 2025).

[10] Id. at 789.

[11] U.S. Risk, LLC, The D&O Dictionary 4, https://www.usrisk.com/siteassets/documents/white-papers/u.s.-risk-do-dictionary.pdf.

[12] Towers Watson & Co., 138 F.4th at 789.

[13] Peter Adams, Jacquelyn Burke, & Linh Nguyen, Will a Bump-Up Exclusion Bar Coverage of an M&A Settlement? Harv. L. Sch. F. on Corp. Governance (Sept. 2, 2024), https://corpgov.law.harvard.edu/2024/09/02/will-a-bump-up-exclusion-bar-coverage-of-an-ma-settlement/.

[14] Id.

[15] Id.

[16] Towers Watson & Co., 138 F.4th at 790.

[17] Id.

[18] Id. at 789–90.

[19] Id.

[20] Id. at 789, 793.

[21] Id. at 793 (internal quotations and brackets omitted).

[22] Id. at 794.

[23] Id.

[24] Id.

[25] Id.

[26] Id. at 796–97.

[27] Id. at 796 (citing Brundle ex rel. Constellis Emp. Stock Ownership Plan v. Wilmington Tr., N.A., 919 F.3d 763, 785 (4th Cir. 2019)).

[28] Id. at 796–97.

[29] C.A. No. N22C-05-098 PRW CCLD, 2025 WL 84702 at *1, 6 (Del. Super. Ct. Jan. 7, 2025).

[30] Id. at *9–10.

[31] Id. at 794–95.