Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

On August 18, 2026, the Securities and Exchange Commission (SEC) proposed Regulation Crypto Assets, a new registration-exempt offering framework designed specifically for crypto assets. The proposal would create two exemptions from Securities Act registration; a conditional safe harbor under which a crypto asset would no longer be treated as a security; and preemption of state blue sky registration and qualification requirements. This is the SEC’s first purpose-built offering regime for crypto assets, and it comes as the Senate has stalled for now on broader crypto market structure legislation. Comments are due 60 days after publication in the Federal Register.

Background: From Enforcement to a “Fit-for-Purpose” Framework

Since the 2017 DAO Report, the SEC has regulated crypto assets largely by applying the Supreme Court’s SEC v. W.J. Howey Co. test through informal guidance and enforcement, asking whether a crypto asset was sold as part of an “investment contract” and thus regulated as a security. Market participants have long argued that this analysis is hard to apply consistently and that case law, disclosure and resale rules written decades before blockchain technology was invented are a poor fit for token distributions.

The SEC’s posture shifted with the creation of the Crypto Task Force in 2025 and, on March 17, 2026, the SEC and Commodity Futures Trading Commission (CFTC) issued a joint interpretive release addressing how the federal securities laws apply to certain crypto assets and transactions. That March interpretation confirmed that while some crypto assets are not securities, they may be sold subject to an investment contract that is a security and, critically, that the otherwise non-security underlying crypto asset may later “separate” from its investment contract security when purchasers can no longer reasonably expect the issuer to engage in essential managerial efforts. Regulation Crypto Assets would codify that separation concept and build an offering regime leading up to it.

The Building Block: “Covered Investment Contracts”

The proposed regime centers on the “covered investment contract” definition: an investment contract where a crypto asset is the only asset subject to the contract and that crypto asset is not itself a security; that token is separately defined as the “subject crypto asset.” Notably, the startup exemption covers “covered transactions,” a term that expressly includes airdrops and network rewards in addition to offers, sales and other distributions. Where the underlying crypto asset is a security, however (such as with tokenized stock securities), the definition, and thus the exemptions, do not apply.

All issuers relying on either exemption (both are described below) would provide principles-based narrative disclosure under proposed Rule 103, with 10 topics, including the material terms of the covered investment contract and the issuer’s representations or promises to engage in essential managerial efforts. Rule 103 would also require that the disclosure be consistent with the issuer’s public communications (e.g., its website, official social media accounts and whitepapers), rendering communications discipline a compliance issue in addition to a marketing one. Both exemptions would be non-exclusive. They are unavailable to “bad actors” disqualified under Regulation A’s Rule 262, registered investment companies and business development companies.

The Startup Exemption

Proposed Rule 200 would exempt offers, sales and other distributions of covered investment contracts up to $5 million over up to four years. The exemption is available only once to an issuer and its affiliates for the same or a substantially similar crypto asset, and the issuer may be an entity, an individual or a group.

To use the exemption, an issuer would file a notice of reliance on new Form NOR with the SEC before any covered transaction occurs, certifying its intent to fulfill the promised essential managerial efforts within four years; keep the Rule 103 disclosures freely available on a specified website; update them within 30 calendar days after each year-end if there have been material changes; and file a transition report on new Form TR no later than the end of the four-year period. The Rule 103 information itself would not be filed on EDGAR, making version control and recordkeeping important if questions later arise about what was publicly available and when.

Unlike Regulation D and Regulation Crowdfunding, the startup exemption would impose no accredited investor condition and no individual investment limit, would permit general solicitation, and would not treat the covered investment contracts as restricted securities subject to Rule 144-style holding periods. The SEC’s view is that free tradability supports the network effects that drive token value.

The Fundraising Exemption

Proposed Rules 300 through 307 would create a two-tier offering exemption modeled on Regulation A.

  • Tier 1 would permit up to $20 million of covered investment contracts in a 12-month period (including no more than $6 million by affiliated selling securityholders), with no audit requirement.
  • Tier 2 would permit up to $75 million in a 12-month period (including no more than $22.5 million by affiliated selling securityholders), with financial statements audited under U.S. GAAS or PCAOB standards.

The fundraising exemption would impose a U.S. nexus test drawn from the “foreign private issuer” definition: the issuer must be organized in the United States, a majority of its executive officers or directors must be U.S. citizens or residents, more than 50% of its assets must be located in the United States and its business must be administered principally in the United States.

Issuers would file an offering statement on new Form 1-CRYPTO, modeled on Form 1-A, with a Part II offering circular tracking the Rule 103 topics, a narrative discussion of financial condition modeled on Regulation Crowdfunding and U.S. GAAP financial statements. Regulation A-style offering conditions would carry over, including a 10% of income or net worth investment limit for non-accredited investors, “testing the waters” communications under Rule 304, and a prohibition on at-the-market offerings. Qualified issuers would then be subject to ongoing reporting on new Forms 1-KC (annual), 1-SC (semiannual) and 1-UC (current).

The Investment Contract Safe Harbor

Proposed Rule 400 would provide a non-exclusive, conditional safe harbor from the term “investment contract” in the definitions of “security” in Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act. An issuer satisfies the safe harbor if it (1) has completed or permanently ceased all essential managerial efforts it promised under the covered investment contract, and is not making and does not intend to make new such promises; and (2) files a transition report on Form TR certifying satisfaction of that condition and providing a supporting analysis. The safe harbor is available whether or not the issuer used either exemption.

Three limits deserve attention. The safe harbor rests on the issuer’s own certification and analysis rather than any SEC staff determination or bright-line decentralization metric. The SEC would not be barred from later challenging whether the conditions were actually met, in which case it may argue that the investment contract never ceased to exist. And while the safe harbor would control the SEC’s administration of the federal securities laws, the release states plainly that it “would not prevent other parties from asserting that a crypto asset is subject to an investment contract (or is otherwise a security)”—leaving private plaintiffs and state regulators outside its protection.

Preemption of State Registration and Qualification

Proposed Rule 500 would define “qualified purchaser” for purposes of Securities Act Section 18(b)(3), making covered investment contracts sold under the regime “covered securities” and thus preempting state registration and qualification requirements. Preemption would extend to secondary market transactions by persons other than an issuer, underwriter or dealer in covered investment contracts initially sold under Regulation Crypto Assets or another federal exemption—but only while the issuer remains current with the applicable disclosure, filing and periodic reporting requirements of a Regulation Crypto Assets exemption. Resale preemption can therefore lapse. States would retain their antifraud authority.

Importantly, the proposal does not address whether platforms trading covered investment contracts must register as exchanges, brokers or dealers. Free transferability and blue sky preemption alone would not create a complete federal pathway for secondary trading.

Practical Implications

  • The comment period is a leverage point. The 60-day window is the principal opportunity to shape offering limits, the disclosure topics, the safe harbor conditions, foreign issuer applicability, and the scope of preemption. Commissioner Hester Peirce, who leads the Crypto Task Force, acknowledged that the proposal “will not fit every model” and specifically invited comment on facilitating crypto assets that “serve a role akin to equity.”
  • Disclosure discipline starts now. Because Rule 103 requires consistency with whitepapers, websites and official social media, and because the description of promised “essential managerial efforts” becomes the benchmark against which the safe harbor is later measured, issuers should treat public statements about roadmaps and milestones as securities disclosure.
  • Public companies can mine Rule 103. Issuers with material crypto operations, exposure or treasury strategies may find the Rule 103 topics a useful reference for risk factors, competitive intelligence, and digital asset disclosure even if they never file the new forms.
  • The safe harbor is not a private litigation shield. Counsel should not treat a Form TR filing as an ultimate determination of non-security status. Contractual protections, a defensible, contemporaneous supporting analysis, and ongoing compliance remain essential.

Takeaways

Regulation Crypto Assets would be a significant shift from regulation-by-enforcement toward a defined pathway for crypto asset offerings. Its treatment of resales, general solicitation and state preemption is more permissive than any existing small-offering exemption, providing a regulatory advantage to such crypto offerings as compared to offerings of other securities.

But it targets smaller, unregistered offerings, leaves secondary market intermediary questions unresolved, and its centerpiece safe harbor binds only the SEC. Chairman Paul Atkins framed the package as “minimum effective dose, maximum freedom to build, and durable clarity under existing law,” while cautioning that “legislation remains indispensable to enacting ‘future-proofed’ rules of the road that are durable enough to protect the work we are undertaking today from being unwound by a future rogue regulator.”

With the Senate likely to take an initial vote on the CLARITY Act soon, issuers and market participants would be wise to treat the proposal as only the current state of play in a rapidly changing regulatory environment for crypto assets.

For more information on Regulation Crypto Assets and its implications for crypto asset offerings, disclosure practices and securities law compliance, please contact Scott Gootee, Eric Mikkelson, Andrew Arbuckle or the Stinson LLP contact with whom you regularly work.

The Securities and Exchange Commission, with aligned guidance from the Commodity Futures Trading Commission, issued a comprehensive interpretation clarifying how federal securities laws apply to crypto assets and certain crypto transactions. The release introduces a functional taxonomy, explains when non‑security crypto assets can become subject to an investment contract under Howey, and addresses the securities status of protocol mining, protocol staking, wrapping, and airdrops. The agencies intend to administer their statutes consistent with this interpretation and are soliciting public comment. The interpretation is effective upon publication.

A Practical Taxonomy: Five Buckets

  • Digital commodities: Native assets of functional crypto systems whose value is tied to programmatic operation and supply/demand—not to expected profits from others’ essential managerial efforts. They may enable staking, governance, and pay “gas” fees. The assets themselves are not securities.
  • Digital collectibles: Assets designed for collection or use (e.g., art, music, in‑game items, memes). They may carry limited IP licenses or creator royalties, but do not convey rights to income, profits, or assets of an enterprise. Fractionalization can introduce securities issues.
  • Digital tools: Functional utilities (e.g., membership, ticket, credential, title, identity badges), often non‑transferable. Value is in utility; the tools themselves are not securities.
  • Stablecoins: A broad category designed for price stability. By statute, a “payment stablecoin” issued by a permitted issuer under the GENIUS Act will be excluded from the securities definition when the Act becomes effective. Prior to effectiveness, the SEC interprets “Covered Stablecoins,” as described in the staff’s 2025 statement, as not securities. Other stablecoins may be securities depending on facts and circumstances.
  • Digital securities: Tokenized versions of instruments enumerated in the securities definition, or structured rights to distributions from a centrally managed enterprise. Format does not affect substance—securities remain securities whether onchain or offchain.

When a Non‑Security Crypto Asset Becomes a Security via Howey

  • Creation of an investment contract: A non‑security crypto asset becomes subject to an investment contract when an issuer induces an investment of money in a common enterprise by making representations or promises to undertake essential managerial efforts from which purchasers would reasonably expect profits.
  • What matters: The source, content, timing, and channel of issuer communications. Explicit, detailed promises (e.g., milestones, resourcing, timelines, how profits may arise) conveyed through formal channels (agreements, website, official social media, whitepaper, regulatory filings) are more likely to create reasonable profit expectations. Vague statements or post‑sale promises do not.
  • Secondary market implications and “separation”: The asset does not transform into a security. But the associated investment contract can “travel” with the asset in secondary trades if purchasers would reasonably expect the issuer’s promised essential managerial efforts to remain connected. The connection can cease—separating the asset from the investment contract—when:
    • Fulfillment: The issuer completes the promised essential efforts (e.g., achieves stated functionality, decentralization, or open‑sources code), and publicly discloses completion.
    • Abandonment/failure: The issuer clearly and publicly announces it will no longer perform the promised essential efforts, or sufficient time has passed without performance and investors would no longer reasonably expect those efforts.
  • Continuing obligations: The offer and sale of an investment contract must be registered or exempt, regardless of later separation. Anti‑fraud liabilities for misstatements or omissions remain.

Airdrops: When No “Investment of Money,” No Investment Contract

  • Covered airdrops: Disseminations of non‑security crypto assets where recipients provide no money, goods, services, or other consideration in exchange for the airdropped assets.
  • Examples within the interpretation:
  • Unannounced airdrops to holders of a specified asset.
  • Post‑facto airdrops to users of a testing environment for a prior period, with no prior announcement or conditioning.
  • Unannounced, free airdrops to users based solely on prior use of a related application.
  • Exclusions: If recipients must provide consideration (e.g., purchases, services, tasks) in exchange for the airdropped asset, the interpretation does not apply. The analysis addresses only the “investment of money” prong of Howey.
  • Note: Even if an airdropped asset is not subject to an investment contract at dissemination, later transactions could create an investment contract (e.g., subsequent offers/sales).

The Department of Treasury has issued an Advance Notice of Proposed Rulemaking (ANPRM) to implement the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act. Comments are due October 20, 2025.

Through this ANPRM, Treasury is seeking public comment on potential regulations that may be promulgated by Treasury, including regarding regulatory clarity, prohibitions on certain issuances and marketing, Bank Secrecy Act (BSA) antimony laundering (AML) and sanctions obligations, the balance of state-level oversight with federal oversight, comparable foreign regulatory and supervisory regimes, and tax issues, among other things.

Treasury is seeking comment on all aspects of the ANPRM from all interested parties and also requests commenters to identify other issues that Treasury should consider. However, the ANPRM poses questions for comments with respect to the following areas:

  • Stablecoin Issuers and Service Providers
  • Illicit Finance
  • Foreign Payment Stablecoin Issuers
  • Taxation
  • Economic Data
  • Other Topics

Overview

On September 17, 2025, the Securities and Exchange Commission (SEC) issued a final rule and policy statement clarifying that the inclusion of mandatory arbitration provisions between issuers and investors will not affect the staff’s decision to accelerate the effectiveness of registration statements under the Securities Act of 1933. The SEC’s new policy focuses on the adequacy of disclosures in registration statements, including those related to arbitration provisions, and confirms that federal securities statutes do not override the Federal Arbitration Act (FAA) in this context.

Key Takeaways

  • No Impact on Acceleration Decisions: The presence of issuer-investor mandatory arbitration provisions in registration statements will not influence the SEC staff’s decision to accelerate effectiveness. The staff will instead focus on whether the registration statement provides complete and adequate disclosure, including clear information about any arbitration provisions.
  • Federal Arbitration Act Prevails: The SEC’s analysis, informed by recent Supreme Court precedent, concludes that the FAA’s policy favoring arbitration agreements is not displaced by federal securities statutes. There is no “clearly expressed congressional intention” in the securities laws to override the FAA with respect to issuer-investor arbitration provisions.
  • Disclosure is Paramount: The SEC emphasizes that any issues related to the enforceability or appropriateness of arbitration provisions are best addressed through robust disclosure in the registration statement, rather than through the acceleration process.
  • State Law Considerations Remain: While the SEC’s policy is clear at the federal level, state laws may still impact the permissibility or enforceability of mandatory arbitration provisions. For example, recent amendments to Delaware law may restrict such provisions in corporate charters or bylaws.
  • No Endorsement of Arbitration Provisions: The SEC does not express a view on the merits or appropriateness of mandatory arbitration provisions for issuers or investors, nor does it opine on the enforceability of any specific provision.

Legal and Practical Implications

  • Issuer Certainty: Issuers seeking to include mandatory arbitration provisions in their governing documents or offering materials can do so without concern that such provisions will delay or prevent the acceleration of their registration statements, provided disclosures are adequate.
  • Investor Considerations: The adoption of mandatory arbitration provisions may affect investors’ ability to bring class actions or pursue claims in court, potentially impacting the cost and outcome of dispute resolution. However, the SEC’s policy does not address the substantive fairness or enforceability of such provisions, which may still be subject to state law or judicial review.
  • Market Dynamics: The SEC acknowledges that the new policy may influence issuer behavior, potentially leading to broader adoption of arbitration provisions. However, the ultimate impact will depend on market forces, including investor preferences, proxy advisory firm recommendations, and stock exchange requirements.
  • No New Regulatory Burden: The policy statement does not impose new rules or requirements on issuers but clarifies the SEC’s approach to a recurring issue in the registration process.

Conclusion

The SEC’s final rule provides clarity for issuers and market participants regarding the treatment of mandatory arbitration provisions in registration statements. By deferring to the FAA and focusing on disclosure, the SEC aims to provide regulatory certainty while leaving substantive questions about the appropriateness and enforceability of arbitration provisions to other forums. Issuers should ensure that any such provisions are clearly disclosed and consider potential state law and market reactions before adoption.

The U.S. Department of the Treasury issued a Request for Comment required by the  Guiding and Establishing National Innovation for U.S. Stablecoins Act, or the GENIUS Act, which furthers the Trump Administration’s policy of supporting the responsible growth and use of digital assets, as outlined in Executive Order (E.O.) 14178 on “Strengthening American Leadership in Digital Financial Technology.”  A press release indicates the request for comment fulfills Treasury’s obligation pursuant to section 9(a) of the GENIUS Act, which creates a comprehensive regulatory framework for stablecoin issuers in the United States.

 The Genuis Act is U.S. legislation focused on the regulation of stablecoins, specifically “payment stablecoins”. It aims to create a comprehensive framework for the issuance, redemption, and oversight of these digital assets, prioritizing consumer protection, fostering innovation, and strengthening the US dollar’s status as a global reserve currency.

This request for comment offers the opportunity for interested individuals and organizations to provide feedback on innovative or novel methods, techniques, or strategies that regulated financial institutions use, or could potentially use, to detect illicit activity involving digital assets.  In particular, Treasury asks commenters about application program interfaces, artificial intelligence, digital identity verification, and use of blockchain technology and monitoring.

Halinski v. ADS Grp. Acquisition, LLC (Del. Ch. (7/25) discusses the propriety of indemnification claims.  The relevant SPA deferred payment of a $4,439,000 Tax Holdback to cover certain possible post-closing tax liabilities. Over time, the SPA required Purchaser to release the Tax Holdback to Sellers in three unequal installments.  Purchaser released the First Intermediate Tax Holdback, but never paid the Second Intermediate Tax Holdback. The seller representative filed suit to recover the unpaid Tax Holdback.

On the eve of the deadline to respond to the Complaint, Purchaser sent an indemnification demand to Sellers. The indemnification demand alleged Sellers breached certain representations and warranties in the SPA.  However, Purchaser did not follow Section 7.07 of the SPA which included a dispute resolution provision which provided that in the event of a dispute the parties were to negotiate in good faith to resolve the dispute before pursuing remedies.

 Purchaser sought to avoid compliance with the dispute resolution provision by asserting compliance would be futile.  

The Court noted Delaware courts regularly enforce contractual pre-suit dispute resolution provisions.  According to the Court, courts excuse noncompliance with a pre-litigation dispute resolution provision where it “would be futile in achieving its intended purpose.” Performance is futile “only when the defaulting party expressly and unequivocally repudiates the contract or where the actions of the defaulting party have rendered future performance of the contract by the non-defaulting party impractical or impossible.  Those circumstances were not present here, and the court found Purchaser’s position insufficient to prevent distribution of the Second Intermediate Tax Holdback.

Purchaser also claimed it could set off the indemnification claim against the Second Intermediate Tax Holdback. The Court rejected that argument.  The reason was the SPA specifically required any remedy for breach of a representation to be recovered from a distinct holdback arrangement and after that from an R&W insurance policy.

The Delaware Court of Chancery dismissed three claims in Ritchie v. Baker (6/25). Broadly speaking, the plaintiff failed to adequately plead demand futility under Court of Chancery Rule 23.1 because the complaint did not establish that a majority of the demand board faced a substantial likelihood of liability on non-exculpated claims.

The plaintiff sought to sue derivatively on behalf of Corcept Therapeutics, Inc.  Corcept is a pharmaceutical company that derives most of its revenue from a single drug, Korlym, which treats endogenous Cushing’s syndrome. In early 2019, investigative reports claimed Corcept had increased profits by marketing Korlym for off-label uses in violation of federal law. Litigation followed.

The three claims alleged by plaintiff were as follows:

  • Caremark Theory:  The defendants breached their fiduciary duties by failing to adequately oversee operations at Corcept that resulted in a corporate trauma.
  • Massey Theory: The defendants breached their fiduciary duties by causing Corcept to violate positive law.
  • Malone Theory: The defendants breached their fiduciary duties by deliberately issuing false or misleading disclosures.

The Court also noted that Caremark liability was an “ill fit” for the facts alleged because the company had not suffered “enormous legal liability” or any corporate trauma but rather had experienced dramatic revenue growth during the relevant period. In addition, the Court reasoned that the complaint contradicted itself by alleging both that the board failed to implement adequate oversight systems and that the board was “well-informed” of “all significant Korlym-related matters.” The Court found that the board had implemented reporting systems through regular board and audit committee meetings where Korlym marketing and sales were discussed.

Likewise, there was no basis for a “red flag” claim under Caremark.  The Court found that none of the alleged red flags (marketing to non-specialist physicians, prescriber “whales,” and changing specialty pharmacies) would have alerted the board to illegal activity. The Court noted that the complaint failed to allege facts supporting a reasonable inference that the board knew about or consciously disregarded evidence of illegal marketing practices.

On the Massey claim, the Court determined that the complaint failed to allege that directors purposely caused the company to violate the law, which is an even higher burden than alleging conscious disregard under Caremark.  The Court stated the Complaint falls short of alleging red flags that should have alerted the director defendants to an illegal scheme, let alone that the director defendants knew about and purposely caused the violations.

With respect to the Malone claim, the Court concluded that without adequately alleging the directors knew of an off-label marketing scheme, the complaint failed to establish the scienter necessary for a disclosure violation claim.

The SEC has withdrawn proposed rules captioned “Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8″. In conjunction therewith the SEC announced “The Commission does not intend to issue final rules with respect to these proposals.”

The SEC also withdrew 13 other proposed rules related to the Division of Investment Management and Division of Trading and Markets.

The SEC announced today that it will host a roundtable on June 26, 2025, to discuss executive compensation disclosure requirements. The roundtable’s agenda and speakers will be disclosed at a later date.

Concurrently with the announcement of the roundtable, SEC Chairman Paul S. Atkins issued a statement regarding the roundtable, including questions for the staff to consider.  Chairman Atkins noted “While it is undisputed that [the executive compensation rules], and the resulting disclosure, have become increasingly complex and lengthy, it is less clear if the increased complexity and length have provided investors with additional information that is material to their investment and voting decisions.”

The nine questions posed by Chairman Atkins pretty much cover the waterfront on the patchwork of disclosure requirements implemented by the SEC over the years.  The topics include compensation discussion and analysis, say-on-pay, pay versus performance and perquisites.  Interested persons can submit comments as noted in the two statements.

Amongst the issues discussed in a Delaware Chancery Court opinion in a case captioned In re Plug Power Inc. Stockholder Derivative Litigation, was whether SEC comment letters formed a basis for a Caremark Claim.

The Company received five comment letters from the SEC between mid-2018 and early 2021. The letters were dated September 5, 2018, April 24, 2019, June 20, 2019, December 16, 2020, and February 10, 2021. The Company responded to the letters on September 19, 2018, May 8, 2019, July 5, 2019, and January 14, 2021.12  The allegations reflect that the Audit Committee discussed SEC letters during that period, although there was scant mention of those letters in the minutes.

The comment letters inquired into the following, among other things:

  • Discussing revenue and gross profit on a gross basis excluding the effects of the provision for the fair value of warrants issued as sales incentives;
  • Presenting non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP;
  • Presenting revenue by line item and in total, excluding the provision for the fair value of warrants issued as sales incentives;
  • Presenting non-GAAP measures with greater prominence than the directly comparable GAAP measure, or failing to discuss the comparable GAAP measure at all;
  • Describing adjusted EBITDA as purely a liquidity metric, not a performance measure;
  • Excluding cash flow effects associated with changes in working capital from the adjusted EBITDA measure, which was inconsistent with presenting it as a liquidity measure and potentially misleading investors; and
  • Lease accounting and accounting for lease financing implicating Plug Power’s application and presentation of Topic 842, including “right of use” accounting issues.

Caremark claims can be brought in one of two ways if a plaintiff alleges particularized facts that establish:

  • the directors utterly failed to implement any reporting or information system or controls (an information systems claim), or
  • having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention (a red flag claim).

To support their information systems claim the Plaintiffs argued:

  • SEC comment letters generally present a distinct risk that requires its own monitoring system beyond the ambit of the Audit Committee; and
  • The Audit Committee discussions were not sufficiently robust.

The Court noted that Delaware law does not dictate what structure a reporting system must take. Rather, under Delaware law, “how directors choose to craft a monitoring system in the context of their company and industry is a discretionary matter.”   That is, the law requires courts to exercise good faith oversight, “not to employ a system to the plaintiffs’ liking.”

Turning toward the allegation that the Audit Committee discussions were not sufficiently robust, the Court noted the “absence of regular board-level discussions on the relevant topic” “alone is not enough for the [c]ourt to conclude a board of directors acted in bad faith.” Plaintiffs’ disagreement with the adequacy of the Audit Committee’s or Board’s consideration of the SEC comment letters did not mean that the Board failed to make a good-faith effort to establish a system.

As to the Plaintiff’s red flag allegations, the Court doubted receipt of an SEC comment letter alone was a red flag.  Even if the comment letters constituted a red flag, it was not reasonable to conclude based on the facts alleged that the Board ignored them in bad faith.  Plug Power’s system in place worked to some degree—Plug Power responded promptly to each of them and the Audit Committee received reports about them.

Finally, the Court noted the Plaintiff’s had not specifically plead any corporate trauma resulting from the comment letters.  Even assuming for purpose of the analysis that Plaintiffs adequately pled a corporate trauma, they have not proffered any theory that connects the dots between the Board’s alleged conduct and that harm.

Accordingly, the Court dismissed the Caremark claim pursuant to Rule 12(b)(6).