Regulatory

Why Equity-Based Crowdfunding Is Not Flourishing? — A Comparison Between the US and the UK

Tianxiang Zhou, MJLST Editor

While donation-based crowdfunding (giving money to enterprises or organizations they want to support) is flourishing on online platforms in the US, the equity-based crowdfunding (funding startup enterprises or organizations in return for equity) under the JOBS Act is still staggering as the requirements are proving impractical for most entrepreneurs.

Donation-based crowdfunding is dominating the major crowdfunding websites like Indiegogo, Kickstarter, etc. In March, 2017, Facebook announced that it will introduce a crowdfunding feature that will help users back causes such as education, medical needs, pet medical, crisis relief, personal emergencies and funerals. However, this new crowdfunding feature from Facebook has nothing to do with equity-based crowdfunding; it is only used for donation-based crowdfunding. As for the platforms specialized in crowdfunding,  equity-based crowdfunding projects are difficult to find. If you visit Kickstarter or Indiegogo, most of the crowdfunding projects that appear on the webpages are donation-based crowdfunding project. As of April 2, 2017, there are only four active crowdfunding opportunities appearing on the Indiegogo website that are available for investors. The website stated that “more than 200 (equity-based) projects funded in the past.” (The writer cannot find an equity-based crowdfunding opportunity on Kickstarter or a section to search equity-based crowdfunding opportunities.)

The reason why equity-based crowdfunding is not flourishing is easily apparent. As one article points out, the statutory requirements for Crowdfunding under the JOBS Act “effectively weigh it down to the point of making the crowdfunding exemption utterly useless.” The problems associated with obtaining funding for small businesses that the JOBS Act aims to resolve are still there with crowdfunding: for example, the crowdfunding must be done through a registered broker-dealer and the issuer have to file various disclosure statement including financial statement and annual reports. For smaller businesses, the costs to prepare such reports could be heavily burdensome for the business at their early stage.

Compared to crowdfunding requirements in the US, the UK rules are much easier for issuers to comply with. Financial Conduct Authority (FCA) introduced a set of regulations for the peer-to-peer sector in 2014. Before this, the P2P sector did not fall under any regulatory regime. After 2014, the UK government requires platforms to be licensed or to have regulated activities managed by authorized parties. If an investor is deemed a “non-sophisticated” investor constraints are placed on how much they are permitted to invest, in that they must not invest more than 10% of their net investable assets in investments sold via what are called investment-based crowdfunding platforms. Though the rules require communication of the offers and the language and clarity of description used to describe these offers and the awareness of the risk associated with them, much fewer disclosure obligations are required for the issuers such as the filing requirements of annual reports and financial statement.

As a result, the crowdfunding market in the UK is characterized as “less by exchanges that resemble charity, gift giving, and retail, and more by those of financial market exchange” compared with the US. On the UK-based crowdfunding website Crowdcude, there are 14 opening opportunities for investors as of April 2, 17, and there were 494 projects funded. In comparison, the US-based crowdfunding giant Indiegogo’s statement that “more than 200 projects funded in the past” is not very impressive considering the difference between the sizes of the UK’s economy and the US’ economy.

While entrepreneurs in the US are facing many obstacles in funding through equity-based crowdfunding, the UK crowdfunding websites are now providing more equity-based opportunities to the investors, and sometimes even more effective than government-lead programs. The Crowd Data Center publicized a report stating that seed crowdfunding in the UK is more effective in delivering 40% more funding in 2016 than the UK government funded Startup Loans scheme.

As for the concern that the equity-based fraud funding involves too much risk for “unsophisticated investors,” articles pointed out that in countries like UK and Australia where lightly regulated equity crowdfunding platforms welcomed all investors, there is “hardly any instances of fraud.” While the equity-crowdfunding JOBS Act has not failed to prove its efficiency, state laws are devising more options for the issuers with restrictions of SEC Rule 147. (see more from 1000 Days Late & $1 Million Short: The Rise and Rise of Intrastate Equity Crowdfunding). At the same time, the FCA stated that it will also revisit the rules on crowdfunding. It would be interesting to see how the crowdfunding rules will evolve in the future.


MJLST for Kids: How the ESSA Promotes K-12 Edtech

Nolan Hudalla, MJLST Staffer

The Minnesota Journal of Law, Science, and Technology is frequently at the forefront of current technological advances. The journal’s publications often address the emerging systems and devices that are changing society, as well as the legal constructs that can be employed to optimize technology’s use. But the next generation is not yet old enough to read MJLST and understand its implications. So how are today’s young students empowered to learn about and keep pace with technology that is advancing so quickly? Additionally, how is such cutting-edge technology being provided to teachers to help them maximize student potential?

Federal funding for K-12 education is largely provided by the Every Student Succeeds Act (“ESSA”). The ESSA is a major education reform bill that was passed with bipartisan support in December 2015. It is the immediate successor to the highly controversial No Child Left Behind Act (“NCLB”), and there is great anticipation for the ESSA to finally take full effect in the 2017-2018 school year. In fact, Lamar Alexander, chairman of the Senate Health, Education, Labor and Pensions Committee, recently remarked that the new law “will unleash a flood of innovation and student achievement across America.” One specific way that the ESSA is trying to “unleash innovation” is through educational technology (“edtech”).

There are two primary ESSA-provided mechanisms that will impact K-12 edtech. First, Title IV of the ESSA authorizes the Student Support and Academic Enrichment Grant program. The program empowers states and districts to pursue their own edtech initiatives. Second, Title I – the nation’s largest source of federal funding to K-12 education – now makes it easier for schools to use existing funds for edtech than it was under the NCLB.

The Title IV grant program authorizes $1.65 billion dollars for states to dedicate to local priorities. Such priorities could include, for example, counseling, Advanced Placement classes, and edtech. Nearly $900 million of the grant program is permitted to go toward innovative edtech strategies, demonstrating Congress’s commitment to advancing technology in schools. In fact, this authorization is approximately 4 percent of the ESSA’s total funding provision.

Title I of the ESSA gives states and localities greater flexibility and control over the benchmarks that must be met to receive the Title’s funding. The NCLB was heavily criticized because it set rigorous federally-determined standards, with harsh penalties for districts and schools that could not meet those standards. The ESSA allows school districts to now have a say in what they must do to meet the Title I requirements. For example, a state could demonstrate that they are making satisfactory progress in their school districts, and thus qualify for Title I funding, in part by providing a district-chosen level of edtech programs each year.

In addition, Title I now permits states to reserve certain Title I funding for specific learning activities such as edtech. In particular, 3 percent of their Title I funds can go toward “Direct Student Services,” which could include individualized edtech curriculum in districts that particularly require improvement. The ESSA also provides funds for an Education Innovation and Research program that can be similarly leveraged.

Through the ESSA, the federal government has provided the opportunities and tools to significantly advance edtech. The bill authorizes a lot of money for the states to put toward advancing education initiatives through both grants and Title I funding provisions. However, it remains up to the states and localities to implement the necessary tools to fully take advantage of the new opportunities created by Congress.


The Excitement and Danger of Autonomous Vehicles

Tyler Hartney, MJLST Staffer

“Roads? Where we’re going we don’t need roads.”

Ok. Sorry Doc. Brown, but vehicular technology is not quite to where Back to the Future thought it would be in 2017; but, there are a substantial amount of companies making investments into autonomous vehicles. Ford invested $1 billion to acquire an artificial intelligence startup company that had been founded by engineers previously employed by Google and Uber with the intent to develop self-driving vehicles. Tesla already has an autopilot feature in all of its vehicles. Tesla includes a warning on its website that the use of the Self-Driving functionality maybe limited depending on regulations that vary by jurisdiction.

To grasp an understanding of what many of the experts are saying in this field, one must be familiar with the six levels of autonomy:

  1. No autonomy
  2. Driver assistance level – most functions still controlled by human driver
  3. At least one driver assistance system – cruise control or lane monitoring
  4. Critical safety features – shifts emergency safety features such as accident awareness from vehicle to human
  5. Fully autonomous – designed for the vehicle to perform all critical safety features and monitor road and traffic conditions
  6. Human like autonomy – fully capable of autonomy even in extreme environments such as off-road driving

The societal benefits could be vast. With level 4 autonomy on household vehicles, parents and siblings need not worry about driving the kids to soccer practice because the car is fully capable of doing it for them. Additionally, the ridesharing economy, which has grown incredibly fast over the past few years, would likely see a drastic shift away from human drivers. Companies have already begun to make vehicles for the purpose of clean energy ride sharing using autonomous vehicles such as Ollie. Ollie is an electric and 3D printed bus that can be summoned by those in need of a ride in a similar fashion to Uber.

While this self-driving vehicle technology is exciting, are we really there yet? Last June, a fatal car accident occurred involving a Tesla using its autopilot function. The driver in this case had previously touted his car saving him from an accident; he was very confident in the ability of his vehicle. It was later reported by a witness that there was a portable DVD player in the car that was found playing Harry Potter at the time of the accident. If this witness is correct, the driver of the vehicle violated the Tesla disclaimer that reads the autopilot feature “is an assist feature that requires you to keep your hands on the steering wheel at all times.” Some experts argue these manufacturers have to be more upfront about the limitations of their autopilot feature and how drivers should be cautious in the use of this advanced technology. It is no question that the driver of the Tesla (if you can call him that?) was reckless in the use of this technology. But what about the liability of the vehicle manufacturer?

The deceased’s family hired a product defect litigation law firm to conduct an investigation in conjunction with the federal government’s investigation. The goal of these investigations was to determine if Tesla is at fault for the vehicle’s autopilot feature failing to stop. Recently, news broke that the government investigation concluded that no recall must be made for the Tesla vehicles nor did the government levy any fines to the automaker. The government reported that the autopilot feature was not defective at the time of the crash because it was built to protect the driver from rear-end collisions (the man’s car rear-ended a truck) and also gave notice to consumers that the driver must remain fully attentive to the operation of the vehicle.

Legally, it appears that plaintiffs won’t likely have much luck in suits against Tesla in cases like this. The company requires purchasers to sign a contract stating the autopilot function is not to be considered self-driving and that they are aware they will have to remain attentive and keep their hands on the wheel at all times. However, Tesla operates on an interesting structure where purchasers buy directly from the manufacturer which may give them more of the ability to engage in these types of contracts with their consumers. Other automobile manufacturers may have a more difficult time maneuvering around liability for accidents that occur when the vehicle is driving itself. Car companies are going to have to ensure they provide repeated reminders to consumers that, until technology is tested and confidence in the feature is significantly higher, that the autopilot features are in the beta-testing mode and driver attention and intervention is still required.


The Rise and Fall of A Scholarly Crowdfunding Article

Tim Joyce, Editor-in-Chief, MJLST Vol. 18

Print publication of science and tech articles is a weird thing. On the one hand, a savvy articles selection team will prioritize articles on the most pressing and innovative advancements in the field. On the other, though—and precisely because these articles are so current—a draft piece can be partially outdated even before the publisher’s pressing start rolling. So it is that a little piece on investment crowdfunding, conceived in September 2015, meticulously researched throughout the 2015–16 academic year, and selected in April 2016, for publication in January 2017, can transform from forward-looking thinkpiece to historically-dated comparison piece.

My recent article with MJLST, 1000 Days Late & $1 Million Short: The Rise and Rise of Intrastate Equity Crowdfunding, compares the newly-activated federal Regulation Crowdfunding to Minnesota’s intrastate investment crowdfunding model MNvest. When the piece was originally conceived both of these laws were not yet active; in fact, it was not yet clear that the SEC would ever release final rules for what would become Regulation Crowdfunding. When the issue was ultimately sent to the printers, each of the laws had been active for at least 6 months. Like I said, weird.

This post is intended to update the curious reader on current happenings with investment crowdfunding on both a federal and a state level.

On the federal level, Regulation Crowdfunding rules have been final since October 2015 and active since May 2016. Nearly 200 offerings later, analysts and scholars are already starting to crunch the numbers. [Full disclosure: I am one of those academics. Our paper (co-author Zach Robins of Winthrop & Weinstine) will be presented at the Mitchell-Hamline Law Review Symposium next month, if you’re interested.] Similar to rewards-based crowdfunding models like Indiegogo and Kickstarter, there appear to be some things a crowdfunding issuer can do to increase the likelihood of success of their offering. Here are some examples.

First, a clear business plan is essential to attracting investors. After all, the “crowd” is made of lots of folks without sophisticated investing experience; so you have to find a creative way to hook them without violating securities disclosure restrictions. This isn’t always as easy said than done, and some portal operators have already gotten in serious trouble for violating their obligations to ensure offering accuracy.

Second, and perhaps a bit counterintuitive, the most successful Regulation Crowdfunding issuers actually have slightly higher minimum investments than you would expect. There is no dollar floor to the investment under the rules of Reg CF, but a small minimum opens the door to a potentially unwieldy cap table. In addition, a high minimum investment decreases the number of available spots for investors in the targeted offering amount; there is a very real “exclusivity” effect. To illustrate: it takes 10,000 investors at $10/per to get to $100,000 offering, but you could raise the same $100,000 with only 100 investors at $1,000/per. Issuers get to choose which investors they take on in oversubscription situations, and it can’t hurt to create a little buzz as investors “compete” for limited spots in the offering.

Finally, communicating the business plan using a strong video is a must—industry analysts report that campaigns using any video at raised significantly more money that those without (on the order of 11:1 times more money!). If that video is of good enough quality, according to those same analysts, your offering does even better. Of course, video quality only matters if your network is sufficiently large to reach enough potential investors. For issuers hoping to raise $50,000, that generally means connecting with more than 3,000 people.

There are plenty more nuggets of wisdom to glean from the first 8 months of federal investment crowdfunding offerings, and this post only scratches the surface. For more, see our forthcoming paper in Mitchell-Hamline Law Review’s symposium issue later this year.

As for MNvest, unfortunately, while the law has been technically available for Minnesota crowdfunders since June 2016, it took until the end of the year for the Department of Commerce to approve any portals. So only a handful of issuers and portals are currently active in the space. True to form, for federal crowdfunding offerings at least, craft breweries are making a strong showing (read: in Minnesota, 4 of the first 4 MNvest issuers are breweries!). Hopefully we’ll see more of them as the vehicle becomes more well-known.

One thing that should further aid MNvest issuers is that the SEC recently released final rules that will make it easier and safer for intrastate issuers to use the internet to advertise. Before the rules update, issuers were bound by advertising and solicitation restrictions drafted in the 1970s (that is, before the interwebs). As crowdfunding, almost by definition, requires the use of the internet to reach a crowd, these updates should streamline and loosen up the fundraising process. The new final rules create a new exemption (Rule 147A); state legislatures that based their intrastate laws on old Rule 147 will need to update their laws accordingly first.

Investment crowdfunding laws of the intrastate and federal varieties hold promise for many issuers. And, while there is not yet a perfect model or a one-size-fits-all strategy for fundraising, it is clear that investors and issuers alike are excited by the promise this investment vehicle holds.

Who knows—perhaps in another 18 months the way we crowdfund will have experienced as much change again, to make this piece as quickly “historical” as my earlier article!


Something to Chew On: The FDA, Food, and a Healthy Dose of Definitions

MJLST Guest Blogger, Tommy Tobin

[Editor’s Note: This post is #3 in a series on current FDA issues. You can find the previous post here and here.]

Is food medicine? The answer to this simple question is surprisingly complicated.

The name of the Food and Drug Administration (FDA) seems to distinguish between foods and drugs. So too does the Federal Food, Drug, and Cosmetics Act, which helpfully defines “food” as “(1) articles used for food or drink for man or other animals, (2) chewing gum, and (3) articles used for components of any such article.”

While it is not difficult to swallow the concept of chewing gum being food, the broad legal definition of “food” is somewhat circular and does not provide much guidance by itself.  Indeed, the definition of “drug” under the same law notes that drugs are, in relevant part, “articles (other than food) intended to affect the structure or any function of the body of man or other animals.”

Setting the table for further discussion, it should be noted that foods and drugs face different regulatory burdens. For example, drugs face pre-market approval. As for foods, the FDA does not have sole regulatory oversight over food products, which it shares with approximately 14 other federal agencies. The Government Accountability Office labeled the patchwork of federal food safety oversight as a “high risk issue” noting that it had caused “inconsistent oversight, ineffective coordination, and inefficient use of resources.”

Knowing whether an item is a drug or a food dictates whether it is regulated appropriately and even which laws apply to the item. From the definitions, it would seem that foods are categorically not drugs. Yet, sometimes foods do function as medicine. For example, the Harvard Food Law & Policy Clinic argues that “for critically and chronically ill people, food is medicine.” Part of the Clinic’s work has advocated for expanded medically-tailored food and nutrition interventions to improve health outcomes and reduce overall health care costs for high-risk, high-need populations. Even outside of high-risk populations, it is likely many of us provide self-care through food, such as sipping chicken soup for colds or the flu.

Adding more food for thought, there are several terms that blur the lines between the categories of “food” and “drug.” The FDA notes that “terms like ‘functional foods’ or ‘nutraceuticals’ are widely used in the marketplace” but are not explicitly defined in the Food, Drug, and Cosmetic Act. While one could devote a book to the regulation of nutraceuticals and functional foods (and some have done so), it is sufficient here to note that nutraceuticals and functional foods have their own definitions in the relevant, non-regulatory literature. According to an article in the aptly-titled scholarly journal Nutrients, a nutraceutical is “food (or part of a food) that provides medical or health benefits, including the prevention and/or treatment of a disease” and functional foods are “food products that have an added positive health benefit” (internal citations omitted). Notably, each definition expressly notes that these items are foods, not drugs. Put another way, an apple a day may keep doctors away, but apples enriched with antioxidants may be a functional food that merits a price premium from consumers.

The terms have largely arisen out of marketing practice, and a combination of the words “nutrition” and “pharmaceutical.” Entire publications have devoted themselves to the news and scholarly analysis of these products, including Nutraceuticals World and the Journal of Functional Foods. One recent article examined whether Jelly Belly, the jelly bean purveyor, could support its claims that its Sports Beans were “clinically-proven” to maximize sports performance.

Further blurring the line between foods and drugs, a “medical food” is defined under a statute that has “drug” in the name, but the product is not actually a “drug.” A “medical food” is defined under the Orphan Drug Act, as “a food which is formulated to be consumed or administered enterally under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation.” Pursuant to the above definition, the FDA has declared that medical foods must be taken only under the supervision of a physician. According to a recent FDA Guidance Document, medical foods are explicitly not drugs and are not subject to the requirements that apply to drugs. As an example, one medical food, Deplin, is an orange pill that advertises itself as a “prescription medical food” specifically designed to meet the “clinical dietary management of depression and schizophrenia.”

In the supermarket, consumers may stroll from the pharmacy aisles to the food aisles, seeing pharmaceuticals one moment and nutraceuticals the next. With consumers willing to pay a price premium for healthy foods, including functional foods, foods that make claims to reduce disease and promote good health are likely here to stay.


Genetically Modified Foods And The Consumer Quest For Disclosure

Nicholas Ratkowski, MJLST Staffer

In 2000, the Minnesota Journal of Law, Science, and Technology (MJLST) proudly published its first issue, spanning a variety of issues between Patent Protection of Computer Programs to an analysis of the First Amendment through the lens of Jesse Ventura. One Note addressed how genetically modified foods (GMOs) should be labeled, if at all. In the seventeen years since MJLST’s inception, much has changed – how has the landscape of GMO labeling progressed?

In 2000, the principal argument was whether or not GMOs should be specially labeled as such; the author references unexpected concomitant protein allergies and environmental effects as prime concerns. As of 2000, scientists had not identified any negative effects from consuming GMOs. The Note notes different approaches between Europe and the United States, with the former relying on strict disclosure requirements, and the latter ignoring the issue (for the most part). At the time of authorship, “[m]ore than 4,500 GM plants ha[d] been tested, and at least 40 ha[d] passed government reviews” and “as much as 70% of processed foods contain[ed] GM components. The Note “propose[d] that the most appropriate method of resolving the labeling issue involves developing a new, international, voluntary labeling standard for products that have not been developed through genetic engineering techniques or do not contain genetically engineered ingredients.”

Now to the fun part – has anything changed? The short answer is not really. In 2013, Connecticut became the first state to “successfully enact a law requiring food containing genetically modified ingredients to be labeled as such, though it comes with the unusual requirement that four other states must pass similar legislation.” As of 2017, more than 70 bills across 30 states have been proposed in an effort to require labeling of GMOs. Only two states (Vermont and Maine) have joined Connecticut’s lead in forcing disclosure of genetically modified foods. Maine’s disclosure law requires disclosure, but is subject to a litany of exceptions. Vermont’s seems a bit more stringent, but is also easily circumvented. See §3043(d) and §3044 (for example, “Any processed food that would be subject to subsection 3043(a) of this title solely because it includes one or more materials that have been produced with genetic engineering, provided that the genetically engineered materials in the aggregate do not account for more than 0.9 percent of the total weight of the processed food”).

It is perhaps surprising then that GMOs remain mostly invisible to the average consumer in the United States, considering “[m]ore than 70 percent of Americans say they don’t want genetically modified organisms in their food” and “92 percent of Americans want genetically modified foods to be labeled,” according to a 2014 Consumer Reports survey. I’m not smart enough to tell you whether or not eating GMOs has any effect on health, much less whether that effect would be positive or negative. I can, however, posit a theory to explain this paradox, albeit not a novel one – the Pro-GMO lobby is simply too powerful for states to butt heads with in the courts on the taxpayers’ dime. With Monsanto leading the charge, the pro-GMO lobby has spent tens of millions of dollars to fight state-level labeling initiatives. In 2013, lobbyists spent $9,300,000 to prevent GMO disclosure requirements. In just the first quarter of 2014, lobbyist spent another $9,000,000. How can states compete?

If the U.S. ever makes the policy decision to implement widespread labeling requirements for GMOs, doing so will require federal legislation; states have been shown to lack the resources necessary to fight the purveyors of incomplete information that are GMO lobbyists. On the other hand, would labeling have any discernable effect on consumers? Maybe not, but I believe consumers should have the choice to pick what they eat, and how their food is sourced.


Evaluating an FDA ban on Use of Human-Used Antibiotics in Animals

Nathan Vanderlaan, MJLST Staffer

Over the past several years, antibiotic resistance in humans has become one of the leading health concerns in the United States. Many heads are turning towards the U.S. farming industry, and the antibiotic consumption by animals as a leading culprit. Today, about 80% of all antibiotic consumption in the United States is attributable to animal consumption. Many argue that unless the government takes stronger regulatory stances on the animal consumption of antibiotics, an inability to effectively fight a number of illnesses due to antibiotic resistance will be on the horizon.

In her article “Slowing Antibiotic Resistance by Decreasing Antibiotic Use in Animals,” Jennifer Nomura argues that the FDA should implement a total ban on the use of antibiotics in animals that are also used therapeutically in humans. Currently, the FDA has taken the position that there is no definitive proof that antibiotic use in animals leads to greater resistance in humans. As such, they intend to allow producers to continue to use antibiotics used to treat humans in farming practices until a scientific correlation between resistance and farm use is established. Nomura advocates that the FDA transition from this “wait-and-see” policy and enter the realm of stiff antibiotic regulation. She argues that the FDA is under such an obligation based on their duty to minimize risks to human health. However, this duty may suggest that the FDA should not rush into a total ban on antibiotics also used in human health.

An all-out ban on such antibiotics may in fact have a more detrimental impact on human health. The potential that a ban would lead to increased incidence of disease cannot be underscored. While Nomura suggest that disease may be kept down due to improved farming practices, the reality of creating the infrastructure to promote such practices may not be feasible for a country with such high meat production. And although several countries have been successful in making the transition from these kinds of antibiotics, their success may not be entirely indicative of the success a large country like the U.S. will have. If the incidence of disease goes up after a ban, consumers will likely suffer medically and financially, and these risks cannot impulsively be set aside.

Nonetheless, the FDA must take notice of the growing problem of antibiotic resistance. Resistance is giving rise to “super-bugs” and leading to more unpreventable deaths every year. While steps must be taken to address these growing concerns, any action taken by the FDA should not be hasty. Instead of an outright ban on all antibiotics used for humans as well, the FDA should do a full risk analysis regarding the impact giving these drugs to animals poses to humans. Then the FDA should conduct an individual analysis of the highest risk antibiotics being used, tackle these antibiotics first, and then slowly transition away from the use of certain antibiotics once it is determined such a transition will not threaten the health of humans or the nations live stock.


Dinner for Two? Federal Regulations Indicate a Newfound Love for the Pediatric Medical Device Market

Angela Fralish, MJLST Invited Blogger

In December 2016, President Obama signed the 21st Century Cures Act which includes Subtitle L “Priority Review for Breakthrough Devices” and Subtitle M “Medical Device Regulatory Process Improvement.” Subtitle L addresses efficiency in medical device development by allowing inventors to request an expedited review for inventions that target disease, and for which there is no alternative device is currently on the market. Subtitle M requires FDA staff to be trained in least burdensome concept reviews and allocates $500 million to speed up commercialization.

This Act presents growth opportunities for the pediatric medical device market which often lacks device development due to time and expense. Under the Cures Act, if the device targets a childhood disease and there is no alternative, this new regulation requires a priority review determination within 60 days from the FDA Secretary. Additionally, there are now $500 million supporting implementation of the priority review.

Currently, pediatric devices can take up to 10 years and $94 million to develop. Market incentives often drive device innovation and the market for children is small. Consequently, most developments are not initiated for profit, but for personal interest in children’s health.

For example, despite using an expedited review process under a humanitarian device exemption, an implantable rib to prevent thoracic collapse took 13 years just to get FDA approval to begin the commercialization process. The pediatric medical device market is viewed by some as a crisis and the 21st Century Cures Act has the potential to improve kids’ health.

For lawyers, scientists and engineers, an increase in device development leads to an increase in demand for regulatory, design, reimbursement and scientific technology experts. Lawyers can make a major difference in getting devices from bench-to-bedside. On the other side of the fence is demand for the same to protect consumers from manufacturers taking advantage of the Cures Act. In fact, some tort lawyers directly oppose the Cures Act for fear of watered-down processes for safety in devices.

However, regardless of one’s stance on the issue, it’s a good time to show some legal love to the kiddos in need of growth in the pediatric medical device market.


Split Ends: WEN Hair Care & The FDA’s Regulation of Cosmetics

MJLST Guest Blogger, Tommy Tobin

[Editor’s Note: The LawSci Forum is pleased to announce a new series on current issues in FDA law. This post is #1 in the series, with more in the coming weeks.]

We have all been tempted by late-night television infomercials and their promises. If the product works, our lives become more convenient; if it doesn’t, we’re only out a few dollars and the product will gather dust. For thousands across America, one product that promised a hair-care revolution left them scratching, itching, and balding.

The Food & Drug Administration (FDA) is investigating over 20,000 incidents of adverse events resulting from WEN by Chaz Dean. Los Angeles-based stylist Chaz Dean is the face of the WEN brand, endorsed by Brooke Shields, Alyssa Milano, and other celebrities. Sold on QVC, infomercials, and elsewhere, WEN is unlike most shampoos. It is marketed as a “revolutionary way to cleanse and hydrate the hair” without water.

There’s another way that WEN is unlike most shampoos: using WEN all too often results in large clumps of hair falling off one’s head. The FDA has received complaints of baldness in addition to hair loss, itching, and rashes after consumers tried WEN products. In July 2016, the FDA issued a Safety Alert to warn the public about potential results of using this hair care product. In that warning, the FDA noted that this was the largest number of reports ever received for a hair cleansing product.

Unsurprisingly, litigation has ensued. One California case has resulted in a preliminary class action settlement of over $26 million. Filed in the Central District of California, the suit alleges that the plaintiffs, and their similarly-situated class members, suffered hair loss and scalp irritation, among other injuries. One class representative allegedly lost one-third of her hair after she used WEN’s Sweet Almond Milk kit. In addition, plaintiffs claimed that the WEN was falsely advertised as safe and failed to warn users of potential harm.

Under the terms of the preliminary settlement, notice will be given to 6 million class members, defined as any American purchaser of WEN hair care products between November 2007 and August 1, 2016. A warning will be added to the product’s packaging telling users to seek immediate medical attention for adverse reactions. While many claimants in the class can submit claims for a $25 payment, those with more extensive damages can submit claims for additional recovery. For example, those that have lost more than 50% of their hair with minimal “hair regrowth” could recover as much as $20,000.

But, wait there’s more! The nature of the allegations against WEN have led many consumers, lawmakers, and even the New York Times to ask whether the FDA should have the authority to recall dangerous cosmetics from the market. Currently, the FDA is not authorized to order recalls of cosmetic products. Instead, such recalls are voluntary efforts by manufacturers or distributors.

A cursory inspection of the FDA’s name reveals that “cosmetics” is nowhere to be found in the title of the Food & Drug Administration. While the FDA notes that cosmetic companies and marketers “have the legal responsibility to ensure the safety of their products,” the WEN case provides an opportunity to reflect on the FDA’s regulatory authority over cosmetic products.  For example, the FDA may order warning statements on cosmetics that present health hazards and work with manufacturers on voluntary recalls. Time will tell whether WEN prompts further action to regulate cosmetic products.


Split Ends: WEN Hair Care & The FDA’s Regulation of Cosmetics

MJLST Guest Blogger, Tommy Tobin

[Editor’s Note: The LawSci Forum is pleased to announce a new series on current issues in FDA law. This post is #1 in the series, with more in the coming weeks.]

We have all been tempted by late-night television infomercials and their promises. If the product works, our lives become more convenient; if it doesn’t, we’re only out a few dollars and the product will gather dust. For thousands across America, one product that promised a hair-care revolution left them scratching, itching, and balding.

The Food & Drug Administration (FDA) is investigating over 20,000 incidents of adverse events resulting from WEN by Chaz Dean. Los Angeles-based stylist Chaz Dean is the face of the WEN brand, endorsed by Brooke Shields, Alyssa Milano, and other celebrities. Sold on QVC, infomercials, and elsewhere, WEN is unlike most shampoos. It is marketed as a “revolutionary way to cleanse and hydrate the hair” without water.

There’s another way that WEN is unlike most shampoos: using WEN all too often results in large clumps of hair falling off one’s head. The FDA has received complaints of baldness in addition to hair loss, itching, and rashes after consumers tried WEN products. In July 2016, the FDA issued a Safety Alert to warn the public about potential results of using this hair care product. In that warning, the FDA noted that this was the largest number of reports ever received for a hair cleansing product.

Unsurprisingly, litigation has ensued. One California case has resulted in a preliminary class action settlement of over $26 million. Filed in the Central District of California, the suit alleges that the plaintiffs, and their similarly-situated class members, suffered hair loss and scalp irritation, among other injuries. One class representative allegedly lost one-third of her hair after she used WEN’s Sweet Almond Milk kit. In addition, plaintiffs claimed that the WEN was falsely advertised as safe and failed to warn users of potential harm.

Under the terms of the preliminary settlement, notice will be given to 6 million class members, defined as any American purchaser of WEN hair care products between November 2007 and August 1, 2016. A warning will be added to the product’s packaging telling users to seek immediate medical attention for adverse reactions. While many claimants in the class can submit claims for a $25 payment, those with more extensive damages can submit claims for additional recovery. For example, those that have lost more than 50% of their hair with minimal “hair regrowth” could recover as much as $20,000.

But, wait there’s more! The nature of the allegations against WEN have led many consumers, lawmakers, and even the New York Times to ask whether the FDA should have the authority to recall dangerous cosmetics from the market. Currently, the FDA is not authorized to order recalls of cosmetic products. Instead, such recalls are voluntary efforts by manufacturers or distributors.

A cursory inspection of the FDA’s name reveals that “cosmetics” is nowhere to be found in the title of the Food & Drug Administration. While the FDA notes that cosmetic companies and marketers “have the legal responsibility to ensure the safety of their products,” the WEN case provides an opportunity to reflect on the FDA’s regulatory authority over cosmetic products.  For example, the FDA may order warning statements on cosmetics that present health hazards and work with manufacturers on voluntary recalls. Time will tell whether WEN prompts further action to regulate cosmetic products.