Home » Archives for April 2019 » Page 2

Month: April 2019

Fund Manager Failed to Register as Broker-Dealer

A former fund manager was barred from the industry and faces possible fines and disgorgement for misrepresenting fees and commissions and for selling the fund without registering.  His partner previously settled with the SEC by agreeing to pay over $1.2 Million.  According to the SEC, the defendant hid the nature of the compensation received for selling the fund, which constituted transaction-based compensation requiring broker-dealer registration.  The SEC also charged the adviser with failing to register his firm as an investment adviser and with securities fraud. 

Fund managers that engage in selling efforts must register as broker-dealers unless they can take advantage of the issuer exemption (Rule 3a4-1), which prohibits the receipt of specific transaction-based compensation. 

SEC Says that ICO is Not a Securities Offering


The staff of the SEC’s Division of Corporation Finance has issued no-action relief that allows an initial coin offering without registration.  The no-action relief relies on an opinion of counsel that the underlying digital tokens are not securities as well as several other conditions including (i) the sponsor will not further develop the platform, (ii) the tokens will be immediately useable and functional, and (iii) the tokens are not marketed in a manner that emphasizes their potential for increased market value.  In a companion release, the SEC Strategic Hub for Innovation and Financial Technology (FinHub) issued guidance about how to determine if an ICO is an offering of securities under the applicable Howey test.  FinHub relies heavily on whether the sponsor of the network will engage in further development of the network or digital asset so as to generate increased market value for investors. 

Up until now, the SEC has taken the position that ICOs are securities offerings, subject to the Securities Act’s registration and disclosure requirements.  This no-action letter and companion guidance suggest that the SEC may back off its aggressive position and allow the digital token world to evolve organically.  What is unclear is whether any ICO sponsor should go forward without a no-action letter.

Fund Sponsor Violated Private Offering Rules

The sponsor of a private fund agreed to disgorge its management fees for soliciting investors without a pre-existing, substantive relationship.  The SEC accuses the fund sponsor and its principal with engaging in a public solicitation through a website and media interviews.  The respondents had filed a Form D Notice of a private offering.  The alleged public solicitation violated Section 5 of the Securities Act, which requires a registration statement before engaging in a public offering.  During the unlawful offering, the value of the fund declined 62%, which amounted to over $300,000.  The Order notes that the principal had no prior securities industry experience. The SEC declined to impose further penalties because of the respondents’ financial condition.

Most securities professionals know that you cannot raise capital in a private offering unless the offeror can document a pre-existing relationship with potential investors.  However, as FinTech and the securities markets intersect, the neophytes may not realize that they are tripping over the regulatory wires.  This respondent is lucky that the SEC didn’t order full rescission of the offering and the refund of the amount lost. 

Adviser Faces Industry Death Penalty and Criminal Prosecution for Ignoring Custody Rule

An adviser agreed to shutter the firm and close its private fund and pay over $1.1 Million in disgorgement and interest for lying to clients about the safety of their assets.  The firm’s principal has also been barred from the industry and faces criminal prosecution.  According to the SEC, the firm violated the custody rule (206(4)-2) by failing to deliver audited fund financial statements and then lying to clients about the fund’s assets and pendency of the audit.  The SEC alleges that the respondents misappropriated client assets for personal and firm expenses and lied to clients with false account statements, tax documents and Form ADV.  The SEC also charges the respondents with securities fraud.

It is a HUGE warning sign when a fund manager fails to deliver audited financial statements, regardless of the ostensible reasons for delay.  What may be most shocking is that this firm engaged in unlawful conduct for at least 11 years until the SEC uncovered wrongdoing during a routine OCIE exam in 2018.