Home » registration

Category: registration

One Junior Employee in Shared Office Space Does not Qualify for Reg A Offering

 

A federal court has ordered rescission, including $3.5 Million in disgorgement and $3.2 Million in penalties, with respect to an offering that falsely claimed to satisfy Regulation A.  According to the SEC, the sponsors lied to the SEC by claiming a U.S.-based principal place of business when, in fact, the firm was run entirely outside of the U.S., and its sole U.S. contact was one employee in shared office space.  The SEC also accuses the sponsor of lying to NASDAQ by inflating its float with non-qualifying insider transactions.  A court previously ordered $26 Million in penalties for unlawful sales of insider securities that did not qualify under Rule 144.

Lying to the regulators in public filings to qualify for exemptions will lead to big trouble.  Ordering rescission is the Big Kahuna of enforcement penalties because it involves returning all proceeds with interest in addition to fines and usually an ongoing cease and desist order.  Act deliberately when filing that Form D or making those Rule 144 representations.      

Exempt Reporting Adviser Barred and Fined Over $1.1 Million

The principal of an exempt reporting adviser was barred from the industry and agreed to pay over $1.1 Million in disgorgement and penalties for conflicted transactions and misrepresentations.  The SEC charges that the respondent caused a fund he managed to purchase a portfolio company from an affiliated fund in violation of the purchasing fund’s debt and concentration limits.  The SEC asserts that the respondent intentionally misled investors by undervaluing the portfolio company in financial statements and disclosure documents.  The SEC also claims that the respondent misled investors about underlying investments and charging undisclosed monitoring fees.  The SEC also fined the firm’s CFO/CCO.  The SEC cites violations of the anti-fraud rules under the Advisers Act (206(4)-8), the Securities Act (17(a)(1) and 17(a)(3)), and the Exchange Act (10b-5).

An exempt reporting adviser is still subject to several provisions of the Advisers Act, including its fiduciary and anti-fraud rules.  We recommend that ERAs implement a legitimate compliance program to avoid a firm-ending regulatory action like this one.

Private Fund Manager Completely Shirked His Compliance Obligations

 

The SEC fined a now-defunct fund manager for ignoring its compliance obligations.  The SEC charges that the firm never delivered audited fund financials within 120 days as required by the custody rule (206(4)-2).  Although the firm did hire an auditor, the firm never received an opinion that the financials were prepared in accordance with GAAP.  Instead, the audit firm issued reports stating that it was unable to express such an opinion.  In addition, the SEC charges the firm with violating the compliance rule (206(4)-7) because the principal, who also served as the Chief Compliance Officer, failed to adopt and implement policies and procedures and disregarded his obligation to conduct annual compliance reviews.

When you register as an investment adviser, you subject yourself to the full panoply of substantive regulation imposed by the Investment Advisers Act.  To comply and continue as a going concern, you need to hire a competent Chief Compliance Officer to help you meet the regulatory requirements.  Otherwise, you may end up either in your next career or in jail.

Unregistered Adviser Barred From Industry for Marketing Misrepresentations

 

The SEC fined an unregistered investment adviser and barred its principal from the industry for making false representations in marketing materials primarily to professional athletes.  The SEC asserts that the adviser, which terminated its SEC registration in 2008 but continued to market its investment advisory services through 2018, baldly lied about its assets under management, clients, management, and employees.  The firm emailed its misleading brochure to over 80 prospects over a 12-month period and included a cover email that also included significant misrepresentations.  The SEC alleges violations of the Advisers Act’s antifraud rules.

Just because you do not register with the SEC does not mean that you are exempt from its antifraud rules.  Section 206 applies to any statement made by an investment adviser, whether registered or unregistered, that could defraud any client or prospective client.

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. 

Self-Reporting ICO Forced to Offer Rescission to All Investors

The sponsor of an initial coin offering agreed to offer full rescission of proceeds raised in order to settle SEC charges that the firm engaged in an unregistered securities offering.  The sponsor raised $12.7 Million by issuing digital tokens in exchange for Ether as part of its efforts to raise funds to further develop its internet security product.  The tokens would serve as currency for a peer-to-peer network that would allow participants to access additional bandwidth in the event of a cyber-attack.  As part of its marketing, principals suggested that the value of the tokens should rise as the network expanded.  The SEC maintains that this “reasonable expectation of a future profit” satisfied the Howey test and that, therefore, the tokens were “securities” and the offering constituted an unregistered securities offering.  The SEC did not impose a civil penalty because the firm self-reported. 

We don’t think that the SEC has a slam-dunk case that ICOs are securities offerings.  In fact, some courts have opined that the SEC must specifically prove that each ICO is in fact a securities offering.  Until the courts offer some specific guidance, ICO sponsors should observe the securities laws to avoid a crippling enforcement action. 

SEC Cancels Internet RIA Registration for Failure to Launch


The SEC cancelled the adviser registration of a purported internet investment adviser because the registrant failed to launch its website in the three years since registering.  The registrant filed as an RIA under the internet adviser exception whereby an adviser without assets under management is eligible to register if the adviser provides advice exclusively through an interactive website.  The adviser registered in May 2015 and still has not launched its website due to personal events and product complexity.  The registrant argued that the internet adviser exception allows a grace period for development.  The SEC concedes that an internet adviser may be allowed some leeway beyond 120 days (the stated time period for new advisers), but three years is “well over any reasonable grace period.”  Additionally, the SEC places the burden on the adviser to demonstrate “substantial efforts and progress toward developing an interactive website” in order for the Commission to exercise discretion to allow registration beyond the initial 120-day period. 

This decision states for the first time that internet advisers may get more than 120 days to launch so long as they can demonstrate significant progress.  The SEC will grant a grace period, but three years is too long.    

Adviser Falsely Claimed SEC Registration Eligibility

The SEC barred from the industry the principal of a registered investment adviser for falsely claiming SEC registration eligibility.  In his initial Form ADV filing, the respondent claimed over $500 Million in assets under management, but the SEC asserts the firm managed no assets.  A year later, the respondent claimed a Wyoming principal place of business and assets under management in excess of $25 Million.  The SEC maintains that the firm operated from New York and had assets less than $5.4 Million.  In both years, the respondent electronically signed the Form ADV “under penalty of perjury.”

The SEC does not look kindly on advisers that lie on Form ADV to claim registration eligibility.  The regulator already supervises over 13,000 advisers that legally qualify for federal registration. 

FBI Takes Down Unregulated Non-U.S. Swaps Dealer

 

An FBI sting operation ensnared an unlawful non-U.S. based securities dealer that offered securities-based swaps without registering.  The Austrian-based defendant operated an internet-based platform that offered contracts for difference, which operated as securities-based swaps based on publicly-traded U.S. equity and indexes.   An undercover FBI agent opened an account with nothing more than a username and a password and traded CFDs with bitcoin.  The platform served as the counterparty and collected the bid-ask spreads.  The SEC charges the platform with failing to register the securities offering and the platform as a broker dealer.  The SEC also asserts that the CFDs were required to be traded on a registered securities exchange.

OUR TAKE:  We love innovation and technology.  However, when you apply new technologies to a highly regulated industry, you must follow the same rules as everybody else.  Trading in securities with U.S. persons implicates the whole panoply of U.S. securities regulation including the regulation of the offering, the parties, and the venue.  Also, never assume that law enforcement or the regulators won’t find you.  Your competitors and clients have an interest in helping the investigators find those who are cutting regulatory corners.

SEC Halts Crypto Hedge Fund Offering for Failing to Register

 

The manager of a crypto hedge fund offered its investors rescission and agreed to pay a $200,000 fine for failing to comply with the securities.  The SEC argues that the fund, which invested in digital assets, was “engaged in the business of investing, holding, and trading certain digital assets that were investment securities.”  Consequently, the offering, which did not comply with Regulation D’s private offering safe harbors, should have been registered under the Investment Company Act.  The SEC charges violations of the registration provisions of the Securities Act and the Investment Company Act as well as the antifraud rules.  This case is the SEC’s first enforcement action against a crypto hedge fund manager for failing to register under the Investment Company Act.

OUR TAKE:  Most significant is the SEC Enforcement Division taking the position that a fund that invests in digital assets is subject to the securities laws.  It remains to be seen whether others will challenge that position in the courts.