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.
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 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.
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
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.
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.
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.
The SEC fined and suspended the principal of a defunct investment adviser for falsely claiming SEC registration eligibility. The firm claimed that it had at least $25 Million in assets under management through 2011 and then suddenly claimed it had at least $100 Million assets under management following passage of the Dodd-Frank in 2012. The SEC asserts the firm had no basis for claiming SEC registration eligibility because it did not have the purported assets under management. The SEC also alleges violations of the custody rule arising from the firm’s role as a private fund manager.
OUR TAKE: Lying to the SEC about registration eligibility is more than mere marketing puffery. It can prompt a public enforcement action. Make sure you have records to support the claimed assets under management.
The SEC fined a deregistered investment adviser and barred its former principal for multiple compliance failures involving double dipping, Form ADV disclosures, fee rebates, and misrepresentations. The respondents recommended that clients invest in private funds in which the principal held ownership and managerial interests. Although the SEC acknowledges that clients knew about the conflict, the firm failed to list and describe the conflicts on Form ADV. The SEC also charges the firm with multiple compliance program failures including inadequate policies and procedures and failing to conduct annual testing of the compliance program.
OUR TAKE: There is no such thing as declaring regulatory bankruptcy: the SEC’s long arm won’t let a firm engage in wrongdoing and then simply de-register to avoid consequences. Compli-pros should also note that disclosure alone will not always cure significant conflicts of interest, such as fee double dipping for advisory services along with underlying products.
OUR TAKE: This case has significant implications for larger organizations. If a firm operates a registered investment adviser affiliate, the SEC, based on this action’s reasoning, would prohibit the firm from claiming an exemption registration for an unregistered fund manager under the same roof. The SEC is using the regulatory flexibility to integrate advisers under one Form ADV as a regulatory weapon to force registration on otherwise exempt affiliates.