The selling broker for Med-X’s Regulation A+ offering has quit, citing the late filing of the company’s 2015 annual report, which resulted in the suspension of the offering by the Securities and Exchange Commission in September.
In late December Med-X received a letter from Boustead Securities (formerly Monarch Bay Securities, LLC) terminating its July 2016 engagement as the exclusive placement agent for the company’s $15 million offering, the ongoing suspension of which is the subject of a hearing before the Commission today.
Los Angeles-based Med-X, who makes pesticides for marijuana growers, was qualified to raise up to $15 million in July 2016 through a Tier 2 offering. But when the company continued to sell securities while falling six months behind in filing its first annual report, it became the subject of the SEC’s first enforcement action against a Reg A+ issuer. Scott Purcell, CEO of Med-X’s escrow agent FundAmerica, told Growth Capitalist as of January monies collected from the offering are still held in escrow until Med-X CEO Matthew Mills and his deal lawyer Mark J. Richardson, of Richardson & Associates, decide to release them.
As of September 10, 2016, Med-X had raised approximately $840,000 from the sale of approximately 1,400,000 shares, according to the belated semiannual report filed with the SEC two days after the Commission suspended the offering. Boustead Securities was charging Med-X 8.9% of funds raised.
Online portal StartEngine was also contracted to help sell the Reg A+ offer and told Growth Capitalist in they stopped working with the company after the SEC enforcement action came down in September.
The Company was notified of the temporary suspension on September 22, 2016, in a letter dated September 16, 2016, from the SEC. The letter issued an Order Temporarily Suspending Exemption of the Company's Regulation A+ Offering due to the Company not filing its 2015 Annual Report on Form 1-K by April 30, 2016. On September 19, 2016, the Company filed its 2015 Annual Report on Form 1-K and 2016 Semiannual Report on Form 1-SA with the SEC. Growth Capitalist previously reported on the Reg A+ offer suspension.
The company requested the suspension be lifted and the offering be reinstated in September after filing its annual report. It has taken four months for the SEC to get through pre-hearing motions. The hearing to have the suspension order vacated is scheduled for January 10 at the SEC headquarters in Washington. Med-X removed its original counsel Richardson in November and replaced him with James F. Moyle of Moyle LLC.
After the lawyer switch Jason S. Patil, the SEC’s administrative law judge, issued a motion detailing what kind of evidence Med-X would need if it planned to use a defense of “advice-of-counsel” for why it didn’t file timely financial reports. The company said in its December 2 Form 1-U filing that there is no guarantee it will prevail getting the suspension lifted.
Meanwhile on October 14, 2016, Med-X filed to sell shares through a Regulation D 506(c) offering to raise $1.3 million. The filing said the minimum equity investment was $3,000 and $47,000 had already been sold. Syndication costs were estimated at $276,000 but a broker dealer wasn’t being used, according to an SEC filing. Some proceeds from the offering would be used to pay company executives.
A “bad actor” rule applies to all 506(c) offerings. Under the rule, if an executive of an issuer or the issuer is charged with an SEC action they cannot participate in the offering without a waiver from the SEC. The rule, established in 2013 under Dodd-Frank legislation, is explicit that SEC stop orders and orders suspending a Regulation A exemption trigger a bad actor qualification, according to the SEC’s website.
But in a December 2, 2016 filing that announced Boustead Securities has quit the offering, investors learned the 506(c) offering wasn’t being used to sell shares. Instead Med-X said it’s conducting a small private placement of its common stock at $0.60 per share only to prospective investors with whom it has a pre-existing business relationship and who are accredited investors.
The December filing, signed by Med-X CEO Matthew Mills, said, “The private placement is being made pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the "Act"). As of December 21, 2016, the Company had sold 555,333 shares of its common stock in the offering, raising $333,200 of capital. No offers or sales will be made in reliance on Rule 506 of Regulation D of the Act.”
Matthew Mills, in response to emails from Growth Capitalist asking for his view on the SEC enforcement action said, “Our lead securities counsel has requested the required SEC hearing to attempt to lift the suspension. We cannot make any other comments regarding this matter at this time.”