Legal

SEC Places U.S. Investment in China EGCs at Crossroads

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The recent ruling banning Chinese affiliates of the Big Four accounting firms from auditing companies listed on U.S. exchanges exposed a faulty agreement between the two countries and returned a longstanding conundrum to the forefront: Can officials concoct an oversight regime of Chinese issuers that satisfies both countries and reassures U.S. regulators and investors? The answer at this point: as much chance as the Jamaican Olympic bobsled team winning gold in Sochi. On January 23, Securities and Exchange Commission Administrative Law Judge Cameron Elliot ordered a six-month suspension of the Chinese units of KPMG, Deloitte & Touche, PricewaterhouseCoopers and Ernst & Young after the accountants failed to provide audit work papers of some Chinese issuers to U.S. regulators, who have been investigating the companies for fraud. The accounting firms claimed that to do so would have violated secrecy laws in China and wanted officials with the two countries to resolve the problem. The ruling fouled investor sentiment on Chinese companies over delisting fears.

Legal
Joe Meuse

China Reverse Merger Banker Meuse Banned by the SEC

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A leading banker in China reverse merger deals was banned from the penny stock business for five years by the Securities and Exchange Commission. On January 8, the U.S. District Court for the Southern District of New York ordered Belmont Partners CEO Joseph Meuse to pay fines and penalties of $224,500. The SEC barred Virginia-based Belmont and Meuse from committing fraud in relation to a securities offering again but Meuse did not admit or deny guilt.
Joe Meuse
In December 2011 the government regulator alleged that the company and Joseph Meuse used fabricated and backdated documents to convince a transfer agent and an attorney writing an opinion letter to issue free-trading shares of Alternative Green Technologies (AGTI). The SEC also charged AGTI, its CEO Mitchell Segal, a business partner named Howard Borg and stock promoters for their roles in the scheme that resulted in unknowing investors purchasing fraudulently issued AGTI shares. “Shell packagers who buy and sell public companies for use by fraudsters have no rightful place in our markets,” said David Rosenfeld, Associate Director of the SEC’s New York Regional Office in 2011 after the SEC fraud suit was filed.

crowdfunding
Views

Will Deal Costs Kill Retail Equity Crowdfunding?

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As the SEC prepares to finalize rules governing what companies must do qualify equity private placement offerings for sale to unaccredited investors under Title III of the JOBS Act, more and more would-be players in the nascent “equity crowdfunding” market are coming around to the view that statutory deal costs may prevent it from ever becoming a viable channel for raising significant capital. The SEC, in its own analysis of expected costs of raising capital via Title III sanctioned public or retail crowdfunding included in the 585-page Title III rule proposal released last October, suggested that fixed costs of accounting audits, legal work and offering commissions could consume up to 39% of proceeds from crowdfunding raises of less than $100,000, and up to 15% of raises between $100,000 and $1 million. Crowd Capital Associates, a Berkeley, Calif., research group founded by crowdfunding evangelist Sherwood Neiss, estimates that Title III equity offerings of $100,000 to $1 million, the annual statutory limit for companies, will spend between 10% and 40% of their proceeds on deal costs and compliance. Those costs include ongoing annual audits for companies raising $500,000 or more that could eat up 25% of the proceeds of a $500,000 offering. Which may mean entrepreneurs will need to crowdfund the deal costs of a crowdfunding round before they can actually raise money for their businesses.

Markets

Hennessy SPAC Raises $115M in IPO

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Daniel J. Hennessy
Hennessy Capital Acquisition Corp. (HCACU) is the first SPAC of the year, successfully completing an IPO in late January that raised $115 million after underwriter Deutsche Bank exercised its over-allotment on the company’s initial $100 million public offering. The offering was structured as units offered at $10 each consisting of one share of the company's common stock and one warrant to purchase one half of one share of common stock at an exercise price of $5.75 per half share ($11.50 per full share). Deutsche Bank Securities acted as the sole book runner for the offering. The SPAC is led by Daniel J. Hennessy, a longtime partner of the Chicago-based private equity firm Code Hennessy and Simmons (CHS), where is the lead partner for industrial, infrastructure and energy investments.