Growth Capitalist (https://growthcapitalist.com/category/premium-articles/legal/page/23/)
Legal developments affecting capital formation by pre-IPO private and public emerging growth companies
Regulators over the last several weeks have signaled that they are prepared to loosen regulations overseeing merger and acquisition brokers, advisory firms, and other consulting businesses that don’t facilitate securities offerings but may nevertheless receive compensation based on securities-related transactions.
The Securities and Exchange Commission has settled a suit against a Long Island, New York man running his own money through his prop-trading firm, Worldwide Capital, for short selling on sixty stocks that violated Rule 105. The regulator touted the $7.2 million fine as the largest Rule 105 settlement to day and boasted they have now collected in excess of $42 million through settling over 40 actions against firms with investment advisors. Worldwide’s founder, Jeffery M. Lynn, age 55, engaged in an investment strategy focused primarily on new shares of public issuers coming to market through secondary and follow-on public offerings. The SEC alleges that, through traders he engaged to trade on his behalf, Lynn sought allocations of additional shares soon to be publicly offered, usually at a discount to the market price of the company’s already publicly trading shares. He and his traders would then sell those shares short during the pre-offering restricted period. The regulator claims Lynn and Worldwide Capital improperly profited from the difference between the price paid to acquire the offered shares and the market price on the date of the offering in stocks such as Citigroup. “The trading conducted by Lynn and Worldwide Capital disregarded the markets’ independent pricing mechanisms,” said Amelia A. Cottrell, associate director of the SEC’s New York Regional Office. “Their use of multiple accounts in obtaining offering shares and short selling did not satisfy the separate accounts exception to Rule 105.”
The SEC says, as a result of these Rule 105 violations, Worldwide and Lynn received ill-gotten gains totaling approximately $8,425,595.
The SEC has won a $19M default judgment against the chairman and chief executive officer of China MediaExpress Holdings (CCME). The formerly Nasdaq-listed China-based company was itself recently found liable for $49M in disgorgement and penalties relating to a “scheme to mislead and defraud investors by, among other things, grossly overstating China Media’s cash balances.”
At the time, the company claimed to have over $170 million in cash deposits, when the actual cash held by the company was just $10 million. The misleading financial information led to a tripling of the company’s stock price, allowing it to raise more than $53 million from investors – most notably a fund led by AIG’s former chairman Hank Greenberg – via equity private placements. The CEO, Zheng Cheng, was also found guilty of knowingly signing off on the financial representations in SEC filings, and of offering $1.5 million to bribe an investigator sent by its external auditor to verify the company’s bank records.
With the comment period in full-swing on the SEC’s proposed rule expanding Reg A to allow companies to conduct “mini-IPOs” of up to $50 million without filing a traditional S-1 registration statement, supporters and critics of “Reg A+” are using the proposal as a vessel that is being filled with the hopes and fears of a generation of frustrated securities professionals and regulators. Small cap bankers and deal attorneys see the proposal as the first real opportunity to revive the moribund under-$100 million IPO market for the first time since the mid-1990s, when a series of mostly well-intended anti-fraud and securities trading reforms conspired to nearly eliminate small public offerings in the U.S. They have imbued the proposal with the potential to bring forth a cornucopia of mini-IPOs, mini-SPACs, and mini-REITs that will stimulate public investment in new companies at rates unseen in nearly two decades. State regulators, led by the North American Securities Administrators Association (NAASA), fear Reg A+ as proposed, with its blanket federal pre-emption of state securities laws, will blast a hole through the patchwork of state-level investor protection laws aimed at stanching penny stock fraud. They fear a return to the days when stock grifters moved about the country freely offering unregistered Reg D 504 shares in shell companies, and syndicated partnership stakes in mining claims and oil and gas leases, with no oversight and little truthful disclosure, let alone investment legitimacy. The 50 State Solution
With the comment period on Reg A+ at the halfway point to its March 24 close, the NAASA leadership, represented by Bill Galvin, Massachusetts’ Secretary of the Commonwealth, and Jack Herstein of the Nebraska Department of Banking and Finance, continue to argue for a multi-state “coordinated review system” to regulate and review Reg A offerings at the state level.
