Legal

Variable-priced PIPEs Hastened Demise of Digital Domain

By |

Digital Domain Media Group (DDMG), the Port St. Lucie, Fla.-based digital special effects company that filed for Chapter 11 bankruptcy on Tuesday, a mere 10 months after the company's IPO, pocketed $50 million in three private placements over the last few months as its cash position deteriorated. The variable-priced conversion terms of those deals hastened its voluntary filing as it strove to control costs, which included a recent decision to shut down an animation studio and layoff 300 workers. A week before Digital Domain filed for bankruptcy, it defaulted on a $35 million convertible debt transaction that closed in May. Hudson Bay Capital Management, Tenor Capital Management and Empery Asset Management subscribed to the deal, which featured a five-year term and an interest rate of 9%, according to PlacementTracker, a service of Sagient Research.

Legal

SEC Sues China Sky One for Fake Revenue

By |

Weight loss supplement maker China Sky One Technologies (CSKI) pumped up its revenues illegally, according to a Securities and Exchange Commission lawsuit alleging that the company concocted almost $20 million in fictional revenues it improperly reported in 2007 and 2008. In March, the complaint says, Nasdaq halted trading in the China-based company’s shares following the resignation of 26 mid-level managers, including nine from the accounting department and two handling internal controls. China Sky allegedly recorded revenues of $12.2 million and $7.5 million in 2007 and 2008 respectively for sales of weight loss patches to Takasima Industries, a Malaysian company that in reality purchased only about $167,000 worth of the products. The commission sued the company and its CEO Yan-qing Liu, who allegedly signed misleading regulatory filings. The suit seeks to have Liu repay incentive-based compensation and to have him barred from serving as officer or director of a public company.

Legal

SEC Cans Ad Ban on Private Placements

By |

It’s hard to imagine any one constituent group being overly enthused about the Securities and Exchange Commission’s effort to write rules that implement general solicitation in private offerings as mandated by the JOBS Act. Although the proposal was accepted on a vote of 4-1, lawmakers and some commissioners voiced displeasure that the SEC failed to meet the law’s proscribed 90-day deadline and that SEC Chairman Mary Schapiro late in the game elected to issue a proposal and take comments for 30 days instead releasing of an interim final rule. State regulators and other organizations predicting widespread fraud can’t be pleased that the proposal didn’t include their suggestions for strict, well-defined procedures for issuers to follow when verifying that a purchaser is an accredited investor. Parties that lobbied to keep the verification process the same as it is today – largely certification by buyers that they are accredited investors via questionnaires – may be uncomfortable with the proposed “facts and circumstances” test to establish a “reasonable belief” that a purchaser is in fact an accredited investor. And although allowing general solicitation has been a centerpiece of discussion among market participants over the last several months, practitioners may nevertheless have a tough time wrapping their minds around the change.

Legal

Shells Brandish the Emerging Growth Company Label

By |

In May 2007, New York-based blank check company Madison Ventures Capital Group registered with the Securities and Exchange Commission to sell 3.2 million shares. After filing amendments over the next few months, it dropped off the radar. Until recently. Madison Ventures resurfaced in April and withdrew its Form S-1. Ten days later the company, which is sponsored New York-based Mintz & Fraade Enterprises and Boca Raton, Fla.-based Sierra Grey Capital, registered as a Form 10 blank check.