Lender’s $4.5 Million of Promissory Notes Were Unregistered Securities

A case involving real estate lending illustrates the perils of failing to comply with the securities laws.  Last fall the Securities and Exchange Commission filed a complaint against Paul Z. Singer, a Philadelphia-based lender, and his company, Singer Financial Corp. (“SFC”), alleging that from October 2012 to July 2015, Singer, “by and through SFC, raised $4.5 million from at least 70 investors through an illegal and unregistered offering of securities in the form of promissory notes.”

This is not the first time Singer and SFC have been alleged to have sold unregistered securities.  The Pennsylvania Securities Commission imposed penalties against SFC in 1997 and Singer and SFC in 2007 for violations of Pennsylvania’s securities laws pertaining to the unregistered offer and sale of securities.  Also, the New Jersey Bureau of Securities imposed a $5,000 fine against SFC in 2010 for selling unregistered securities.

According to the SEC’s complaint, SFC’s business was making “hard money” commercial real estate loans.  “Hard money” lending is a type of financing usually targeted at high-risk borrowers, and tends to involve charging high interest rates and underwriting “loans secured by real property with a low loan-to-value ratio.”  SFC’s primary source of funds for these commercial real estate loans comes from the sale of investment certificates and promissory notes to investors.

The complaint alleges that from about 1998 to 2010, SFC opted to raise capital to finance the commercial real estate loans by way of investment certificates that were offered to the public pursuant to Regulation A.  However, in June 2010, SFC’s final effective offering statement pursuant to Regulation A expired.  Regardless, SFC and Singer persisted in offering the certificates without making any efforts at that time to requalify the offering under Regulation A or to register the offering under the Securities Act of 1933.

The complaint also alleges that in June 2012, SFC and Singer tried to qualify another Regulation A offering of investment certificates by filing a Form 1-A offering statement and financial statements with the SEC.  The SEC, however, sent a comment letter to SFC asking for information regarding SFC’s business model and, specifically, how it would be able to charge interest rates between 12 percent and 16 percent when interest rates were at a historic low.  The comment letter also inquired about some related party loans that SFC had made to Singer and some affiliates.

Rather than answering the SEC’s questions in the comment letter, SFC and Singer allegedly started to offer and sell promissory notes without informing the SEC, registering the offering with the SEC, or following the Securities Act’s registration obligations.  SFC and Singer allegedly sold the promissory notes to the general public, and a newsletter which showcased the promissory notes allegedly did not include any information typically included in a registered securities offering’s prospectus.  The complaint alleges that the newsletter did not feature any documents outlining the nature of SFC’s business or how it used proceeds from the promissory notes.  Altogether, SFC and Singer sold $4.5 million in promissory notes to about 70 investors.

The SEC’s complaint asks the court to enjoin SFC and Singer from further violations of the Securities Act and from offering securities in an unregistered offering and that SFC and Singer be required to disgorge any ill-gotten gains and to pay civil money penalties.

Cases such as this serve to underscore the importance of issuers complying with securities registration statutes and regulations.  While investment promissory notes are sometimes thought by non-securities professionals to be outside the purrier of the securities laws, they are actually almost certain to be regarded as securities by regulators.


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