Articles Tagged with Securities Act of 1933

While designed as a capital formation alternative to going public or conducting a private placement offering under Section 4(a)(2), use of the intrastate offering exemption has not been widely used since the SEC revised the regulation in 2016. Sometimes referred as “crowdfunding” due to the ability to raise smaller amounts from more investors, the intrastate offering exemption differs greatly from Regulation Crowdfunding, also known as Regulation CF.

North American Securities Administrators Association (NASAA), the group of state securities administrators tracks the state jurisdictions that have implemented an intrastate offering exemption. In total, 35 jurisdictions have adopted some form of an intrastate exemptions with the regulatory requirements differing from state-to-state. While not widely used by Issuers in the majority of jurisdictions, other states such as Texas, Michigan, and Georgia have seen numerous filers take advantage of the exemption.

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Organizations seeking to raise capital have multiple options at their disposal – each with their own benefits, limitations, and regulatory obligations. As part of the JOBS Act, the SEC was tasked with reviewing an almost century old regulatory structure with the goal of easing and modernizing aspects of the federal securities regulations concerning capital formation. One of these such areas that the SEC reviewed and modernized was the traditional intrastate offering exemption.

The intrastate offering exemption, codified as Section 3(a)(11) of the Securities Act of 1933, customarily has been used in conjunction with the safe harbor contained in Rule 147. Under this framework, offerings conducted by an Issuer, that are only offered or sold within the same state jurisdiction as the Issuer, solely to residents within the same state jurisdiction as the Issuer, are exempt from registration with the SEC, and instead only have to comply with the respective state’s securities laws.

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On February 19, 2019, the United States District Court for the Southern District of Ohio granted a consent judgment against John Gregory Schmidt, a former Wells Fargo Advisors Financial Network (FINET) advisor.  The Securities and Exchange Commission had filed a complaint against Schmidt in September 2018, alleging that Schmidt sold securities that belonged to some of his retail brokerage customers and covertly used the proceeds from those sales to conceal shortfalls in customer accounts.  According to the SEC’s complaint, Schmidt sent his customers fake account statements which overstated their account balances in order to cover up his conduct.  This case demonstrates the need for broker-dealers and registered investment advisers to adopt and enforce policies that effectively give them the ability to detect the use of such fraudulent statements.

Schmidt worked as a registered representative and the branch manager of a FINET office from about December 2006 through October 2017.  By October 2017, he had about 325 retail brokerage customers, many of whom were retirees who were dependent on withdrawals from their accounts to pay living expenses. Continue reading ›

On October 30, 2018 the Securities and Exchange Commission announced amendments to rules and forms designed to improve disclosures made to clients regarding variable annuities and variable life insurance contracts.  According to the SEC, the purpose of the proposed amendments is to assist investors in comprehending the characteristics of variable annuities and variable life insurance contracts and the risks associated with those investment products.  The proposed amendments would allow financial institutions who offer variable annuities and variable life insurance contracts to give a summary prospectus to investors, which would satisfy the financial institutions’ disclosure obligations.  The SEC has invited the public to comment on both the proposed amendments and the hypothetical summary prospectus samples created and included in the proposed rule.  The comment period will run through February 15, 2019. Continue reading ›

Earlier this month, the Securities and Exchange Commission announced that it had reached a settlement with Ross Shapiro, a former managing director of Nomura Securities International, Inc. (“Nomura”).  The SEC filed a complaint against Shapiro and two other defendants, Michael A. Gramins and Tyler G. Peters, in September of 2015.  The complaint alleged that between January 2010 and November 2013, Shapiro, Gramins, and Peters made misrepresentations to customers about the prices of residential mortgage-backed securities (“RMBS”) and manufactured housing asset-backed securities (“MHABS”), thereby violating the Securities Act of 1933 and the Securities Exchange Act of 1934.

An RMBS is a security whose underlying assets comprise residential loans.  Customers who invest in an RMBS typically obtain payments derived from the interest and principal payments on these loans.  Shapiro, Gramins, and Peters provided market information and sold RMBS and MHABS on behalf of Nomura, a FINRA-registered broker-dealer.  The customers in question were funds that invested in RMBS.

The SEC’s complaint alleged that Shapiro, Gramins, and Peters made various misrepresentations to customers regarding the prices at which Nomura bought and sold RMBS and MHABS and that they misrepresented the amount of compensation that Nomura would receive for arranging any trades.  For example, Shapiro, Gramins, and Peters allegedly deceived customers on numerous occasions regarding how much Nomura paid for RMBS and MHABS.  Shapiro, Gramins, and Peters also gave clients the impression that Nomura had paid a higher price for RMBS and MHABS than it actually had.  These misrepresentations were usually made via electronic communications such as instant messaging, emails, and online chats.

On June 25, 2018, Wells Fargo Advisors, LLC agreed to an Order settling charges brought by the Securities and Exchange Commission relating to Wells Fargo’s use of Market-Linked Investments (“MLIs”). According to the Order Instituting Administrative and Cease-and-Desist Proceedings, beginning in January 2009 and ending in about June 2013, Wells Fargo and its predecessor “improperly solicited customers to redeem their market-linked investments (“MLI”) early and purchase new MLIs without adequate analysis or consideration of the substantial costs associated with such transactions.”  Continue reading ›

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. Continue reading ›

On May 4, 2017, the Securities and Exchange Commission (“SEC”) reached a settlement with Verto Capital Management, LLC (“Verto”), a New Jersey-based life settlement firm, and its CEO, William Schantz III (“Schantz”).  Verto and Schantz consented to pay the SEC about $4 million, which includes both disgorgement and a penalty, to settle claims that they used funds from new investors to pay older investors in a Ponzi-type manner.  The SEC also alleged that Verto and Schantz diverted investor funds for Schantz’s personal use.

The settlement resulted from a complaint filed by the SEC in the United States District Court for the District of New Jersey alleging that between November 2013 and November 2015 Verto and Schantz issued about $12.5 million worth of nine-month 7% promissory notes to investors.  Verto and Schantz claimed that the funds from these promissory notes would be used to purchase “life settlements,” which are life insurance policies that have been sold by their original owners to third-party buyers.  The SEC’s complaint alleges that Verto and Schantz made a variety of misrepresentations in the sale of these promissory notes. Continue reading ›

Earlier this month, the Securities and Exchange Commission (“SEC”) instituted an administrative proceeding against Blue Ocean Portfolios, LLC (“Blue Ocean”), an SEC-registered investment advisor with approximately $106 million in regulatory assets under management, and its Principal, CEO and Chief Compliance Officer, James A. Winkelmann, Sr.  According to the allegations, Blue Ocean and Winkelmann began raising capital from clients of Blue Ocean in order to generate business proceeds for Blue Ocean in April, 2011.  The adviser raised the funds by issuing a number of what it called “Royalty Units,” which were in fact interests that paid a minimum return to the investors with the prospect of a higher return if Blue Ocean’s advertising investment yielded successful new customers with annually recurring revenue.

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A Denver-based alternative fund manager was recently charged by the Securities Exchange Commission (“SEC”) with engaging in fraudulent behavior regarding the handling of its futures fund, The Frontier Fund (“TFF”).  The alternative fund manager, Equinox Fund Management LLC (“Equinox”), allegedly overcharged management fees to its investors and overvalued certain assets.

Equinox is registered as an investment adviser with the SEC and thus owes its investors certain fiduciary duties, one of which is to act in the best interests of its investors by being accurate and complete with its registration statements and SEC filings. Equinox, however, allegedly failed to meet those duties by misrepresenting in their TFF registration statements that management fees were based on the net asset value of the assets, when in reality they were based on the notional trading value of the assets. The notional trading value takes into account both the amount invested and the amount of leverage used in the underlying investments, and is significantly higher than net asset value.

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