SEC Seeks Order For Section 3(a)(10) Action

Section 3(a)(10) Attorney
Securities Lawyer 101 Blog

On December 23, 2013, the Securities and Exchange Commission (“SEC”) entered into a proposed settlement of a pending civil action against Advanced Cell Technology, Inc. (“Advanced Cell”), arising out of Advanced Cell’s issuance of hundreds of millions of unregistered shares of common stock on thirteen separate occasions without qualifying for any exemption from registration. The settlement is subject to the Court’s approval.

In its Complaint filed on May 30, 2012, the SEC alleged that seven defendants, including Advanced Cell, a biotechnology companywith headquarters in Marlborough, Massachusetts, violated the federal securities laws by engaging in the illegal unregistered distribution of billions of shares of penny stocks through the repeated misuse of the exemption from registration contained in Section 3(a)(10) of the Securities Act of 1933. Section 3(a)(10) permits a company to issue common stock to public investors other than pursuant to an effective registration statement “in exchange for one or more bona fide outstanding securities, claims or property interests . . . where the terms and conditions of such issuance and exchange are approved after a hearing [held before a court or other governmental authority authorized to conduct such hearings] upon the fairness of such terms and conditions.” The Section 3(a)(10) exemption may not be relied upon for capital formation by issuers, and it was improperly used for that purpose in these transactions. Section 3(a)(10) is commonly misused by dilution funders.

According to the SEC’s Complaint, in or about early 2006, Mark A. Lefkowitz, a penny stock financier, developed an illegal strategy for penny stock issuers to pay off past due debts and also raise capital by issuing stock purportedly pursuant to the Section 3(a)(10) exemption. The SEC Complaint alleges that in September 2008, Lefkowitz introduced the strategy to William Caldwell IV, who was then the Chief Executive Officer of Advanced Cell.

The SEC Complaint alleges that from September 2008 through January 2009, pursuant to an agreement between Lefkowitz and Caldwell, several entities affiliated with Lefkowitz (collectively, the “Lefkowitz Related Entities”) purchased past due debts of Advanced Cell from various Advanced Cell debtholders. Shortly after a Lefkowitz Related Entity acquired each debt, Lefkowitz and Caldwell agreed on the terms of a settlement, and the Lefkowitz Related Entity filed a lawsuit against Advanced Cell in a Florida state court purportedly to collect on the debt. The principal purpose of the lawsuits, according to the Complaint, was to present the settlements to the Florida state court for a fairness hearing, as required by Section 3(a)(10).

The Complaint alleges that, in each instance, the Florida state court found the settlements to be fair and entered an order granting a Section 3(a)(10) exemption. However, the Commission’s Complaint asserts that the parties never informed the Florida state court of the full terms and conditions of the settlements, thereby compromising the fairness hearings. According to the Complaint, the parties falsely represented to the Florida state court that they were settling for the face value of the past due debts and did not inform the Florida state court of the actual market value of the settlement shares or that the market value of the shares greatly exceeded the amount of the debts that were to be extinguished. Nor was the Florida state court told that the Lefkowitz Related Entities had agreed to sell the settlement shares quickly and remit a substantial portion of the sales proceeds to Advanced Cell.

According to the Complaint, Advanced Cell ultimately issued a total of 260,115,983 shares of unrestricted common stock to settle the thirteen lawsuits filed against it by the Lefkowitz Related Entities. The settlement shares, which had a total market value of approximately $9,230,000 as of the respective settlement dates, were issued to satisfy past due debts totaling approximately $1,110,000. According to the SEC Action, after retaining a portion of the profits from the sale of the shares for themselves, the Lefkowitz Related Entities remitted $3.5 million to Advanced Cell.

The SEC Complaint alleges that, as a result of the foregoing, Advanced Cell’s unregistered distributions to the Lefkowitz Related Entities violated Section 5 of the Securities Act. The SEC Action also alleges that Advanced Cell failed to timely disclose the settlement agreements and its issuance of unregistered shares of common stock in connection with the Section 3(a)(10) settlements by filing current reports on Forms 8-K with the Commission.

The proposed final judgment would enjoin Advanced Cell from violating Section 5(a) and 5(c) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934 and Rule 13a-11 thereunder. It would also order Advanced Cell to disgorge $3.5 million in ill-gotten payments from the Lefkowitz Related Entities, plus prejudgment interest in the amount of $586,619, for a total of $4,086,619, but would not impose a civil penalty based upon Advanced Cell’s financial condition. Advanced Cell consented to the entry of the proposed Final Judgment without admitting or denying the allegations in the Commission’s Complaint.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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