Securities Law and Going Public Blog

Rule 506(b) and Rule 506(c) State Blue Sky Laws

A short sale transaction can be part of a legitimate trading strategy. It is often endorsed for its beneficial effects on the securities markets, which include increasing liquidity. Short selling is also criticized. S

While the Securities and Exchange Commission (the “SEC“) regulates and enforces the federal securities laws, each state has its own securities regulator who enforces what is known as “blue sky” laws. If a company is selling securities, it must comply with both federal regulations and state securities laws and regulations in the states where securities are offered and sold. Read More

General Solicitation and Advertising in Rule 506 Offerings

Both public and private companies may conduct securities offerings using Rule 506. The exemption provides a valuable tool for enabling issuers to obtain shareholders in connection with a going public transaction particularly issuers electing to go public direct. Read More

Regulation D Rule 504, Rule 506(b), Rule 506(c) Offering Exemptions

Securities offerings must be registered with the Securities and Exchange Commission (“SEC”) or exempt from registration. Private placements are unregistered, non-public securities offerings that rely on an available exemption from registration. Unregistered offerings of securities must rely on an exemption from registration under either Sections 3 or 4 of the Securities Act of 1933 (the “Securities Act”). Most private offerings, however, are sold pursuant to three “safe harbor” rules promulgated under the Securities Act; Regulation D, Rules 504, 506(b), and 506(c). These rules provide issuers with a clearer and more objective set of requirements for which their offerings may qualify for exemption from registration.

Regulation D provides for three types of securities offerings that can be used by private or publicly traded companies. The Regulation D exemptions can also be used by issuers conducting initial or direct public offerings as part of the going public process. The most commonly used exemption from SEC registration is Rule 506© of Regulation D. This blog post outlines each of the exemptions provided by Regulation D. Read More

Gonzalo Ortiz Sentenced to 30 Months’ Imprisonment for Defrauding Investor and Lying about his Trading Experience

Gonzalo Ortiz was sentenced on February 2, 2023, in federal court in Brooklyn to 30 months in prison for defrauding an investor of nearly $600,000 by making false representations about his trading expertise and the profitability of various investments. The Court also ordered Ortiz to pay $224,500 in restitution to the victim and imposed two years of supervised release to follow his custodial sentence. In November 2021, Ortiz pleaded guilty to one count of investment advisor fraud. Read More

SEC Obtains Over $5 Million Final Judgment Against Charlie Abujudeh in Multi-Million Dollar Microcap Pump and Dump Scheme

On January 20, 2023, the U.S. District Court for the Eastern District of New York entered a final judgment against California resident Charlie Abujudeh whom the SEC had charged for his role in a microcap fraud scheme targeting retail investors. Among other things, the judgment orders Abujudeh to pay a total of over $5 million.

According to the SEC’s complaint, filed on July 22, 2021, from August 2019 to at least September 2020, Abujudeh worked with others to fraudulently sell several microcap companies’ stock to investors by making misleading statements during high-pressure sales calls and/or email promotions.

The SEC alleges that, as part of the scheme, Abujudeh and his associates convinced investors to invest in the stock of Odyssey Group International, Inc. (ODYY), as well as other microcap companies, including Scepter Holdings, Inc. (BRZL), and CannaPharmaRx, Inc (CPMD). Read More

Former top FBI official Charles McGonigal arrested over ties to Russian oligarch Oleg Deripaska

Charles McGonigal, a former top counterintelligence official in the FBI’s New York Field Office, who retired from the FBI in 2018, has been arrested and charged in two separate cases involving his dealings with foreign operatives, including billionaire Russian oligarch, Oleg Deripaska. He was arrested Saturday afternoon after he arrived at JFK Airport following travel in Sri Lanka according to reports.

McGonigal pleaded not guilty to the four-count indictment unsealed Monday in Manhattan.

The judge ordered him released on a $500,000 personal recognizance bond plus restrictions on his travel and prohibitions on contacting anyone associated with the case. Read More

SEC Charges Avraham Eisenberg with Manipulating Mango Markets’ “Governance Token” to Steal $116 Million of Crypto Assets

On January 20, 2023, the Securities and Exchange Commission (the “SEC”) charged Avraham Eisenberg with orchestrating an attack on a crypto asset trading platform, Mango Markets, by manipulating the MNGO token, a so-called governance token that was offered and sold as a security.

Eisenberg, a 27-year-old U.S. citizen who was arrested and detained at MDC Guaynabo, Puerto Rico, is awaiting transport to appear before the Southern District of New York where he is facing parallel criminal charges brought by the Department of Justice [read the Criminal Complaint] and civil charges brought by the Commodities Futures Trading Commission (CFTC) [read the CFTC Complaint].

Investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.

SEC Obtains Judgment Against Todd Zinkwich

On January 12, 2023, the U.S. District Court in Boston entered a final judgment by consent against Florida resident Todd Zinkwich, whom the SEC charged for engaging in a scheme to manipulate the market for numerous microcap stocks. The District Court had previously entered a partial judgment against Zinkwich, imposing multiple injunctions against him.

According to the SEC’s complaint, from at least June 2017 to March 2018, individuals and groups who held large quantities of microcap stocks paid Zinkwich hundreds of thousands of dollars to facilitate a scheme to drive up demand for the stocks of certain issuers. As alleged in the complaint, Zinkwich arranged for his associate Eric Landis to generate an appearance of increased demand for the stocks by placing thousands of trades between numerous accounts under Landis’s control, including accounts that Zinkwich controlled and gave Landis access to. Read More

SEC Charges Andrew DeFrancesco, Marlio Mauricio Diaz Cardona, Carlos Felipe Rezk, Nikola Faukovic, and Catherine DeFrancesco for their roles in a fraudulent scheme to mislead investors about Cool Holdings, Inc

On January 6, 2023, the Securities and Exchange Commission (“SEC”) announced charges against five individuals for their roles in a fraudulent scheme to mislead investors about Cool Holdings, Inc., a publicly-traded company (“Cool”).

The SEC alleges that, from at least March 2018 through June 2019 (the “Relevant Period”), Andrew DeFrancesco, the chairman of Cools’ board, devised and implemented the scheme with Marlio Mauricio Diaz Cardona, Cools’ chief executive officer; Carlos Felipe Rezk, Cools’ chief marketing officer; and Nikola Faukovic, one of DeFrancesco’s employees. According to the complaint, DeFrancesco, Diaz, and Rezk made false statements and omitted material information in Cools’ filings with the Commission, including about a critical business relationship, in order to mask Cools’ perilous financial condition and future prospects. Read More

OTC Markets Group Offers New Guidance for Submitting Attorney Letters

OTC Markets Group has published amendments to the Pink Basic Disclosure Guidelines. The amendments to the Guidelines have been updated to require additional information about ownership and to improve investor access to company disclosure by establishing best practices for publication of the disclosure documents and any accompanying Attorney Letters.

All quarterly and annual reports for the period ended December 31, 2022 or later must be prepared using the amended Guidelines (found here). Read More

SEC Wins $10.2 Million Judgment Against Justin W. Keener d/b/a JMJ Financial For Acting As Unregistered Penny Stock Dealer

On December 20, 2022, Judge Beth Bloom of the United States District Court for the Southern District of Florida entered a final judgment against Justin W. Keener d/b/a JMJ Financial.

The SEC’s complaint alleged that Keener failed to register as a securities dealer with the SEC, or to associate with a registered dealer, when he bought and sold billions of newly issued shares of penny stock from at least January 2015 through January 2018. Keener obtained the shares directly from issuers after converting debt securities known as convertible notes. By failing to register, Keener avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory inspections and oversight, financial responsibility requirements, and maintaining books and records. Read More

OTC Markets Group Publishes Guidance on Dilution Risk with Respect to OTCQX and OTCQB Applicants

OTC Markets published guidance with respect to Section 2.13(d) of the OTCQX Rules for U.S. Companies and Section 1.4(5) of the OTCQB Standards regarding the review of applications to the OTCQX and OTCQB markets.

The notice is intended to provide a better understanding of OTC Markets’ application review process and the underlying rationale behind it, to facilitate initial and ongoing compliance with the OTCQX Rules and the OTCQB Standards and support successful participation in these markets.

The notice also highlights a focus by OTC Markets on protecting investors by paying particular attention to dilution risks in the structure of new OTCQX and OTCQB Applicants, including refusing an application based on dilution risks if it determines that admission of the company’s securities would likely be detrimental to the interests of investors or requiring approved applicants involved in convertible financings to provide timely disclosures of the dilution risks. Read More

SEC Charges J.H. Darbie & Co with Anti-Money Laundering Violations

On December 12, 2022, the Securities and Exchange Commission (the “SEC”) charged J.H. Darbie & Co., Inc., a New York City-based brokerage firm, with failing to report suspicious activity related to transactions in tens of billions of shares of low-priced securities – or “penny stocks” – that were traded in over-the-counter markets.

To help detect potential securities law and money-laundering violations, broker-dealers are required to file Suspicious Activity Reports (SARs) describing suspicious transactions taking place through their firms.

According to the SEC’s complaint, from at least January 2018 to January 2020, J.H. Darbie had written anti-money laundering policies and procedures (“AML P&P”) requiring that J.H. Darbie file a SAR consistent with the BSA and its implementing regulations. But despite the policies and procedures, J.H. Darbie failed to investigate and file SARs for numerous suspicious transactions, even when the transactions raised red flags recognized in J.H Darbie’s written anti-money laundering policies and procedures and in regulatory guidance. Read More

Members of New Republican House Majority Seek to Rein in Gary Gensler

A week before the 2022 midterm elections, the ranking members of four important committees of the House of Representatives composed and jointly signed a letter to Gary Gensler, Chair of the Securities and Exchange Commission, demanding answers to a number of important questions. The ranking members—the most senior members of each committee from the minority party—were Jim Jordan (R-OH)) of the Committee on the Judiciary, Patrick McHenry (R-NC) of the Committee on Financial Services, James Comer (R-KY) of the Committee on Oversight and Reform, and Tom Emmer (R-MN) of the Subcommittee on Oversight and Investigations of the Committee on Financial Services.

Since the Republicans won the House in the midterms–though by only a few seats, not in the Red Wave they’d hoped for—those four congressmen will become chairmen of their committees in January 2023. They’ll wield more power and influence than they have in the past four years and perhaps find themselves in a position to achieve some of their goals. They’re likely to increase past efforts to prevent what they see as excessive regulation of our financial markets. As we shall see, they object to Gensler’s interest in regulation and rulemaking and would, for the most part, like to see him thwarted.

Charges Filed Against Eight Social Media Influencers in $100 Million Stock Manipulation Scheme Promoted on Discord and Twitter

On December 13, 2022, eight social media influencers were arrested and charged in the United States District Court for the Southern District of Texas Houston Division for a stock manipulation scheme that earned the group at least $114 million.

Charges in the Indictment are as follows:

FTX Founder Samuel Bankman-Fried Charged by the SEC and Criminally Indicted

Insider Trading

Today, December 13, 2022, the Securities and Exchange Commission (the “SEC”) charged Samuel Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (“FTX”), the crypto trading platform of which he was the CEO and co-founder. The SEC alleges that Bankman-Fried fraudulently raised billions of dollars from investors in FTX and misused funds belonging to FTX’s trading customers.

According to the SEC’s complaint, since at least May 2019, FTX, based in The Bahamas, raised more than $1.8 billion from equity investors, including approximately $1.1 billion from approximately 90 U.S.-based investors. In his representations to investors, Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets. Read More

Justin Bieber, Kevin Hart, Snoop Dogg, Madonna, Serena Williams, Jimmy Fallon, and More Are Being Sued for Promoting Bored Ape Yacht Club NFTs

A Class Action Complaint filed in the United States District Court Central District of California Western Division on December 8, 2022 names several A-list musicians, athletes and celebrities as defendants for promoting Bored Ape Yacht Club NFTs (“BAYC NTFs”), accusing them of generating billions of dollars in sales and re-sales by using misleading statements to artificially increase the interest in and price of the BAYC NFTs, causing loses to the investors that purchased the BAYC NFTs at the drastically inflated prices.

The Complaint further alleges that the Executives of Yuga Labs, the parent company of Bored Ape Yacht Club, failed to register the investments as securities with the Securities and Exchange Commission (the “SEC”) and the A-list celebrities failed to disclose their compensation for promoting the BAYC NFTs.

The celebrity promoters named in the complaint include Madonna Louise Ciccone, Justin Bieber, James “Jimmy” Fallon, Paris Hilton, Gwyneth Paltrow, Serena Williams, Austin Richard “Post Malone” Post, Thomas “Diplo” Pentz, Calvin “Snoop Dogg” Broadus, Jr., Kevin Hart, Alexander Pall, Andrew Taggart, Wardell Stephen Curry II, Nayvadius “Future” Wiburn Cash, Abel “The Weeknd” Tesfaye, Khaled Mohammed Khaled “DJ Khaled”, and Mike “Beeple” Winkelmann. Read More

Audits With Deficiencies Increased in 2021, According to New PCAOB Staff Report

December 8, 2022

A new Public Company Accounting Oversight Board (“PCAOB”) staff report published this month, found on the Staff Publications page on the PCAOB website, shows a year-over-year increase in the number of audits with deficiencies at audit firms inspected by the PCAOB in 2021.

The report titled “Staff Update and Preview of 2021 Inspection Observations” presents aggregate observations from the PCAOB’s inspections of 141 annually and triennially inspected audit firms in 2021.

According to the report, PCAOB staff expects approximately 33% of the audits reviewed will have one or more deficiencies that will be discussed in Part I.A of the individual audit firm’s inspection reports, up from 29% in 2020. Read More

Foreign Issuer Going Public Registration Statements and SEC Filings

The Securities and Exchange Commission (“SEC”) requires various forms of SEC registration statements covering the offer and sale of securities for both public and private companies. The eligibility and requirements of each SEC registration statement vary depending on the characteristics of the issuer and the securities offering. The requirements vary for US issuers and non-US companies.

Non-US companies may seek to file a US registration statement to go public and access the US public capital markets to raise capital in the US, use its securities as a currency for mergers and acquisitions or to list on a national securities exchange like NASDAQ or the NYSE.

Foreign issuers going public in the U.S. who qualify as Foreign Private Issuers can avail themselves of certain benefits, including less detailed disclosure and reporting requirements. When going public, a Foreign Issuer can offer and sell the same types of securities that a U.S. Issuer can offer and sell. Read More

David Stephens, Donald Danks, Jonathan Destler, and Robert Lazerus Indicted for Conducting an International Pump-and-Dump / Money Laundering Scheme Using Loop Industries Inc

On November 22, 2022, Canadian resident David Stephens and California residents Donald Danks, Jonathan Destler, and Robert Lazerus were charged in a federal grand jury indictment with securities fraud in connection with a pump-and-dump scheme, and Danks was additionally charged with money laundering, arising from their alleged manipulation of the market for shares of Quebec-based Loop Industries, Inc. (NASDAQ: LOOP). Read More

SEC Charges Unregistered Brokers, Jeffrey K. Galvani and Stuart A. Jeffery, for Facilitating $1.2 Billion in Penny Stock Trades

insider trading

On November 17, 2022, the Securities and Exchange Commission (the “SEC”) charged Jeffrey K. Galvani, Stuart A. Jeffery, and two New York-based entities they controlled with operating as unregistered broker-dealers that facilitated more than $1.2 billion of securities trading, primarily in penny stocks.

The SEC’s complaint alleges that Galvani and Jeffery – both registered brokers at a registered broker-dealer unconnected with this case (Crito Capital LLC, according to FINRA Broker Search) – created GEL Direct Trust, which they managed through its trustee, GEL Direct, LLC.

The GEL entities were not registered with the SEC as broker-dealers. Nonetheless, from 2019 through at least May 2022, Galvani and Jeffery, acting through the GEL entities, executed more than 19,000 trades of more than 300 billion shares of stock of more than 400 issuers (primarily penny stocks) on behalf of approximately 60 customers.

Trades facilitated by GEL generated more than $1.2 billion of trading proceeds for its customers, from which the defendants allegedly received at least $12 million in transaction-based and other compensation. Read More

Class Action Lawsuit filed against Tom Brady, Stephen Curry and other Athletes and Celebrities that Promoted FTX

By now, most people have heard about the epic collapse of FTX. The crypto exchange founded by Sam Bankman-Fried (“SBF”) was once the 3rd largest crypto exchange, with an estimated valuation of $32 billion, and is now in Bankruptcy, facing a flurry of allegations of illegal activities and misappropriation of customer funds.

It all began on November 2nd when Coindesk reported that a leaked balance sheet showed that Alameda Research (SBF’s trading firm for FTX) was full of FTX – specifically, the FTT token issued by the exchange, meaning SBF’s trading giant Alameda rested on a foundation primarily made up of a coin that its sister company invented, not an independent asset like a fiat currency or another crypto. Further, it showed that Alameda held far more of the tokens than traded on the market, suggesting its stake would be hard to liquidate at current prices.

Then, on November 6th, Binance CEO Changpeng “CZ” Zhao said his company, the largest crypto exchange, planned to sell its FTT holdings, which dated back to an early investment by Binance in FTX. Read More

Joseph Padilla Arrested and Charged in $7 Million Securities Fraud

On August 25, 2022, Joseph Padilla was arrested at the San Diego International Airport in connection with his alleged involvement in a sophisticated securities fraud scheme that generated over $7 million in illicit proceeds.

Padilla, 53, of Carlsbad, Calif., was charged in the United States District Court District of Massachusetts (Boston) with one count of securities fraud. The charge provides for a sentence of up to 20 years in prison, three years of supervised release, and a fine of $5 million.

According to the Complaint, between February and April 2021, Padilla participated in a lucrative pump-and-dump fraud scheme involving the shares of Charlestowne Premium Beverages Inc., a thinly-traded microcap company that traded under the stock ticker symbol FPWM.

The Complaint alleges that Padilla (i) concealed control by one or more persons of a large portion of Charlestowne stock (including nearly 97% of the float), (ii) orchestrated the fraudulent manipulation of Charlestowne stock in order to inflate its price through his association with five traders and cooperating witness #2 (CW-2) and, (iii) orchestrated the dump of Charlestowne stock through Valor Capital, a broker-dealer in the Cayman Islands netting at least $7 million in illicit proceeds. Read More

SEC Charges Incarcerated Felon (Syed Arham Arbab) and Five Friends in $2 Million Fraud Scheme

On October 31, 2022, the Securities and Exchange Commission charged six individuals, including a federal inmate, for conducting a freeriding scheme that defrauded multiple broker-dealers.

The SEC’s complaint alleges that from May 2019 to early January 2021, Syed Arham Arbab, 25, and five others – Tomas Javier Jimenez, 24, of Dunwoody, Georgia; Blake Douglas McKinney, 26, of Plymouth, Michigan; Mushfiqur Rahman, 21, of Jamaica, New York; John Ryan Shows, 25, of Atlanta, Georgia; and William Carl Spagnoli, 24, of Alpharetta, Georgia – made more than $2 million in bogus deposits from empty or underfunded bank accounts into various brokerage accounts to deceive broker-dealers into providing instant deposit credit for online securities trading. Read More

What Is SEC Periodic Reporting?

PUBLIC COMPANY SEC REPORTING LAWYERS

Once the staff of the Securities and Exchange Commission (“SEC”) declares a company’s registration statement on Form S-1 effective under the Securities Act of 1933, as amended (the “1933 Act”), the company may offer and sell the registered securities covered by the Form S-1.

Once the registration statement is effective, the company becomes subject to the SEC’s periodic reporting requirements. Companies can also become subject to the SEC’s periodic reporting requirements by filing a Form 10 Registration Statement. The SEC reporting requirements mandate that the company file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on an ongoing basis. The company’s management must certify financial and certain other information contained in these periodic filings and reports. Read More

SEC Registration Statements And Direct Public Offerings Q & A

Registration Statement Attorneys-Direct Public Offering Lawyers

SEC Registration Statements And Direct Public Offerings Q & A

Filing a Form S-1 registration statement is the most efficient and reliable method for a private company to obtain public company status. Using a Form S-1 registration statement, companies provide transparency to investors and avoid the risks of reverse merger transactions. Any issuer can use Form S-1. This blog post addresses some of the most common questions we are asked about Form S-1 and SEC registration statements during the going public process.
Read More

Nasdaq puts the brakes on IPOs of at least 4 small Chinese companies while it probes suspicious market activity

According to various internet reports, Nasdaq Inc has halted the initial public offerings (IPOs) of at least four small Chinese companies while it investigates short-lived stock rallies of other recent Chinese IPOs after going public.

Several small Chinese companies that raised small amounts, typically $50 million or less, in their IPOs, saw their stock prices rise 2,000% – 32,000% in their debuts, only to crash in the days that followed, harming investors who chased the stocks at its higher prices.

This penny stock-style pump-and-dump action allegedly has NASDAQ officials concerned about manipulative trading, and until the causes of the price action can be determined, similar Chinese IPOs are on hold. Read More

Five Russians and Two Oil Traders Charged in Global Sanctions Evasion and Money Laundering Scheme

A 12-count indictment was unsealed on October 19, 2022, in federal court in Brooklyn, New York, charging five Russian nationals, Yury Orekhov, Artem Uss, Svetlana Kuzurgasheva, also known as “Lana Neumann,” Timofey Telegin and Sergey Tulyakov with various charges related to a global procurement, smuggling and money laundering network.

Also charged were Juan Fernando Serrano Ponce, also known as “Juanfe Serrano” and Juan Carlos Soto, who brokered illicit oil deals for Petroleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned oil company, as part of the scheme.

On October 17, 2022, Orekhov was arrested in Germany and Uss was arrested in Italy, both at the request of the United States, and will undergo extradition proceedings.

According to the Indictment, the Defendants obtained military technology from U.S. Companies, smuggled millions of barrels of oil and laundered tens of millions of dollars for Russian Oligarchs, Sanctioned Entities and the world’s largest energy conglomerate based in Beijing, People’s Republic of China. Read More

SEC Defendant and FBI Fugitive Justin Costello Arrested

On October 4, 2022, SEC Defendant and FBI fugitive Justin Costello was arrested by an FBI SWAT team. Costello had been on the run from authorities as a fugitive since September 29th after failing to surrender to authorities after being charged with 22 counts of wire fraud and 3 counts of securities fraud as part of $35 million financial fraud.

According to the criminal Indictment, Costello, a 42-year-old resident of La Jolla, California, (i) diverted at least $3.6 million to himself from his company Pacific Banking Corp, which provided banking services to three marijuana companies, (ii) cost more than 7,500 investors about $25 million through pump-and-dump schemes fueled by false statements, (iii) scammed $6 million from 29 investors who invested directly with Costello based on false statements made to those investors about his background and experience, and (iv) misappropriated $42,000 to pay for his wedding with Katrina Rosseini, which included a Jame Bond-themed cake and ice sculptures. Read More

OTC Markets Group Reflects on Amended Rule 15c2-11

The last week of September marked the one-year anniversary of the compliance date for the Securities and Exchange Commission (“SEC”) amendments to Securities and Exchange Act Rule 15c2-11, which regulates the quotation of over-the-counter securities. As we shall see, OTC Markets Group, whose issuer-clients are directly affected by the amended rule, decided to commemorate the occasion with a webinar called “One Year On: The Impact & Outcomes of SEC Rule 15c2-11.”

An overhaul was long overdue; the rule had last been altered in 1991, more than 30 years ago. Since then, the ways in which most people manage their investments have changed enormously. Now they can do research on the internet, and buy and sell through online brokers, many of whom will charge them charge them no SECs or fees. They can communicate with their fellow investors on a large number of social media forums. All of that made the need for amended Rule 15c2-11 urgent.

Amended SEC Rule 15c2-11 took quite a while to make it to prime time. First, a concept release titled “Publication or Submission of Quotations Without Specified Information” was published by the SEC on September 25, 2019. Concept releases are relatively rare—none has appeared since the one under discussion here—and their purpose is to “solicit the public’s views on securities issues so that we can better evaluate the need for future rulemaking.” The SEC got what it wanted: though the deadline for comment was December 30, 2019, members of the public, market participants, and even politicians continued to send letters until July 26, 2022. Read More

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