Regulation A Not Giving Warm Fuzzies to the SEC
In April of this year, NASDAQ submitted a proposal related to the Regulation A Offering Exemption which would require any Company listing on NASDAQ in connection with an offering under Tier 2 of Regulation A of the amended Securities Act of 1933, (the “Securities Act”), to have a minimum operating history of two years at the time of approval of its initial listing application.
Posted by Brenda Hamilton
Nasdaq’s Regulation A Proposal
The Nasdaq Stock Market LLC (“Nasdaq”) proposed a rule that would impose listing requirements for Regulation A companies pursuant to pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 19b-4 thereunder, to adopt a new initial listing requirement for any company applying to list on Nasdaq in connection with an offering under Regulation A of the Securities Act of 1933 (“Securities Act”).
On June 28, 2019, the SEC approved a change to Nasdaq Listing Rule 5210 to impose listing requirements for companies conducting offerings under Regulation A of the Securities Act of 1933 (the “Securities Act”). The amendment will take effect on July 28, 2019.
We’ve written several times about reverse mergers and Operation Shell Expel. Shell Expel is one of the Securities and Exchange Commission’s most successful enforcement initiatives to combat the use of shell companies for reverse mergers. Its object is to render useless and worthless dormant shell companies that might otherwise be hijacked, used in reverse mergers, and ultimately pumped and dumped. These companies are a real problem for the agency. If an issuer that’s an SEC registrant is abandoned by management, after a couple of years the SEC’s Enforcement Division can bring an administrative proceeding to revoke registration. Most targeted companies find they can’t really object, and when an initial order becomes effective, the public shell company becomes a private entity.
The SEC charged on May 9, 2019, Lloyd Schuman and Dane Janes for insider trading and for repeatedly traded and tipped on confidential information that they obtained through their respective employers.
The SEC’s complaint, filed in the U.S. District Court for the Western District of Tennessee, alleges that Lloyd Schuman, of Cordova, Tennessee, learned that his employer, Verso Corporation, had confidential plans to acquire privately-held NewPage Holdings Inc. According to the SEC’s Complaint, Lloyd Schuman purchased Verso shares before Verso publicly announced the acquisition. Lloyd Schuman also allegedly tipped a relative, who also purchased Verso shares before the public announcement. Immediately after the announcement, Lloyd Schuman sold all of his Verso shares realizing more than $107,000 in profits. His relative also sold his Verso shares, realizing more than $2,500 in profits. Read More
On May 9,2019, the SEC charged Danny Williams, the former President of Quality Companies, LLC, a former subsidiary of Indianapolis-based Celadon Group Inc., with an accounting fraud that allowed Celadon to avoid disclosing substantial losses and misrepresent its financial condition.
According to the SEC’s complaint, between mid-2016 and April 2017, Danny Williams, engaged in a scheme to sell used trucks at inflated prices to third parties, in return for buying trucks at comparably inflated prices. This scheme allegedly enabled Celadon to avoid recording losses on the truck sales. The complaint further alleges that, as a result of the scheme, Celadon overstated its pre-tax and net income and earnings per share in its annual report for the period ending June 30, 2016, and in its subsequent public filings for the first two fiscal quarters of 2017. According to the complaint, Danny Williams,aided and abetted Celadon’s violations, and lied to Celadon’s Board of Directors and auditor about the transactions with the third-party dealers. Read More
On May 3, 2019, a federal district court entered a final consent judgment against Rocco Roveccio, a broker who was charged with defrauding customers by making unsuitable and unauthorized trades and churning customers’ accounts, which enriched the broker at the customers’ expense.
The SEC’s complaint, filed in the Southern District of New York, alleges that from July 2012 to October 2014, Rocco Roveccio, a New Jersey resident, recommended to seven customers a pattern of high-cost, in-and-out trading without any reasonable basis to believe that his customers could make a profit. Rocco Roveccio’s recommendations resulted in losses for the customers and gains for Rocco Roveccio. Rocco Roveccio allegedly also lied to his customers about the potential for the accounts to profit. The complaint also alleges that Rocco Roveccio engaged in unauthorized trading and churning. Read More
On April 29,2019, the SEC charged James Siniscalchi, a New York City man with continuing a previously charged scheme, stealing millions of dollars from investors who were allegedly falsely promised their funds would be used for the purchase and resale of tickets to Broadway shows and a sporting event.
According to the SEC’s complaint, James Siniscalchi, Chief Compliance Officer of a company that claimed to have special access to profitable and highly sought-after event tickets, knowingly misused investor money to benefit himself and his extended family. The SEC alleges that James Siniscalchi and his business partners rebranded businesses formerly run by his cousin, Joseph Meli, who ultimately settled to SEC fraud charges and pled guilty to securities fraud in a parallel criminal action, and that this rebranding was done with Joseph Meli’s knowledge and help. Read More
The SEC announced on April 29,2019, the entry of an emergency court order freezing assets related to alleged insider trading that yielded approximately $2.5 million in profits in connection with the April 12, 2019 announcement that oil-and-gas conglomerate Chevron Corporation intended to acquire Anadarko Petroleum Corporation.
The SEC’s complaint, which was filed in U.S. District Court for the Southern District of New York, identifies a series of suspicious transactions prior to the announcement that Chevron intends to acquire all of Anadarko’s outstanding shares for $65 per share in cash and stock, representing a 38 percent premium over Anadarko’s pre-announcement closing price. The traders, who are currently unknown, allegedly used foreign brokerage accounts in the United Kingdom and Cyprus to purchase out-of-the-money call options through U.S.-based brokerage firms and on U.S.-based exchanges in the days leading up to the announcement. Following the acquisition announcement, Anadarko’s shares rose significantly and the brokerage account customers profited by either selling many of the option contracts at a profit or exercising the options to acquire large positions of Anadarko stock at steep discounts. The court’s order freezes the proceeds related to the foreign accounts’ trading. Read More
Benefits of Regulation A+ Amendments
On December 19, 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to Regulation A informally referred to as Regulation A+. The amendment allows companies that are subject to SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), to conduct securities offerings using Regulation A+. The amendments to Regulation A were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which became law in May 2018.
As discussed in more detail below, the amendments offer benefits to smaller reporting companies not listed on the New York Stock Exchange (“NYSE”) or NASDAQ and companies subject to SEC reporting requirements that do not qualify to, use Form S-3 or F-3 shelf registration statements. Read More
On April 26, 2019, the SEC charged Christopher Dougherty and several entities he controlled, with operating a Ponzi scheme that defrauded his investment advisory clients out of $7 million. The San Diego District Attorney’s Office separately announced criminal charges related to the same conduct.
The SEC alleges that Christopher Dougherty provided investment advice to school district employees, hospital employees, veterans, and neighbors, most of whom were unsophisticated investors and trusted Christopher Dougherty completely. Read More