by T. GormanPosted on Posted in SECActions

The Commission has continued to focus on updating and improving existing rules and disclosures while adding new ones in recent weeks. Climate, ESG and SPACs have been the focus of those efforts along with cybersecurity and select others. The agenda for the agency promises more of the same. By the time proposed new Commissioners Jamie Lizauage and Mark Uyeda are confirmed by the Senate, they will clearly be presented with a full plate.

Be careful, be safe this week

SEC Enforcement – Filed and settled actions

Last week the Commission filed 2 civil injunctive actions and no administrative actions, exclusive of 12j, tag-a-long and other similar proceeding.

Offering fraud: SEC v. Bunevacz, Civil Action No. 2:22-cv-02284 (C.D. CA. Filed April 5, 2022) names as defendants: David Bunevacz, who controls Caesarbrfutus LLC and CB Holdings and he pleaded guilty to two felony securities charges based on California law in 2017; Mary Hayca Bunevacz is the step daughter of Mr. Bunevacz; Caesarbrutus and CB Holding Group Corp. are firms controlled by Mr. Bunevacz; and Brutus California Ventures Corp. is controlled by Ms. Bunevacz and is co-issuer with CB Holdings. Over a two-year period, beginning in 2017, Defendant Bunevacz and the two entities he controls, raised over $32 million from at least 40 investors. Solicited investors were told that Mr. Buevacz was selling cannabis products and vape pens containing oil infused with Cannabidiol. The profits from the sale of these products were to be shared with Casearbrutus and CB Holdings. In making the solicitations Mr. Bunevacz did not disclose his criminal convictions. Brutus California was a co-issuer with CB Holdings. Both Ms. Hayca and that firm participated in the solicitations. In fact, the offerings were of unregistered securities and the entity Defendants had no actual business – the transactions were shams and the money was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25356 (April 5, 2022).

Manipulation: SEC v. Arborne Wireless Network, Civil Action No. 21-civ-01772 (S.D.N.Y.) is a previously filed action in which the Court entered final judgements against defendants Chrysilios Chrysiliou and Panagiotis Bolovis for their roles in the manipulation of Airborne’s shares. The complaint alleged that Kalistratis “Kelly” Kabilafkas secretly purchased virtually all of the outstanding shares of Airborne and distributed millions of them among himself and his associates. The other defendants arranged for shares to be deposited in their accounts and convinced transfer agents to put them in their names and clear the securities for sale in the public markets. The shares were then sold in the public while they were being promoted. Defendants Chrysiliou and Bolovis made about $1.3 and $38 million respectively from the sales. Those two Defendant each consented to the entry of permanent injunctions based on Securities Act Section 17(a) and Exchange Act Section 10(b). In addition, Defendant Chrysiliou will pay $739,630 in disgorgement plus $112,612 in prejudgment interest and a $75,0000 penalty. Mr. Bolovis will pay $4,218 in disgorgement, $789 in prejudgment interest and a $50,0000 penalty. A penny stock bar was imposed as to each Defendant. See Lit. Rel. No. 25355 (April 5, 2022).

Sham tender offer: SEC v. Ten Cate, Civil Action No. 22-cv-2787 (S.D.N.Y. Filed April 5, 2022) is an action which names as defendant, Melville Peter Ten Cate, a U.S. citizen residing in Europe who serves as the Chief Technology Officer of Xcalibur Aerospace, Ltd. The firm is a U.K entity that purports to be engaged in the aerospace industry. Defendant and Xcalibur made offers to acquire Textron, Inc. a NYSE listed firm engaged in the aircraft, defense and industrial business. On November 9, 2021, Defendant placed an advertisement in the New York Times announcing Xcalibur’s offer for the common shares of Textron at $60.50 per share or a 56% premium to market would expire shortly. The advertisement followed earlier correspondence about the proposal. The transaction would have required about $11 billion to complete. Later Defendant forwarded what were claimed to be financial statements for Xcalibur. About one year later Defendant again contacted Textron, forwarding what purported to be financial information regarding Xcalibur and again suggesting a purchase of all Textron shares. The proposal was a sham — neither Defendant Ten Cate nor Xcalibur had the funds to complete the transaction. Nevertheless, Textron shares increased in price by about 15%. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is pending.

Division of Examinations exam priorities 2022

The Division of Examinations announced its 2022 Exam Priorities in a release dated March 30, 2022 (here). The 2022 priorities are, as usual, a blend of traditional considerations from past programs mixed with new and at times emerging issues. Each of the areas are grounded in the four pillars of the program: promoting compliance; preventing fraud; identifying and monitoring risks; and informing policy. During the exam the Division will prioritize “several significant focus areas that pose unique emerging risks to investor and the markets . . .” The program begins with what are called “Significant Focus Areas” which are then divided into several specialty areas. The five focus areas are common to the overall program. They are: 1) Private Funds; 2) ESG or Environmental, Social and Governance Investing; 3) Standards of Conduct; 4) Information Security and Operational Resiliency; and 5) Emerging Technologies and Crypto Assets. The Exam Priorities are a valuable guide to key issues facing regulated entities. In the end, the focus areas are not just a check list of important points but facets of properly installed and implemented compliance system.

FinCEN

Remarks: Himamauli Das, Acting Director, Financial Crimes Network, delivered remarks at the FDIC-FinCEN Digital Identity Tech Sprint Demonstration Day (April 4, 2022). His remarks focused on the importance of digital identity to the mission of the agency (here).

U.K.

Release: The Financial Conduct Authority announcing a new three-year strategy designed to improve outcomes on April 7, 2022. The approach focuses on outcomes to prevent serious harm, set higher standards and promote competition. The regulator established 80 new rules designed to shut down problem firms (here).

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by T. GormanPosted on Posted in SECActions

SPACs have become a very popular investment vehicle. In many respects they are the vehicle of choice for IPOs these days. One of the reasons SPACs may popular – perhaps the IPO vehicle of choice – is their simplicity compared to the traditional IPO which often has a lengthy and complex set of offering papers that are costly to assemble.

At the same time regulators such as SEC Chair Gensler have repeatedly cautioned that simplicity comes at a price. SPACS often come with little disclosure, potential conflicts of interests and significant risks, particularly for main street investors who may not see the potential for loss lurking behind a name that sounds like the investment is tied to a crypto asset or some gamified investment opportunity just too good to passed up.

The Commission has proposed new rules to govern SPACs, focused on investor protection (here). The proposals include a mix of provisions which would enhance disclosure regarding the SPAC and its sponsor and conflicts and the de-SPAC deals while adding sections which would increase accountability. The proposals would:

1) Add disclosures about SPAC sponsors, conflicts of interests and the potential dilution of investor interest;

2) Those who are underwriters of the original transaction would also be deemed to be underwrites in any de-SPAC transaction under the proposals, adding accountability to the deals;

3) Another proposal centers on business combinations involving a reporting shell company and another entity not a shell company which, under the proposals, would be considered a sale of securities to the reporting shell company shareholders for purposes of the Securities Act, again adding accountability;

4) There will be a better alignment of the financial statements of private firms in transactions involving shell companies with those required in registration statements for IPOs under the proposals;

5) The proposals also seek to increase the reliability of projections and give investors a better opportunity to evaluate the projections by enhancing disclosure of the underlying basis for the projections; and

6) SPACs will not be deemed Investment Companies under the 1940 Act (or inadvertent investment companies) by complying with certain conditions which include: a) maintaining assets comprised only of cash, government securities and certain money market funds; b) seeking to complete a de-SPAC deal after which the surviving entity will be primarily engaged in the business of the target firm; and c) entering into an agreement with a target company to engage in a de-SPAC transaction within 18 months after its initial IPO and complete its initial public offering and de-SPAC deal within 24 months.

Overall, the proposed rules would enhance the disclosures for investors and perhaps the overall fairness of de-SPAC deals. While the basket of proposals will improve the overall investor protections, the they will still in fact be added to a blank check company controlled by the sponsors. Whether the proposals will furnish investors sufficient information to actually evaluate the transactions is at best unclear. Stated differently, is disclosure enough here to effectively protect main street investor? Doubtful at best.