by T. GormanPosted on Posted in SECActions

New Chairman Gary Gensler began building a staff for his office. Mr. Gensler also appointed Paul Weiss partner Alex Oh as Director of the Division of Enforcement.

Chairman Gensler now faces the daunting challenges presented by a host of weighty issues on the Commission’s agenda. One little recognized difficulty is the PACOB, the SOX created accounting board. Suit was filed alleging wrongful termination and violations of the D.C. Human Rights Act by dismissed Chief Risk Officer Sue Lee against the Board and its Chairman, William Duhnke. It alleges discriminatory conduct by Mr. Dahnke in terminating Ms. Lee who is of Chinese national origin. Lee v. PCAOB. Civil Action No. 1:21-cv-01006 (D.D.C. Filed April 12, 2021).

In the wake of the suit, members of the former oversight board of the PCAOB urged Chairman Gensler to reform the accounting board, according to an article published by Thomson Reuters on April 21, 2021, written by Soyoung Ho. The former advisory board was disbanded by then SEC Chairman Jay Clayton. He also appointed Mr. Dahnke, a former Republican Congressional staff member and each of other current board members. Ms. Lee is affiliated with the Democratic Party.

Be careful, be safe this week

SEC

Whistleblowers: The agency awarded $3.2 million to a whistleblower last week, according to an April 23, 2021 press release. The person provided subject matter expertise and information to the Commission. An award of $100,000 was to a second person for significant information and ongoing assistance.

Webcast: The New York and San Francisco Regional Offices of the agency will co-host a webcast exploring the experiences of tech entrepreneurs of color when capital raising. The program will be held on April 27, 2021 from 4 to 5:30 p.m. ET.

Remarks: Commissioner Elad L. Roismam delivered remarks titled An Honest Conversation about ESG Regulation, raising certain questions regarding that type of regulation (here).

Fully paid lending: The staff issued a no-action letter regarding broker-dealer customer protection under Exchange Act Rule 15c3-3 on April 16, 2021. The letter states that the staff will not recommend an enforcement action regarding certain lending practices for six months to permit broker-dealers to come into full compliance with the Rule.

ESG: The Division of Examinations issued a Risk Alert, Review of ESG Investing, April 9, 2021 (here). The Alert highlights observations by the Division based on inspections involving advisers implementing ESG investing programs.

SEC Enforcement – Filed and Settled Actions

Last week the Commission filed 3 civil injunctive actions and no administrative proceedings, exclusive of tag-along and other similar proceedings.

Offering fraud: SEC v. Jones, Civil Action No. 4:21-cv-00267 (W.D. Mo. April 22, 2021) is an action which names as a defendant attorney Corbyn W. Jones. The complaint alleges that over a period of about one year, beginning in February 2019, Mr. Jones raised over $650,000 from investors that was to be used by his firm for operating expenses. In fact, portions of the investor cash were diverted to his personal use. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendant resolved the action, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, he consented to the entry of an officer and director bar and agreed to pay disgorgement of $82,733, prejudgment interest of $3,950 and a penalty of $50,000. See Lit. Rel. No. 25079 (April 22, 2021).

Misappropriation: SEC v. Burroughs, Civil Action No. 3:19-cv-01913 (D. Conn.) is a previously filed action against Lester Burroughs. The complaint alleged a fraudulent scheme in which Defendant, an investment adviser, sold fictitious financial products to investors and misappropriated the proceeds. In the parallel criminal action Mr. Burroughs pleaded guilty to one count of wire fraud and was sentenced to serve 33 months in prison. In the Commission’s action the Court entered a final judgment by consent that imposes a permanent injunction based on Advisers Act Sections 206(1) & (2). It also directs Mr. Burroughs to pay disgorgement of $560,000 which is deemed satisfied by the criminal restitution order. The Commission previously barred Defendant from the securities business. See Lit. Rel. No. 25078 (April 21, 2021).

Binary options: SEC v. Spot Tech House, Ltd., Civil Action No. 2:21-cv-00632 (D. Nev. Filed April 16, 2021). The action names as defendants the company, Malhaz Pinhas Patarkazishville and Ran Amiran. Each of the Defendants is based in Israel. Over a five-year period, beginning in 2012, Defendants sold binary options to investors. The scheme was structured so that on one side of each trade was a “partner” of the firm, a person recruited by the company. The payout terms were structured to favor the partner. Investors were not aware of these terms. As a result of the structure, investors lost most of the time. The complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b) and 20(a). The case is pending. See Lit. Rel. No. 25073 (April 19, 2021).

Offering fraud: SEC v. Cheng, Civil Action No. 1:21-cv-3456 (S.D.N.Y. Filed April 20, 2021) names as a defendant Sheng-Wen Cheng. The complaint alleges that over a period of about one year, beginning in August 2017, Defendant raised about $404,000 from at least 5 investors who purchased shares in two controlled entities. Investors were told that Defendant had received an investment of $30 million from a single investor and that Defendant had previously created a successful startup firm. The funds were to be used to create a blockchain-based Peer-to-Peer lending market platform. In fact, much of the investor cash was misappropriated. The complaint alleges violation of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was filed by the Manhattan U.S. Attorney’s Office. See Lit. Rel. No. 25076 (April 2, 2021).

Unauthorized trading: SEC v. Dang, Civil Action No. 3:20-cv-01353 (D. Conn.) is a previously filed action which named as a defendant Hai Khoa Dang, an unregistered investment adviser. The complaint alleges that Defendant Hai Khoa Dang had complete control over the investment accounts of a couple. He used that control to largely deplete their portfolio by engaging in risky trading rather than the conservative program with a $250,000 reserve he promised. The risky and unauthorized trading in which Defendant engaged caused the account value to drop by over $2 million and largely wiped out the investments of the couple. The Court entered a final judgment, enjoining Defendant from future violations of Advisers Act Sections 206(1) & (2) and directing him to pay $7,249 in disgorgement and prejudgment interest and a $2.2 million civil penalty. See Lit. Rel. No. 25074 (April 20, 2021).

Manipulation: SEC v. Tobin, Civil Action No. 1:18-cv-12451 (D. Mass.) is a previously filed action which names as defendants Morrie Tobin and two public companies, Environmental Packaging Technologies Holdings, Inc. and CURE Pharmaceutical Holding Corporation. Also named as defendants were attorneys Milan Patel and Mathew Ledvine. The complaint alleges a pump-and-dump market manipulation in which the identity of Mr. Tobin and his ownership of the shares involved was concealed by the other Defendants who deposited the stock of the two firms in accounts of nominees at offshore entities. Promoters were then paid to manipulate the shares. Defendants Tobin, Patel and Ledvina resolved the charges, consenting to the entry of final judgments enjoining them from future violations of Securities Act Sections 5(a), 5(c) and 17(a)(1) & (3) and Exchange Act Section 10(b). Defendants also consented to the entry of penny stock bars. See Lit. Rel. No. 25072 (April 19, 2021).

Australia

Remarks: Karen Chester, Deputy Chair, Australian Securities & Futures Commission, delivered remarks on April 22, 2021 to the Australian Institutional Investor Roundtable. Her remarks focused on a regulatory update regarding the recent work of the Commission (here).

Hong Kong

Remarks: Tim Lui, Chairman, Securities and Futures Commission, delivered remarks at the National Security Education Day on April 15, 2021titled Safeguarding Financial Stability. The Chairman’s remarks built on the idea that financial security is an integral component of national Security (here).

Singapore

Report: The Monetary Authority of Singapore published its Monetary Policy Statement for April on April 14, 2021 (here).

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by T. GormanPosted on Posted in SECActions

SPAC IPOs are all the rage – at least until now. During the first quarter of this year, for example, there were 298 IPOs involving SPACs. That compares to just 91 traditional IPOs during the same period, according to a report by accounting firm PWC (here). In contrast, during 2020 there were 487 traditional IPOs while only 341 involved SPACs. In the fourth quarter of last year, however, the number of IPOs involving SPACs began to rapidly climb, according to the numbers PWC compiled.

Now the number of IPOs has declined, particularly those involving SPACs, according to a report published by CNBC on April 22, 2021 on its website (here). The reason is unclear. It may be that the Commission is focusing on SPACs because of the use of projections in the offering materials or for other matters. SPACs are, of course, what at one time was called “blank check companies” – shells selling shares. Under that label there was no rush to purchase shares. But the new SPAC tag seems to have changed all of that.

As the number of SPAC IPOs climbed to a new high at the end of 1Q21, the Division of Corporation Finance issued a Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies, dated March 31, 2021 (here).

The Corp Fin release is divided into three segments focusing first on the limitations of the entities and then their obligations under the Exchange Act and exchange listing standards, all of which require significant preparation, particularly for private companies as consideration of the points in the release demonstrate.

Restrictions: Restrictions apply to shell companies but not others. These include, for example, a requirement that financial statements for the acquired business be filed within four business days of deal completion – the typical 71 day extension is not available. Similarly, the combined company cannot incorporate Exchange Act Reports into an S-1 registration statement for three years. The combined company will also not be eligible to use Form S- 8 for the registration of compensatory securities offering until at least 60 days after the firm has filed current Form 10information. And, for three-years the new entity will be an “ineligible issuer” under Securities Act Rule 405, meaning it cannot, among other things, be a seasoned issuer, use a free writing prospectus or rely on the safe harbor of Rule 163A from Securities Act Section 5(c) for pre-filing communications.

Exchange Act obligations: The Act imposes a number of obligations on the SPAC before the business combination. Those include the books and records obligations as well as the internal control requirements. The former dictate that the firm maintain books, records and accounts in reasonable detail that “accurately and fairly reflect the issuer’s transactions and disposition of its assets,” according to the release. The control requirement mandates that the entity maintain a system of internal accounting controls sufficient to provide a reasonable assurance about management’s control, responsibility and authority over the issuer’s assets.

The Act also imposes other obligations on the firm. Those include annual or interim reporting and certain disclosure requirements. Tin addition, new accounting standards must be adopted. It is essential that the new firm have the necessary expertise to implement these requirements.

Listing standards: If the merged entity is listed on a national securities exchange, it will need to be prepared to comply with the standards of the New York Stock Exchange LLC or The NASDAQ Stock Market LLC. Equally important is the requirement that the standards be maintained. Otherwise, the new firm will face delisting.

The qualitative standards in the exchange requirements dictate that the company have sufficient public float, an investor based and sufficient trading interest to ensure depth and liquidity to promote fair and orderly markets. These requirements also focus on items such as the number of round lot holders, publicly held shares, the market value of the shares and the price.

The qualitative standards incorporated into listing standards are concerned with corporate governance. The requirements typically mandate that a majority of the directors be independent, that there be an independent audit committee that includes directors with specialized expertise and that independent directors oversee executive compensation and the director nominating process. There must also be a code of conduct applicable to all directors, officers and employees.

Finally, if the firm fails to satisfy the listing standards it may receive a notice of non-compliance. The company will then have to file a report on Form 8-K. Non-compliance with the notice may present a material risk which requires additional disclosure.

Comment

Since the SPAC is a shell or blank check company, and the merger partner is often a private firm, the Release focuses on the question of preparation for the significant limitations and obligations the new issuer will face. Those limitations and obligations require significant preparation. It is essential that those involved in the transactions assess these points. At the same time, those purchasing shares would do well to consider the significant obligations imposed on the new firm as they consider projections for its future and they consider purchasing shares.

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