by T. GormanPosted on Posted in SECActions

Actions centered on offering frauds are one of the most prevalent types of enforcement cases brought by the Commission. They come in all forms and types. The interests being sold to investors range from securities to tickets to hard to get Broadway plays. The common denominator, of course, is that there is something about the solicitation that draws the investor in, appealing to them in a way that makes the offer “to good to be true” in a manner that makes it a “got to have” item. The Commission’s most recent case in this area is not difficult to understand – it offers the opportunity to invest in the cannabis industry. SEC v. Newell, Civil Action No. 5:24-cv-01524 (C.D.Ca. Filed July 22, 2024).

Named as defendants in the case are Robert Newell and Black Hawk Funding, Inc. Mr. Newell is the founder of Black Hawk and served as its CEO during the time period here. The company had a dual headquarters in Coeur d’Alene, Idaho and La Quinta, California. The firm managed various private funds and assets.

Defendants began business operations in 2011. They made loans for real estate transactions. Black Hawk, controlled by Mr. Newell, managed, or had an ownership interest in, dozens of affiliated entities. The firm served as an investment adviser. The business struggled.

In 2016 Mr. Newell decided to shift the business approach for Black Hawk. Moving forward the firm and some of its entities would invest in cannabis and sell shares to investors. Over the next three years, investors were offered interests in three private funds invested in the cannabis industry. There was the potential for 10% returns.

During the period over $37 million was raised from over 200 investors who understood their money would be used for the benefit of the funds. Not so. Much of the money was diverted to the personal use of Mr. Newell. Portions were diverted to make Ponzi type payments. Other segments were diverted to the personal interests of Mr. Newell who misappropriated part of the investor funds while comingling other segments with other funds. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b) as well as Advisers Act Sections 206(1), 206(2) and 206(4).

Black Hawk settled with the Commission. The firm consented to the entry of permanent injunctions based on the Sections cited in the complaint. The firm also agreed not to participate in the issuance, purchase, offer, or sale of any security. See Lit. Rel. No. 26053 (July 23, 2024).

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by T. GormanPosted on Posted in SECActions

A special purpose acquisition company or SPAC is typically formed with the purpose of effecting a merger. Before SPACs were known as such – they are a relatively recent phenomenon — essentially the same vehicle was known as blank check company. The reason was because they had no business. – the vehicle was empty or blank. Stated differently, they were typically just empty shells with listed securities waiting to engage in a merger transaction with another firm and then move forward as a public company. Since transactions with SPACs often lack the kind of protections for investors that are available in a standard merger, the entities have come under scrutiny from the Commission.

In February 2021, Patrick Orlando, on behalf of SPAC A had discussions with Trump Media and Technology Group Corp. regarding a merger. During the Spring of 2021 Mr. Orlando planned, and eventually completed, a deal with Trump Media for Digital World Acquisition Corp. or DWAC, an entity of which he was CEO and controlled.

Later in the year Mr. Orlando executed Forms S-1 which represented that DWAC had not selected any merger target or engaged in any substantive discussions with a merger target. The Forms S-1 were filed with the Commission.

In early September of the same year, DWAC completed an IPO. The company raised over $287 million from investors. An amended Form S-1 was filed on August 31, 2021, signed by Mr. Orland. The Forms represented that neither DWAC nor its officers and directors had any discussions or contacts with any potential target companies prior to the IPO. The Forms also represented that DWAC had not selected any specific business combination target.

The next month – October 2021 – DWAC announced an agreement to merge with Trump Media. Following the announcement the share price of DWAC’s stock increased over 400%. Mr. Orlando signed the filings made with the SEC. Those Forms failed to include material facts regarding the discussions that proceeded the execution of the merger agreement. The Commission then instituted settled cease-and-desist proceedings which named as Respondent DWAC. The Order alleged violations of Securities Act Section 17(a)(2) and Exchange Act Section 10(b). The remedies include a penalty of $18 million.

The merger of DWAC and Trump Media closed on March 25, 2024. The surviving entity renamed itself Trump Media & Technology Group Corp. Prior to that filing, DWAC filed an amended Form S-4. It made disclosures consistent with the findings in the Commission’s published order instituting settled cease-and-desist proceedings.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The complaint is pending. SEC v. Orlando, Civil Action No. 1:24-cv-2097 (D.D.C. filed July 17, 2024); See also Lit. Rel. No. 26051 (July 19, 2024).

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