by T. GormanPosted on Posted in SECActions

The sale of spectrum to operate cell phones can yield millions of dollars in profits. This notion was at the center of an action brought by the SEC against six individuals and eleven entities. Investors who purchased interests in entities that were supposed to secure such valuable rights from the FCC. Unfortunately the spectrum involved could not be used by cell phone companies. SEC v. Janus Spectrum LLC (D. Ariz. Filed April 6, 2015).

The action was brought against two groups: 1) The Janus Spectrum defendants which include the company; David Alcorn, a founder and managing director; and Kent Maerki, a founder and former owner of the company; and 2) the fundraising entity defendants which included four individuals – Daryl Bank, Bobby Jones, Terry Johnson and Raymond Chadwick – and eleven entities variously controlled by and/or affiliated with these four individuals.

At the center of the action is a 2004 FCC plan to reconfigure the 800 MHz portion or band of the wireless spectrum. The plan, in part, separated the frequencies on which public safety systems operate from those used by commercial wireless carriers. The portion of the band called Expansion Band or Guard Band could not be used by the wireless carriers.

Janus Spectrum provided services to over 20 fundraising entities in the preparation of FCC license applications. The firm’s clients include all of the fundraising entities named as defendants. Janus Spectrum, along with Messrs. Alcorn and Maerki, also encouraged investment in the fundraising entity defendants and made specific referrals to those firms. In making those referrals Janus Spectrum and Messrs. Alcorn and Maerki told investors that the 800 MHz spectrum in the Expansion Band and Guard Band could be used by major wireless carriers. That representation was made despite the fact that two years before the first securities offering a representative of Sprint told the Janus Spectrum defendants that the wireless carriers could not use Expansion Band and Guard Band. The next year – 2011 – the primary engineer for Janus Spectrum essentially reiterated this statement to Mr. Alcorn.

The fund raising defendants offered investors the opportunity to purchase an interest in one of the firms or to become members in an association. Overall the fundraising defendants brought in over $12.4 million from investors between May 2012 and October 2014. About half of those funds went through Janus Spectrum. A small portion of those funds were used to prepare applications for FCC use. Significant portions were kept by Messrs. Alcorn and Maerki with other portions going to the four individuals tied to the fundraising entities.

The Commission’s complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a)(1). The case is pending.

Tagged with: ,

by T. GormanPosted on Posted in SECActions

The SEC on Capital Formation: Graded Incomplete – Commissioner Gallagher

Last year the IPO market was overheating – a record number of initial offerings were conducted. Nevertheless, SEC Commissioner Daniel Gallagher gives the SEC a grade of “incomplete” in the area of capital formation in recent remarks. Commissioner Daniel M. Gallagher, “Grading the Commission’s Record on Capital Formation: A+, D, or Incomplete?” (March 27, 2015)(here).

Commissioner Gallagher explained his grade by starting with some kind words for his agency regarding the implementation of Title IV of the JOBS Act and what is being called Reg A+: “I am very pleased that the Commission was finally able to adopt changes to Regulation A . . . The cap on the size of the offering has been raised to the statutory minimum of $50 million, and offers and sales for so-called ‘Tier 2’ issuers preempt state blue sky law. The latter point is critical: issuers looking to make a nationwide offering need only have their offerings qualified by the SEC; they do not need to undergo the review processes, including merit review, of 50+ securities regulators. We’ve also given these issuers a conditional exemption from Section 12(g) of the Exchange Act, so that Tier 2 issuers have some breathing room to raise capital without triggering the burden of full Section 13 reporting . . .”

Yet the job is incomplete, according to the Commissioner. The cap should have been increased to $75 million. In addition, the semiannual reporting under the Rule should have been deemed to be “reasonably current” for Rules 15c2-11, 144 and 144A. Reporting issuers should also have been permitted to use the Rule the Commissioner noted. And, Regulation A is only targeted at primary issuance of securities, not the secondary markets. Venture exchanges – a topic the Commissioner has addressed before – can help solve secondary market liquidity.

Another key point revolves around the fact that the new Reg A Rules do little for Tier I issuers. Those companies are small issuers who still have to deal with state blue sky law qualification and SEC review and qualification. While the new NASAA coordinated review program appears to speed the process, the issuer still is required to undertake merit review.

Finally, for issuers who want to raise $5 million or under, the new rules are of little assistance. “Tier 1, with state qualification, remains too expensive; and Tier 2, with ongoing reporting, will likely be too expensive as well. This is unfortunate,” Commissioner Gallagher noted.

Another avenue for raising capital is crowdfunding. While this mechanism has been approved for accredited investors, it has not for others. “Crowdfunding to non-accredited investors under Title III of the JOBS Act is . . . still stuck in SEC rulemaking limbo. Not because the Commission lacks the will to move forward, but rather due to the weight of the accumulated, nanny state investor ‘protections’ thrown into the JOBS Act mandate by the Senate.” If crowdfunding is adopted as proposed it is likely to be too burdensome for the smallest of companies, according to Commissioner Gallagher.

Turning to Regulation D, the Commissioner focused on two points. First, for the most part the fundamental framework of the Regulation has not been updated since adoption in 1982. Given the substantial changes which have taken place since then it may be time to see if a new balance between access to capital and investor protection can be struck. Second, Rules 504 and 505 are little used. Those Rules permit, respectively, capital raises of up to $1 million and $5 million. Rule 504 permits a general solicitation of registered with the states. The provisions are little used probably because they lack state law preemption, Commissioner Gallagher noted. “To fix these rules, we need to better balance the costs and benefits of each of these exemptions” by considering, for example state preemption.

Other options also need to be considered. For many start-ups compliance with reporting as required for larger companies is simply too burdensome and expensive. The new study on disclosure being prepared by the Division of Corporation Finance “I hope and expect . . . will come out with an aggressive agenda for disclosure simplification . . . If that study simply affirms our existing disclosure regime, when there has been over a decade of unfinished efforts aimed at streamlining disclosures, it will have been a failure.”

Finally, the grade in these efforts for the Commission is an incomplete: “At best, our grade is ‘incomplete’ given the significant number of critical investor protection issues that need to be taken up in the near future. Yes, that’s right – capital formation and investor protections walk hand-in-hand. Rulemaking derided as ‘deregulatory’ may nonetheless help investors, if the costs of that disclosure, both direct, in terms of dollars diverted to compliance, and indirect, in terms of the opportunity costs of those dollars, are not outweighed by the benefits. I believe our rulebook is full of such rules, and hope we can take them on, and soon” declared Commissioner Gallagher.

Tagged with: ,