SEC Charges Cartoon Firm With Sale of Unregistered Securities
Offering frauds have long been a staple of SEC enforcement. Many of these actions are straight forward, involving the sale of securities for a virtually worthless or non-existent business. Some are Ponzi schemes. Virtually all of these actions promise the investor a safe investment with good to sky-high returns.
The SEC’s most recent action in this area is different. It is based on the sale of unregistered securities. The seller is a securities law recidivist and operator of a boiler room. Unlike many cases in this area it did have a business – cartoons. Specifically, it claimed to operate a cartoon streaming service for kids. Unlike many operators in this area investors were not promised safety or sky-high returns. The company marketed itself “as an on-demand entertainment service for children that offers animated cartoons, live-action shows, games, and music via the web and mobile applications,” according to the complaint. SEC v. Toon Goggles, Inc., Civil Action No. 2:19-cv-07687 (D. Ca. Filed Sept. 5, 2019).
Defendant Ira Warkol founded Toons Goggles in 2010. The company focused on marketing entertainment for children. Nevertheless, in 2011 the California Department of Business Oversight issued a cease and desist and refrain order against Mr. Warkol.
Over a four-year, period beginning in 2012, Mr. Warkol raised over $19 million from at least 400 investors in a number of states. The shares were not registered or exempt. The California order was not disclosed to potential investors. While some of the offerings claimed to be limited to accredited investors, there were no verification procedures. The transaction records maintained were inadequate to document the transactions.
Although the five offerings were conducted at different points in time and purported to involve different vehicles for children’s entertain such as a streaming app or the creation of more content, the SEC alleged that they all constituted one, integrated, illegal offering. Those offerings were:
October 2011: This offering continued for about four years. It utilized a PPM and claimed to be exempt from SEC registration and limited to accredited investors. Its purpose was to raise capital for a Toons Goggles related entity that would acquire more cartoon content and develop material for Toons Goggles.
September 2013: The purpose of this offering was to create and/or publish mobile games. Some of the games would be based on cartoon shows appearing on the Toon Goggles platform. Investors were supposed to be accredited.
October 2013: This offering, tied to a related entity, used a PPM and claimed to be exempt from SEC registration. It was also supposed to be limited to accredited investors. 75 units that converted to Toons Goggles shares were offered.
November 2013: This offering also claimed to be exempt from SEC registration and limited they accredited investors. It was related to the October 2013 offering. The units were convertible into shares of another firm controlled by Mr. Warkol.
Yelta Productions: An offering of shares in this firm began about mid-2015. The firm was supposed to create, distribute, license and/or publish a cartoon series and related materials.
Since none of the offerings were registered or exempt. The Commission alleged that each violated Securities Act Sections 5(a) and 5(c). In addition, Mr. Warkol, who orchestrated the solicitations and securities sales, and was paid transaction based compensation. He was not a registered broker-dealer. Accordingly, the complaint also alleges violations of Exchange Act Section 15(a). The case is in litigation. See Lit. Rel. No. 24588 (Sept. 6, 2019).