SEC Charges Firm, Promoters With Offering Fraud
The SEC brought another offering fraud action centered on false projections by an issuer regarding its expected performance. Unlike the action filed early last week, this one did not settle and is headed for litigation. SEC v. Enviro Board Corporation, Civil Action No. 2:16-cv-0427 (C.D. Cal. Filed August 26, 2016).
Named as defendants in the action are the company, supposedly a firm that would profit from recycling agricultural waste products; Glenn Camp, its co-founder and co-chairman, and co-CEO; William Peiffer, its co-founder, co-chairman and co-CEO; and Joshua Mosshart, who solicited investors.
The firm traces its roots to 1992. It planned to develop a technology that would permit the manufacturing of low-cost, environmentally-friendly building panels out of straw and other agricultural waste fiber. Over twenty year period the firm was only able to construct prototypes. Development was suspended in 2011. The offerings were not.
From 2011 through 2014 the defendants offered and sold securities to nearly 40 investors in several states, raising about $6 million. Investors purchased about $3 million in stock, $2 million in bonds that were supposedly secured by tax credits, $1 million in unsecured bonds and $50,000 in promissory notes.
Key to the solicitations was a PPM furnished to investors. Each iteration of that memorandum contained financial projections for the firm, although precise numbers in each differed. For example, the PPM used in 2011 forecast about $42.8 million in revenue and $30.8 million in net income. The mid-2012 – 2013 version claimed that revenue would be $58.8 million and that there would be $32.3 million in net income. Both sets of projections were for the first year of operations.
The revenue was projected to come from three sources: the sale of certain tax credits once the firm successfully commercialized its technology, the sale of products and the sale of mills and associated royalty payments. The PPMs also represented that the firm had previously designed and installed a viable product line, that its panels were available in two sizes and already in use and that the company had secured about $161 million in “vendor financing.”
Those representations had no basis in fact. The company never generated any meaningful operating revenue. The individual defendants did, however, profit, taking as much as $2.6 million of the offering proceeds as compensation. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 15(b). The case is in litigation. See Lit. Rel. No. 23628 (August 26, 2016).