SEC Files Settled Offering Fraud Action
Offering fraud actions continue to be a staple of SEC enforcement. The Commission’s most recent action is this stream of cases involved a limited liability company that never engaged in business. SEC v. Jones, Civil Action No. 1:16-cv-01695 (D.D.C. Filed August 19, 2016).
Defendant Michael Jones is currently a uniform salesman. Previously, he was a registered representative at a number of broker-dealers. In 2007 he was barred from association with any FINRA member by the regulator.
From April 2010 through July 2013 he was the sole shareholder and director of Green Bash, LLC. During that period he sold convertible promissory notes of the firm to 20 investors in 12 states, raising $706,145.
Mr. Jones solicited investors on the telephone and through the use of a PPM. In telephone calls he directed potential investors to a website, creating the impression that he was part of a large, vibrant securities firm. In fact he was not – there was no firm.
The PPM was drafted by Mr. Jones. It contained key misrepresentations including:
Projections of firm performance: These projections had no reasonable basis. Nevertheless, they claimed that Green Bash, supposedly a Los Angeles based firm that arranged “event after-parties,” would have revenue of almost $900,000 in one year, over $2.1 million in two years and over $4.3 million in three years.
Revenue streams: The firm supposedly had six revenue streams: Sales of tickets, music, merchandise and three forms of website-generated revenue. In fact the firm never generated revenue from operations of any kind.
Offering size: The offering size was represented to be limited to $350,000 which was significant since the notes converted to stock. In fact by November Green Bash had issued notes worth that amount.
Portions of the funds raised were used to pay interest on the notes to some investors. Other portions of the offering proceeds were used by Mr. Jones for his personal expenses. The complaint alleges violations of Securities Act Sections 5 and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a).
Defendant Jones settled with the Commission, consenting to the entry of a permanent injunction based on the Sections cited in the complaint, including an order prohibiting him from participating in the issuance, offer or sale of any security (except for those acquired on a national securities exchange for his own account). In addition, he will pay disgorgement of $709,654, prejudgment interest and a penalty equal to the amount of the disgorgement. He agreed to settle a to be filed administrative proceeding that will bar him from the securities business. See Lit. Rel. No. 23622 (August 22, 2016).