Financial institutions used to close customer accounts or refuse to open customers’ accounts based on subjective reasons such as:

• Mitigating risks related to regulatory compliance
• Money laundering
• Fraud
• Terror financing
• Operational risks
• Religious or political views
• Avoiding reputational damage to the bank
• High-risk or politically sensitive industries

In 2011, federal regulators began issuing informal guidance encouraging banks to consider these subjective standards. This practice gave regulators great latitude to be biased against certain industries which they considered to be too risky and to warn banks against doing business with them.

Banks are heavily regulated and can only operate when in good standing with the regulators. Banking regulators are more than a strong influence on bank operations. They can direct and control bank activities.

President Trump’s August 7, 2025, Executive Order, “Guaranteeing Fair Banking for All Americans” (EO 14331), requires banks to ensure that decisions to restrict or terminate accounts (debanking) are based on individualized, documented, objective, and risk-based criteria, rather than political or religious beliefs.

Key Details of the Executive Order and Implementation

• Purpose: To eliminate “politicized or unlawful debanking” by financial institutions
• Requirements: Financial institutions must base decisions on documented, objective, and risk-based analyses
• Regulatory Actions: Federal regulators (OCC, FDIC, Fed, NCUA, CFPB) are instructed to review institution policies, take remedial action (fines, consent decrees) against those engaging in illegal debanking, and remove “reputational risk” as a justification for terminating accounts
• Scope: Protects against discrimination based on political views, religious beliefs, or lawful business activities
• Enforcement: The OCC (Office of the Comptroller of the Currency) announced actions to enforce this order, including reviewing bank performance under the Community Reinvestment Act (CRA)

Legislative Efforts

Congress passed the Ensuring Fair Access to Banking Act to further solidify these requirements into federal law. This law places restrictions on certain banks, credit unions, and payment card networks if they refuse to do business with a person who complies with the law. Restrictions on financial institutions for violations include prohibiting the use of electronic funds transfer systems and lending programs, termination of an institution’s depository insurance, and specified civil penalties. It establishes the right for a person to bring a civil action for a violation of this bill.

Government officials used to encourage banks to debank customers primarily to mitigate perceived risks related to money laundering, terrorism financing, and fraud. Using initiatives like “Operation Chokepoint” and “Know Your Customer” (KYC) rules, regulators have pushed banks to close accounts for high-risk or politically disfavored industries (such as gun manufacturers, crypto, and energy companies) under the guise of “reputational risk”.

Neither the Constitution nor any Congressional statute grant powers to the regulators to decide which lawful businesses deserve access to banking services. If you have been the victim of debanking, please consult the lawyers at Corporate Securities Legal LLP to review your rights and protect your financial reputation.

“The third-party litigation financing industry is not specifically regulated under U.S. federal law. However, some states regulate consumer funding by, for example, limiting the fees funders can charge. There also is no nationwide requirement to disclose litigation funding agreements to courts or opposing parties in federal litigation, although courts have required disclosures of funding arrangements in some instances”. The Litigation Funding Transparency Act and HR 1109, which seek to expose potential conflicts of interest and reduce risks of prolonged, funded litigation was introduced in Congress in February of 2026 but is still moving through the process to become law.

Common Complaints and Risks

• Lack of Transparency: TPLF agreements are usually confidential, and not subject to discovery, although that rule is slowly changing. The objective is to increase transparency and mitigate risks in the justice system. Defendants are put at a disadvantage if they do not know if a third-party investor is pulling the strings in a lawsuit.
• Control over Litigation: Although funders are investors, they may require contractual control over case decisions, including veto power over settlements.
• Foreign Influence: Many foreign entities are using TPLF to attack U.S. companies and gain access to sensitive information.

How TPLF Impacts Commercial Businesses

• Rise in “Nuclear Verdicts”: The influx of outside capital allows plaintiffs to pursue high-stakes, prolonged litigation, often resulting in massive, excessive jury awards that exceed $10 million.
• Increased Litigation Frequency: TPLF incentivizes the filing of non-meritorious or “questionable” claims, as plaintiffs are shielded from the risks of losing.
• Harder Settlement Negotiations: Because funders prioritize maximizing their investment returns, they may push for higher payouts, rejecting reasonable, early settlement offers that businesses often prefer.
• Rise in Specific Areas: TPLF is common in large commercial disputes.
• Operational Strain: Businesses face higher insurance premiums, tighter coverage terms, and increased legal fees defending these cases.

Although federal and state regulation of TPLF is slow in coming, businesses can take steps themselves to mitigate risks through contractual arrangements and other possible legal positions. The lawyers at Corporate Securities Legal LLP have many years of experience dealing with difficult threats to business operations, both for startups and for public companies.

AI is no longer experimental. It now plays a central role in core decision-making processes, and without proper oversight, it can create significant legal, financial, and operational consequences. Regulators are increasingly requiring organizations to move beyond general policy guidance and implement actionable, audit-ready controls.

Emerging AI Risk Areas

As regulatory scrutiny increases, several key risk areas have emerged across industries:

• Black box opacity: AI systems often operate in ways that are difficult to interpret. Organizations must be able to explain how decisions are made to regulators and stakeholders.

• Systemic and automation risk: AI can rapidly scale decisions, allowing small errors to be repeated at high speed, potentially leading to widespread operational failures.

• Third-party and data risks: Reliance on external data sources introduces risks related to data privacy, accuracy, and potential bias or manipulation.

• AI-enabled fraud: Technologies such as deepfakes and AI-driven phishing schemes create new avenues for fraud, increasing potential liability and requiring stronger verification controls.

Why AI Risk Management Matters

Organizations that fail to implement effective AI governance frameworks face both regulatory and competitive consequences:

• Avoiding heavy penalties: Regulatory enforcement actions have resulted in significant financial penalties for inadequate compliance systems.

• Competitive advantage: Companies that successfully integrate AI within structured risk frameworks can innovate more efficiently while maintaining compliance and trust.

NIST AI Risk Management Framework

The National Institute of Standards and Technology (NIST) has developed a widely adopted AI Risk Management Framework that organizations can use to manage AI systems throughout their lifecycle.

The framework includes four core functions:

• Govern: Establish internal governance structures to oversee accountability, compliance, security, and risk management, including clear decision-making and escalation procedures.

• Map: Develop and maintain an inventory of AI use cases, including third-party tools, and evaluate each for risk factors such as data security, regulatory impact, and operational significance.

• Measure: Assess risks through audits and feedback, focusing on issues such as bias, transparency, explainability, and potential manipulation.

• Manage: Implement controls to mitigate identified risks, including human oversight, access controls, employee training, and continuous system monitoring.

Staying Ahead of Regulatory Developments

AI risk management is rapidly evolving as both technology and regulatory expectations continue to develop. Organizations that proactively implement structured frameworks will be better positioned to manage risk, maintain compliance, and capitalize on emerging opportunities.

The attorneys at Corporate Securities Legal LLP provide guidance on navigating evolving regulatory requirements and implementing effective compliance strategies.

As financial strain intensifies, companies are facing higher exposure to liability, contract disputes, and employment-related claims. Proactive planning can be the difference between continued operations and financial failure.

Impact of Corporate Distress

The burdens placed on companies experiencing financial distress can significantly disrupt normal operations and long-term planning. Common impacts include:

• Increased legal costs: The growing complexity of disputes requires substantial resources for legal defense and risk management.
• Reputational damage: Litigation can result in negative publicity, reducing stakeholder trust and future business opportunities.
• Reduced operational flexibility: Ongoing legal matters may limit management’s ability to make strategic decisions and adapt to changing conditions.

Statistical Trends

Recent data highlights the growing severity of corporate distress and its legal consequences:

• Corporate distress and bankruptcy: Monthly large bankruptcy filings have increased significantly, particularly among companies with assets exceeding $1 billion.
• Economic pressures: Rising interest rates and debt burdens have contributed to a notable increase in commercial Chapter 11 filings.

Trending Litigation Areas

Certain types of litigation have become more prevalent as companies navigate financial stress:

• Data breach and cybersecurity: Companies handling sensitive customer data face increased exposure to litigation when security failures occur.
• Employment litigation: Workplace disputes have expanded following the COVID-19 era, including wage issues and evolving employment standards.
• Liability management disputes: Financial restructuring strategies, such as debt exchanges and priority shifts among creditors, have led to increased legal challenges.
• Class actions and regulatory enforcement: Companies are facing heightened scrutiny related to environmental, social, and governance (ESG) issues, as well as contractual and regulatory compliance.

Common Legal Consequences

Legal actions arising from corporate distress can lead to serious financial and operational consequences, including:

• Acceleration of debt: Creditors may demand immediate repayment of outstanding obligations.
• Foreclosure and asset seizure: Lenders may enforce their rights against collateral securing loans.
• Forced bankruptcy: Creditors may initiate involuntary bankruptcy proceedings.
• Receivership: Courts may appoint a receiver to take control of company assets.
• Shareholder claims: Courts may award damages or grant injunctive relief to affected parties.

Why Advance Planning Matters

Preparing for potential legal and financial challenges is essential in times of economic uncertainty. Strategic planning, including carefully structured contracts and internal policies, can help mitigate risk, preserve assets, and maintain operational control.

The attorneys at Corporate Securities Legal LLP have extensive experience advising companies through periods of financial stress, helping them anticipate risks and implement effective protective strategies.

Illegal insider trading can expose a company and its leadership to severe legal, financial, and reputational consequences. A well-structured insider trading policy helps protect the company by establishing clear expectations and discouraging improper conduct.

The SEC has published guidance outlining best practices for companies developing insider trading policies.

Who and What Is Covered

An insider trading policy should clearly identify who is subject to the rules and what types of activities are restricted. SEC Rule 10b-5 prohibits corporate insiders from using confidential corporate information to trade securities for personal gain.

Covered individuals may include:

• Corporate officers and directors;
• Employees with access to sensitive information;
• Consultants and contractors;
• Significant shareholders;
• Family members and household residents of insiders.

The rule also prohibits “tipping,” which occurs when insiders share confidential information with third parties who then use that information to trade securities.

A company’s policy should summarize relevant federal securities laws—including the Securities Exchange Act of 1934 and SEC Rule 10b-5—and explain how insiders may trade securities while remaining compliant with these regulations.

Defining Key Terms

Clear definitions help employees understand what information and conduct may create insider trading risks. Important terms typically addressed in the policy include:

Material Information: Information that could reasonably affect the value of the company’s securities or influence an investor’s decision to buy, sell, or hold stock. Examples include:

• Financial projections;
• Proposed mergers or acquisitions;
• Significant new products or services;
• Major corporate transactions.

Non-Public Information: Information that has not yet been widely disseminated to the public or fully absorbed by the market.

Insider: Any individual who has access to material non-public information due to their relationship with the company, including officers, directors, large shareholders, and individuals who receive confidential tips.

Trading Restrictions and Procedures

An insider trading policy should establish clear rules governing when and how insiders may trade company securities.

Common procedures include:

Blackout Periods: Pre-determined periods during which certain executives and directors may not trade securities, such as around quarterly earnings announcements or other major corporate events.

Event-Specific Trading Restrictions: Temporary restrictions imposed when the company is involved in confidential transactions such as merger negotiations or strategic business developments.

Pre-Clearance Requirements: Directors, officers, and employees with access to confidential information may be required to obtain approval from a designated compliance officer before trading company securities.

Compliance, Enforcement, and Penalties

An effective insider trading policy must address enforcement mechanisms and the consequences of violations.

Key components include:

Designated Compliance Officer: A specific individual—often the company’s general counsel—responsible for administering the policy and answering compliance questions.

Reporting Violations: A confidential reporting channel allowing employees to report suspected violations without fear of retaliation.

Penalties: Violations may result in serious consequences, including:

• Disciplinary action or termination of employment;
• Civil enforcement actions by regulatory authorities;
• Criminal prosecution and imprisonment.

Insider trading penalties can be severe and may include:

• Up to 20 years imprisonment;
• Criminal fines of up to $5 million;
• Civil penalties of up to three times the profits gained or losses avoided.

Implementation and Best Practices

For an insider trading policy to be effective, it must be properly implemented and communicated throughout the organization.

Best practices include:

• Legal Review: Have the policy drafted or reviewed by experienced securities counsel.
• Employee Training: Conduct regular training sessions for employees, especially those with access to sensitive information.
• Monitoring Systems: Track trading activity to detect unusual or suspicious patterns.
• Clear Communication: Provide employees with electronic access to the policy and distribute written copies to directors and senior management.
• Regular Updates: Revise the policy as the company grows or transitions from a private company to a publicly traded entity.

Why Legal Guidance Matters

As companies grow and evolve, insider trading risks and compliance requirements may also change. Maintaining a clear and enforceable insider trading policy helps protect the company and its leadership from significant legal exposure.

The attorneys at Corporate Securities Legal LLP assist companies in developing insider trading policies, implementing compliance programs, and navigating federal securities regulations.

Contact Corporate Securities Legal LLP to ensure your company’s insider trading policies remain compliant with current securities laws and regulatory expectations.

The Foreign Corrupt Practices Act of 1977 (FCPA) prohibits U.S. companies and individuals from offering or paying bribes to foreign officials in order to obtain or retain business advantages. The law applies to conduct occurring both outside and within the United States and broadly covers the use of mail or any means of interstate commerce in furtherance of improper payments.

The statute makes it unlawful to offer, promise, authorize, or provide money or anything of value while knowing that such benefits may be directed—either directly or indirectly—to a foreign official for the purpose of influencing official actions, securing improper advantages, or directing business opportunities.

Importantly, the FCPA also applies to foreign companies and individuals whose actions further corrupt payments within the United States.

Accounting and Internal Control Requirements

Companies subject to the FCPA must maintain strong internal accounting controls designed to ensure transparency and accurate financial reporting. Public companies whose securities trade in the United States are required to:

• Maintain books and records that accurately reflect corporate transactions;
• Implement internal accounting controls sufficient to prevent and detect improper payments;
• Ensure financial reporting systems properly account for corporate expenditures.

The U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) jointly enforce FCPA provisions. Violations may result in severe penalties, including:

• Civil and criminal enforcement actions;
• Monetary fines reaching up to twice the anticipated benefit obtained through misconduct;
• Individual criminal liability;
• Imprisonment of up to five years.

Increased Enforcement and National Security Concerns

Federal regulators have expanded FCPA enforcement efforts in response to growing concerns that corporate misconduct may impact national security. Enforcement priorities now include risks associated with:

• Sanctions evasion and export control violations;
• Cybercrime and cryptocurrency-related misconduct;
• Intellectual property theft;
• Disruption of critical supply chains and emerging technologies.

Companies are increasingly expected to implement sophisticated compliance programs and exit business relationships or markets presenting unacceptable regulatory risks.

DOJ Safe Harbor Policy for Mergers and Acquisitions

In October 2025, Deputy Attorney General Lisa O. Monaco announced a department-wide Safe Harbor Policy encouraging voluntary self-disclosure of misconduct discovered during mergers and acquisitions transactions.

Under this policy, acquiring companies that:

• Promptly and voluntarily disclose criminal misconduct;
• Fully cooperate with government investigations;
• Implement timely remediation measures;
• Provide restitution and disgorgement where appropriate

may receive a presumption of declination, meaning the DOJ may decline prosecution despite otherwise prosecutable conduct.

Significantly, misconduct discovered at an acquired company—including aggravating factors—will not automatically prevent the acquiring company from qualifying for Safe Harbor protection.

According to the DOJ’s FCPA Corporate Enforcement Policy, a declination applies where prosecution would otherwise occur but is avoided due to voluntary disclosure, cooperation, remediation, and financial restitution.

The Importance of Compliance Planning

Modern enforcement policy reflects a shift in regulatory expectations. Corporate compliance programs are no longer viewed merely as operational costs but as essential safeguards against substantial financial and reputational exposure.

Companies engaged in cross-border transactions or acquisition activity should evaluate compliance risks early in the transaction process to preserve eligibility under Safe Harbor protections.

For questions regarding FCPA compliance or voluntary self-disclosure obligations, consultation with experienced securities counsel is critical. The attorneys at Corporate Securities Legal LLP assist companies in meeting regulatory deadlines, conducting internal investigations, and navigating Safe Harbor requirements during mergers and acquisitions transactions.

Contact Corporate Securities Legal LLP to discuss strategies for maintaining compliance and minimizing enforcement risk under the Foreign Corrupt Practices Act.

The risks presented by artificial intelligence (AI) are becoming an increasing concern for corporate boards as emerging technologies influence business strategy, operations, and long-term planning. At the same time, regulators are closely examining how accurately companies disclose AI-related risks and the mitigation measures being implemented.

The U.S. Securities and Exchange Commission (SEC) has already initiated enforcement actions challenging misleading or incomplete disclosures related to artificial intelligence claims.

Growing Focus on AI Risk Reporting

A recent study conducted by Cornell University analyzed more than 30,000 filings from over 7,000 companies during the past five years. Using both quantitative and qualitative analysis, researchers identified a significant increase in AI risk disclosures. Mentions of AI-related risks in company filings increased from 4% of filings in 2020, to more than 43% of filings in 2024. This dramatic increase reflects both expanded corporate reliance on artificial intelligence and heightened regulatory scrutiny.

The Role of Form 10-K Disclosures

Evaluation of AI-related risk disclosure begins with Form 10-K, the annual report most U.S. public companies must file with the SEC. The Commission establishes required disclosure topics and prescribes how information must be presented to investors.

Companies must disclose:

• Material risks affecting business operations;
• Methods used to evaluate emerging risks;
• Strategies implemented to mitigate potential threats.

Because artificial intelligence can affect nearly every aspect of business operations, AI risks may be considered material at multiple levels, including:

• The broader economy;
• Industry-wide impacts;
• Geographic exposure;
• Company-specific operational risks.

Material Disclosure Obligations

Federal securities laws prohibit companies from:

• Making materially false or misleading statements; or
• Omitting material information necessary to prevent investor deception.

To reinforce accountability, both the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) must certify the accuracy and completeness of Form 10-K disclosures.

Categories of Material Risk

Companies generally evaluate disclosure obligations across four recognized categories of material risk.

Market Risk

Market risk arises from broad economic fluctuations such as:

• Interest rate changes;
• Foreign exchange volatility;
• Commodity price movements;
• Stock market valuation shifts.

These risks are largely outside company control but must still be disclosed when material.

Credit Risk

Credit risk evaluates the likelihood that customers or counterparties may fail to meet payment obligations. Companies may manage this risk through:

• Structured repayment terms;
• Collateral requirements;
• Credit evaluation procedures.

Liquidity Risk

Liquidity risk concerns a company’s ability to meet financial obligations as they become due. Companies must assess how quickly they can:

• Obtain financing; or
• Convert assets into cash during downturns.

Operational Risk

Operational risk involves failures in internal systems or external dependencies, including:

• Cybersecurity threats and AI system vulnerabilities;
• Ineffective internal controls;
• Employee training deficiencies;
• Supplier concentration risks;
• Financial reporting fraud or system failures.

Why Compliance Matters

Failure to comply with SEC disclosure requirements—including Form 10-K reporting obligations—can result in significant regulatory consequences and enforcement actions. Accurate disclosure not only promotes investor confidence but also protects companies from allegations of misleading statements.

Consultation with experienced securities counsel helps companies maintain compliance while developing practical risk mitigation strategies aligned with evolving regulatory expectations.

The securities lawyers at Corporate Securities Legal LLP assist companies in navigating disclosure obligations, strengthening compliance frameworks, and implementing effective governance practices related to emerging technologies such as artificial intelligence.

Contact Corporate Securities Legal LLP to ensure your company’s SEC disclosures remain accurate, compliant, and aligned with current regulatory standards.

Fair and orderly securities markets depend on the accuracy and honesty of information provided to investors. Public companies and individuals involved in securities transactions are required to ensure that all filings and communications are complete, truthful, and not misleading. There is no tolerance under federal securities laws for inaccuracies—whether negligent or intentional.

False or misleading disclosures can distort investor decision-making, lead to substantial financial losses, and improperly enrich bad actors. To address these risks, the Securities Exchange Act strictly prohibits deceptive conduct in connection with the purchase or sale of securities.

Federal Prohibitions Against Securities Fraud

Under the Securities Exchange Act, it is unlawful for any person, directly or indirectly, using interstate commerce, the mails, or the facilities of a national securities exchange, to:

• Employ any device, scheme, or artifice to defraud;
• Make untrue statements of material fact or omit material facts necessary to prevent statements from being misleading;
• Engage in any act, practice, or course of business that operates as a fraud or deceit upon any person.

These provisions apply broadly and are enforced aggressively by the Securities and Exchange Commission (SEC).

SEC Enforcement and Real-World Consequences

Some individuals attempt to conceal misconduct through sophisticated accounting practices or misleading disclosures. However, such schemes are frequently uncovered through SEC investigations, whistleblower reports, or audits. When violations are discovered, the consequences can be severe—financially, professionally, and, in some cases, criminally.

A recent enforcement action illustrates these risks.

Example: SEC v. Wagenhals, Wiley, and Larson

In Securities and Exchange Commission v. Frederick W. Wagenhals, Robert D. Wiley, and Christopher D. Larson, the SEC charged three former executives of Scottsdale, Arizona–based Ammo, Inc. (now known as Outdoor Holding Co.) with accounting and disclosure fraud.

According to the SEC’s complaint, former CEO Wagenhals and former CFO Wiley made repeated materially false and misleading statements in Ammo’s public filings and financial statements. These statements were allegedly intended to conceal unfavorable information about the company’s management and operations.

The SEC further alleged that the filings hid the fact that Defendant Larson—a company co-founder and key business leader—continued to play a critical executive and management role despite a 2020 federal court order prohibiting him from serving in an executive capacity at a public company.

Alleged Misconduct and Disclosure Failures

The complaint alleges that Larson’s undisclosed senior role enabled him to:

• Lead major business operations in violation of the court order;
• Negotiate the largest acquisition in the company’s history;
• Structure transactions that financially benefited himself or members of his family.

According to the SEC, Ammo’s public reports and financial statements contained pervasive misstatements, omissions, and fundamental accounting errors. The SEC alleges that Wagenhals and Wiley approved and certified these filings while knowing they were inaccurate.

Legal Charges and Potential Penalties

The SEC filed its complaint in the U.S. District Court for the District of Arizona, charging all three defendants with violations of:

• Sections 17(a)(1) and (3) of the Securities Act of 1933;
• Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Wagenhals and Wiley were also charged with falsifying books and records, misleading auditors, submitting false certifications, and failing to reimburse the company for compensation following an accounting restatement, as required under the Sarbanes-Oxley Act.

The SEC seeks:

• Permanent injunctions;
• Civil monetary penalties;
• Officer and director bars;
• Disgorgement of ill-gotten gains with prejudgment interest;
• Reimbursement of compensation under Section 304(a) of the Sarbanes-Oxley Act.

Civil penalties are often assessed in amounts equal to disgorgement, effectively doubling the financial consequences of the misconduct.

Why Compliance Matters

SEC filing obligations are complex, and mistakes—whether intentional or accidental—can expose companies and executives to significant enforcement risk. Proper legal guidance is essential to ensure accurate disclosures, compliant accounting practices, and adherence to federal securities laws.

If you have questions or concerns regarding SEC filing requirements, the securities attorneys at Corporate Securities Legal LLP can provide experienced counsel and practical guidance. Early legal involvement can help ensure compliance, reduce risk, and prevent costly SEC enforcement actions.

August 13, 2019

The Securities and Exchange Commission (“SEC”) charged Antonio Bravata, a repeat securities law violator, with securities fraud after learning that Bravata was offering securities of a company he owned and controlled while serving his sentence for another Ponzi scheme. The SEC was able to put a stop to the securities offering before any money was raised.

According to the SEC, a Ponzi scheme “is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.”

Bravata was serving out the end of his 5-year federal prison sentence on home confinement as a result of a previous investment fraud with BBC Equities when his latest scheme to defraud investors of their money was uncovered by the SEC. Antonio Bravata was offering securities in a company called Primo World Ventures, LLC (Primo) that he had formed with the help and guidance of his father, John Bravata. John Bravata is currently incarcerated for masterminding the BBC Equities $50 million Ponzi scheme that his son, Antonio Bravata, had also been a part of.

Exactly like the BBC Equities scheme, Antonio Bravata planned to use the money given to him by new investors to pay off old investors, all while taking the biggest cut for himself.

Primo was very similar to BBC Equities, as Antonio Bravata modeled the Primo offering documents off of those that had previously been given to the investors of BBC Equities. The main difference was that with Primo, Antonio Bravata’s name was nowhere to be found. Both Antonio Bravata and John Bravata concealed their involvement in the company behind the façade of an extensive team of analysts, lawyers, and professionals who did not actually exist. In reality, Antonio Bravata was a one man show who ran day-to-day operations, filed Primo’s articles of organization, prepared the offering documents, and obtained permission from a financial institution to hold Primo securities in IRA accounts. While John Bravata advised his son and a former BBC Equities salesman assisted, the involvement of other executives or professionals was simply an attempt to create legitimacy where there was none.

The SEC uncovered the fraud before Antonio Bravata was able to complete any sales of Primo securities, saving many potential investors from losing their money and stopping Antonio Bravata’s plan.

The SEC does not tolerate Ponzi schemes and it remains constantly vigilant to potential schemes. Oftentimes officers can find themselves in a position where they are tempted to pay off prior investors with new investor funds and a company can quickly find itself in a scenario where it unknowingly commits a securities violation. Our firm can readily identify potential issues with securities offerings and prepare compliant investment documentation. More commonly, if you find yourself involved in an investment offering that promises big, consistent returns up front with little to no risk, you may have a Ponzi scheme on your hands.

Wilson Bradshaw LLP is a boutique securities law firm in Irvine, California and New York City. We help companies prepare compliant offering materials and individuals make secure investments. Additionally, if you or your company has received a subpoena from the SEC, we can assist you. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.

On November 29, 2018, the Securities and Exchange Commission (“SEC”) charged two celebrities with unlawfully touting initial coin offerings (“ICOs”). This is the first time that the SEC has brought touting violation charges involving ICOs. Professional boxer, Floyd Mayweather Jr. and music producer Khaled Khaled, commonly known as DJ Khaled, each received cease and desistorderswith the charges.

According to the SEC orders filed November 29, 2018, Mayweather and Khaled did not disclose promotional payments from ICO issuers, including Centra Tech Inc. (“Centra”), and touted on social media accounts to entice potential investors to participate in the offering. May weather posted on twitter that Centra’s ICO “starts in a few hours. Get yours before they sell out, I got mine…” This storm hits after the DAO Report in 2017 indicated that ICO’s may need to be registered as securities and just a little over a year after the SEC issued an informal warning urging caution around celebrity backed ICOs. Now the SEC is cracking down.

In April 2018, the SEC filed an action against Centra founders alleging that the ICO was fraudulent and parallel criminal charges were brought by the U.S. Attorney’s Office for the Southern District of New York.

Mayweather and Khaled have agreed to pay disgorgment, penalties, and prejudgement interest, totaling just over three-quarters of a million dollars, and agreed to not participate in securities offerings for three and two year periods, respectively.

The SEC’s goal is to encourage promoters to fully disclose to investors that they are being endorsed by the company and not to appear as though they are unbiased investors themselves.

Here at Wilson Bradshaw & Cao, we help businesses solicit investors for ICOs in a compliant manner. We restrict our practice to securities law, in particular private and public offerings and SEC enforcement work.

By Whitney De Agostini, Esq.

April 1, 2019

You are literally minding your business when you are slapped with a subpoena or inquiry from the SEC. Why is the SEC investigating me, and what happens now?

The SEC reached out because something about you or your company triggered a red flag—or is connected to an individual or company that was flagged. The mission of the U.S. Securities and Exchange Commission (“SEC”) is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation (i.e. monitor businesses raising money).”[1] As the enforcement body of the Securities and Exchange Act of 1933, its goal is to ensure all companies, whether offering public or private securities to investors, are following federal regulations and disclosure requirements, and are appropriating the funds consistent with investors’ expectations.

So, what now? An investigation by an arm of the Federal Government is intimidating; with seemingly unlimited funds and an unlimited scope. However, understanding the SEC’s investigation process will make the investigation less daunting, and having a strategy to navigate it can help you expedite the process and get back to your business.

The Investigation

The SEC utilizes two processes to investigate potential securities fraud: an informal inquiry and a formal investigation. Note that the SEC does NOT deal with criminal securities violations; they will refer criminal cases, formally or informally, to the Department of Justice (“DOJ”).[2] If you are concerned your actions may have been criminal (especially if your situation involves insider trading, millions of dollars lost in investor funds, or a long disciplinary history), reach out to a criminal law attorney before your communicate with the SEC, as your strategy will be substantially different moving forward.[3]

Informal inquiry

Facts are gathered and developed through an informal inquiry (or “matter under inquiry”), and responses are voluntarily.[4] Inquiries may simply mean you are tangential to another SEC investigation, and they are gathering information. The SEC does not have subpoena authority at this stage but may reach out to your investors and/or employees requesting information on company processes, the nature of the securities, and the use of funds.[5]

If the SEC is satisfied, they may stop contacting you; they are not required however to give you the status of the investigation, or even notice of its closure. If the informal inquiry shows potential securities law violations (which they will usually determine within 2-3 months), the SEC staff will obtain permission from the SEC Commission to conduct a formal investigation.[6]

Formal Investigation

In a formal investigation, the SEC must issue a formal order outlining the specific federal securities provisions they believe you violated. However, even after a formal order is issued, the investigation’s focus is fact-finding, and parties have not yet been accused of any wrongdoing.[7] If you did not receive a formal order, have your counsel request one; with it, an experienced securities attorney can usually determine why you were flagged by the SEC.

The SEC will issue subpoenas requiring numerous documents and witness testimonies. Witnesses are interviewed, under oath, by SEC staff, in the presence of a court reporter. Note however that because any statement made to SEC staff may be used in the investigation, the witness is never “off the record.”[8] The SEC is not confined to the parameters of the formal order, nor are they limited in the number of documents or witnesses they can subpoena,[9] so it is not uncommon for the formal investigation to go on for several months.

Toward the end of the investigation, the SEC will issue a document called a Well’s Notice. It identifies the staff’s conclusions regarding regulations that were violated and informs you that the staff intends to recommend enforcement proceedings against you.[10] You have the option to draft a Well’s Submission disputing the staff’s conclusions. This document is an opportunity to persuade the SEC decision-makers directly. However, the decision to draft a Well’s Submission should be thoughtfully considered with your attorney in that the document will become public record and be eligible as evidence in future civil litigation by private citizens.[11]

Following the investigation, SEC staff will present their findings to the SEC Commission for review. The Commission may authorize the staff to file a case in federal court or bring an administrative action; oftentimes, the Commission and the party charged settle the matter without trial.[12] Note that ultimately, the conclusion of the investigation is heavily determined by the impressions of the SEC staff (and subsequent recommendations to the Commission) regarding your credibility, malice, and injury to investors. Recommended actions can vary from a fine, to a cease and desist order, to referring the case to the DOJ if they suspect criminal violations—which may lead to prison time.

The Strategy

If you suspect criminal liability, lock in an experienced criminal attorney, and protect yourself; and expect to put your life and business on hold. Otherwise, retain a securities attorney, and focus on maintaining credibility, and proactively and thoughtfully cooperating.

Retain a Securities Attorney

Not only is a securities attorney knowledgeable about this corner of the law and SEC investigation procedures, but the securities bar is small, and your attorney will have access to resources and information you do not.[13] They can often deduct the scope and direction of the investigation based upon the Formal Order and communication with SEC staff attorneys. In addition, most document requests are extensive and burdensome, and your attorney can negotiate the request with SEC staff to mitigate the time/money spent on collecting, reviewing and submitting documents to the SEC. It is not uncommon for SEC staff to reach out to investigation subjects on a casual phone call, then use the conversation as evidence. It is important to maintain a buffer between you and the SEC to protect you and control information. Finally, an attorney can assist you in keeping your business legally compliant so it can maintain its operations during the investigation.

Maintain Credibility

At this point, you do not want to add “process” violations (including lying to SEC staff, perjury and obstruction of justice) to your original regulatory violations. Martha Stewart after all did not go to prison for insider trading, but for lying to the SEC.[14] You can be convicted of lying to the SEC, even if you are found innocent of the underlying securities offense.[15] Similarly, once you are contacted by the SEC, do not destroy or alter documents, or influence the testimony of witnesses (18 U.S.C. §1512); being accused of destroying evidence during an investigation can be worse than the outcome of the original investigation. The more behaviors that show malice on your part, the more likely it is that the SEC refers your case to the DOJ for criminal prosecution.

Proactively Cooperate

Goodwill is critical in this process. The SEC staff you are working with will likely be deciding the outcome of the investigation, including fines, cease and desist orders and the future of your business. It is important to work with your attorney to respond promptly and exactly to all document subpoena requests, be forthright and direct in depositions, and proactively share a succinct narrative of your business dealings, rather than making the SEC staff dig for pieces to put together. Show them you prioritize your investors, just like they do. Further, have your securities attorney assess and mitigate regulatory mistakes (such as registration, fundraising, disclosure issues) on an ongoing basis to show above-board good faith efforts to comply with SEC regulations.

Remember that receiving an SEC subpoena does not mean you have done anything wrong. Most people are subpoenaed as witnesses, or to help the SEC gather information, not as targets of an investigation.[16] The goal in this process is to assist the SEC in gathering data, while avoiding liability. This requires thoughtful preparation and the assistance of an experienced securities attorney.

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Whitney De Agostini specializes in representing witnesses and businesses in SEC and other regulatory investigations. The team of securities attorneys at Wilson, Bradshaw & Cao, LLP assist clients through every step of this process. Whitney can be reached at whitney@wbc-law.com, or 801-368-8297.

[1] https://www.sec.gov/Article /whatwedo.html

[2] https://apps.americanbar.org/buslaw/blt/blt00may-sec.html

[3] Id.

[4] https://www.dandodiary.com/2017/01/articles/securities-laws/guest-post-nuts-bolts-sec-investigations-enforcement/

[5] Id.

[6] https://seclaw.blogspot.com/2014/01/tips-for-responding-to-sec-subpoena.html

[7] https://www.dandodiary.com/2017/01/articles/securities-laws/guest-post-nuts-bolts-sec-investigations-enforcement/

[8] http://seclaw.blogspot.com/2014/01/tips-for-responding-to-sec-subpoena.html

[9] https://apps.americanbar.org/buslaw/blt/blt00may-sec.html

[10] https://www.seclaw.com/wells-notice-sec-finra-investigations/

[11] Id.

[12] https://www.sec.gov/enforce/how-investigations-work.html

[13] https://seclaw.blogspot.com/2014/01/tips-for-responding-to-sec-subpoena.html

[14] https://www.seclaw.com/story-martha-telephone-call/

[15] SEC v. Michael G. Sargent, et al., SEC Lit. Rel. No. 16373 (Nov. 29, 1999).

[16] https://seclaw.blogspot.com/2014/01/tips-for-responding-to-sec-subpoena.html

The Securities and Exchange Commission recently released its annual report for the year 2018, which focuses on its enforcement-related accomplishments. The Directors said they believe the effectiveness of the program should be measured by assessing the nature, quality, and effects of the Commission’s enforcement actions. They believe they are deterring future harm by bringing meaningful cases that send clear and important messages to market participants.

Of special interest, is the Commission’s emphasis on accountability of individuals. There were 54 entities and 94 individuals in stand-alone actions relating to issuer financial reporting and disclosures in the following categories: revenue and expense recognition problems; faulty valuation and impairment decisions; missing or insufficient disclosures; misappropriation through accounting misrepresentations; inadequate internal controls; and misconduct by financial reporting gatekeepers.

The report emphasizes that in every enforcement action, they seek appropriately tailored remedies that further enforcement goals. In addition to disgorgement and penalties, there are a wide array of potential remedies available. In each case, the Commission seeks those remedies that will be the most meaningful. Many of the individuals charged in FY 2018 include senior officers at prominent issuers, including CEOs, CFOs, accountants, auditors and other public figures. Overall monetary remedies obtained by the SEC (penalties and disgorgement) increased by 4 percent from approximately $3.789 billion in FY 2017 to $3.945 billion in FY 2018.2

With the rise in cybersecurity issues, the commission is focusing on the timeliness and accuracy of disclosures and the need to maintain strong internal accounting controls. It has shown its ability and preference to enhance the usual enforcement tools in creative ways to address the current violations. It’s becoming increasingly difficult to get away with many of the violations that were previously overlooked, now that the Commission is using advanced capabilities in data analytics. The Commission has also sought to penalize individuals and require them to pay back illegal gains. In FY 2018, the Commission obtained judgments or orders for disgorgement and/or penalties from over 500 individuals, representing an increase of 9% over FY 2017.

Making sure you are in full compliance with all SEC regulations and procedures is the primary focus of the law firm of Wilson, Bradshaw & Cao, LLP. Your success in going public and staying in good standing with the SEC will bring lasting benefits to your company. We actively help companies navigate through SEC Enforcement issues. If you receive a subpoena from the SEC we are here to help.

On Thursday, December 27, 2018 the Securities and Exchange Commission began operation within its plan during a federal government shutdown. They say they have “staff available to respond to emergency situations involving market integrity and investor protection.” That means that out of the 4,426 active staff employees of the SEC, 175 will be retained to protect life or property, 110 of them, who are engaged in law enforcement, will continue working, and only one employee will be working part time on investor protection. The SEC ”will be available to answer questions about fee calculations for filings during the partial shutdown, but they will not respond to other questions.”

The Investment Adviser Registration Depository system will continue to accept filings but the Division of Investment Management will not be available to provide advice. Certain SEC systems, which are contracted out to third parties, will remain in operation, including EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system that allows companies to electronically file initial public offerings and other crucial documents. The shutdown will have no impact on those services, but with the SEC not responding to those filings, it could cause a delay in several IPOs, as well as a lasting impact on the state of the IPO market in 2019. Smaller businesses, particularly those in need of an infusion of capital to continue operating, will bear the brunt of any IPO delays.

These limited and curtailed services will affect different investors in different ways, depending on their needs and objectives. The most critical harm to all investors could be that the SEC will only retain a few staff employees to review complaints from investors, but they will not be in a position to respond to those complaints, questions, or requests for information.

Market Watch reports that If the shutdown were to continue for a prolonged period, companies could end up with financial statements that have gone stale. That means they have reached a point where the quarterly financials included have become so old that the issuer needs to provide numbers for the subsequent quarter. Those numbers need to be audited to be included in a prospectus, creating another potential holdup.

However, the weak stock market in late 2018 and early 2019 signals that investors are being cautious, which may force new IPOs to devalue their prices. Also, the delay in IPO approvals may be a blessing for some IPOs, because, as the stock market strengthens, going into spring, the values may increase.

Navigating the securities markets can be difficult and confusing for those who do not work in it constantly. Without available help from the SEC, it can be more of a challenge. Fortunately, the law office of Wilson, Bradshaw & Cao, LLP, a boutique securities law firm, will not be shut down, but will be available to assist investors and business owners with professional legal advice about the securities market and raising capital.

The SEC suspended trading in the securities of Simex, Inc. due to concerns about inaccurate and insufficient information in the marketplace regarding the company’s products and services and purported regulatory approvals. The SEC order was entered pursuant to Section 12(k) of the Exchange Act.

See: https://www.sec.gov/litigation/suspensions/2018/34-84460.pdf

Earlier this month, Robert A. Cohen, Chief of the SEC Enforcement Division’s Cyber Unit, said that the SEC “does not endorse or qualify custodians for cryptocurrency” and warned investors to be “skeptical of those attempting to sell digital assets” that make claims about future SEC actions. Cohen stated that to allay confusion, the SEC will announce official actions regarding digital assets through official government sources. Examples of official government sources include agency press releases, the Federal Register, an agency’s official government website (SEC.gov, Investor.gov, or CFTC.gov), or authorized public statements by the agency’s leadership.

See: https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-watch-out-false-claims-about-sec

The SEC can suspend trading in stock for 10 days and can enjoin a broker-dealer from soliciting investors until the broker-dealer has met reporting requirements. Pursuant to rule 15c2-11 under the Exchange Act, at the termination of the trading suspension, no quotation can be issued unless they have “strictly complied with all provisions of the rule.”

The SEC’s Office of Investor Education and Advocacy has issued materials to educate investors, including an Investor Bulletin on initial coin offerings and a mock ICO website. Additional information is available on SEC.gov/ICO and Investor.gov.

If you have questions about SEC regulation of cryptocurrency transactions and complying with rule 15c2-11, call the Bradshaw Law Group before publishing statements that may lead to SEC enforcement action.

Regulation D’s Rule 504 and Rule 506 grant exemptions from registration if different requirements are met.

Rule 504

Rule 504 of Regulation D provides an exemption from registration for a 12-month period on the offer and sale of up to $5,000,000. Rule 504 permits general offerings and solicitations so long as they are restricted to accredited investors.

Companies that are not eligible to use the Rule 504 exemption include: companies that are already Exchange Act reported companies, investment companies, companies that “have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company,” and companies with people disqualified under the “bad actor” disqualification provisions.

See: https://www.sec.gov/divisions/corpfin/guidance/rule504-issuer-small-entity-compliance.html

Rule 501(d)(1)(i)-(viii) lists the bad acts that fall under the “bad actor” disqualification rule. Only “bad acts” that have occurred on or after September 23, 2013 can destroy the exemption. Bad actors include:

• Those who have been convicted within ten years of the sale of a felony or misdemeanor in connection with the purchase or sale of any security, involving any false filing with the SEC, or arising out of the business conduct of financial intermediaries.
• Those subject to an SEC order at the time of sale entered under provisions related to investment companies, dealers, and brokers
• Those subject to an SEC order at the time of sale that mandates the person to “cease and desist from committing or causing violations or future violations” of any intentional antifraud provision of the federal securities laws
• Those suspended or expelled from membership in a registered national securities exchange or affiliated securities association for acts found to be incompatible with the just and equitable principles of trade

See: https://www.lexisnexis.com/legalnewsroom/banking/b/banking-finance/posts/rule-506-d-bad-actor-disqualifications-who-s-a-bad-actor-and-why-are-they-bad-part-i for more information

Rule 506

Rule 506 of Regulation D permits two distinct exemptions from registration when companies offer and sell securities. These two exemptions are split based on whether the issuer will engage in general solicitation to market securities.

The first exemption falls under Section 4(a)(2) of Rule 506(b). Section 4(a)(2) provides a “safe harbor” for companies that comply with certain requirements. In addition to a prohibition from using general solicitation to market securities, the requirements of the exemption include:

• A company may sell its securities to an unlimited number of “accredited investors” and up to thirty-five other purchasers
• A company’s information provided to accredited investors must not violate antifraud provisions of federal securities laws, and must not contain false or misleading statements
• Companies must make themselves available to prospective purchasers to answer questions

The second exemption amends Section 4(a)(2) by permitting general solicitation. Companies remain exempt if participating investors are all accredited. For this exemption to apply, companies must take reasonable steps to confirm investors are in fact accredited. This amendment is stated in Rule 506(c).

Companies that comply with exemption requirements do not need to register their securities offering with the SEC. However, these companies must electronically file a “Form D” with the SEC after they initially sell securities. This form is a short notice that contains names and locations of promoters and executives and brief information about the offering.

See: https://www.sec.gov/fast-answers/answers-rule506htm.html

Why is it important to get an exemption from registration?

It is important to get an exemption from registration because by operating under Rule 506 exemptions, companies can raise unlimited capital from an unlimited number of accredited investors (and up to thirty-five (35) non-accredited investors).

Accredited investors are individuals with a joint net worth with their spouse of at least $1 million. Accredited investors also include individuals with income exceeding $200,000 in each of the two most recent years, or joint income with their spouse exceeding $300,000, plus “a reasonable expectation of reaching these income levels in the current year.” Companies with total assets in excess of $5 million are also accredited investors.

Being eligible for an exemption is important for getting help with funding from these types of accredited investors. About 90-95% of all private placements are conducted pursuant to Rule 506, and deals with accredited investors are generally private placements exempt from registration under Rule 506.

See: https://www.thesecuritiesedge.com/2012/09/securities-law-101-part-ii-avoiding-the-pitfalls-in-a-private-placement/

Also: Without an exemption from registration, the issuer, salespeople, officers, directors, and agents may be personally liable. If found liable, the investor can recover the principal, interest, and attorney fees.

See: https://www.equitynet.com/crowdfunding-terminology/general-solicitation

Hester M. Pierce. Commissioner to the U.S. Securities and Exchange Commission (“SEC”) gave a speech via video in Zug, Switzerland on November 7, 2018 on the impressions that the United States regulatory environment is giving to today’s cryptocurrency entrepreneurs.

At the beginning of her speech, she immediately contends that these are her personal opinions and not those of the SEC so we are interpreting her words as mere guidance to entrepreneurs as to what is going on in the minds of regulators when they are grappling with the SEC’s mission to protect the value of companies and facilitate capital formation.

Is the regulatory environment welcoming to today’s cryptocurrency entrepreneurs? Pierce is concerned that the answer right now is no, but she is hopeful for the future.

Peirce’s points are as follows:

In her speech, Pierce says, “regulators are coming to terms with crypto in different ways and do not always coordinate with one another so the United States is admittedly sending mixed messages.” She cites the fact that the Commodity Futures Trading Commission (“CFTC”) has allowed the development of crypto-derivatives markets, but the SEC so far has not approved any application to list an exchange-traded product. She concludes that there is unclear as to how these companies should proceed and if they can even develop organically without being subject to regulations. Interestingly enough, she critiques regulators for their lack of appreciation for the investor’s interest in gaining exposure to digital assets to balance out their investment portfolio and their fear of being blamed for investments that go wrong. Pierce herself, favors an approach that allows investors to make their own decisions by making sure that there is adequate information publicly available to make the investment and the SEC, she believes, should be doing their best to facilitate this process.

Pierce’s next point was that the SEC “needs to do a better job at explaining how and why [they] make decisions and what those decisions mean” to the investor. Stalling trading on the open market without explanation and not providing investors with information when stocks can be traded freely again is an example that Pierce uses in her speech. On the contrary, Pierce says that regulators at the CFTC and SEC are eager to understand the promise of new technology and are implementing new efforts to resolve these issues.

Last month, the SEC launched its Strategic Hub for Innovation and Financial Technology (“FinHub”), a forum dedicated to helping new and developing technology companies understand the regulatory framework. Additionally, Pierce totes the SEC’s many fraud convictions for companies running Ponzi schemes masquerading as cryptocurrency companies. She indicates that now companies who raise money legitimately and are seeking to build something with real value to bring to society can do so and individuals can invest in those companies.

If you would like to raise capital, then contact Wilson Bradshaw & Cao, LLP so you can raise money in a compliant manner. Wilson Bradshaw & Cao, LLP is a boutique securities law firm in Irvine, California and New York City. We help businesses solicit investors for both public and private companies in a compliant manner. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.

On November 29, 2018, the Securities and Exchange Commission (“SEC”) charged two celebrities with unlawfully touting initial coin offerings (“ICOs”). This is the first time that the SEC has brought touting violation charges involving ICOs. Professional boxer, Floyd Mayweather Jr. and music producer Khaled Khaled, commonly known as DJ Khaled, each received cease and desist orders with the charges.

According to the SEC orders filed November 29, 2018, Mayweather and Khaled did not disclose promotional payments from ICO issuers, including Centra Tech Inc. (“Centra”), and touted on social media accounts to entice potential investors to participate in the offering. Mayweather posted on twitter that Centra’s ICO “starts in a few hours. Get yours before they sell out, I got mine…” This storm hits after the DAO Report in 2017 indicated that ICOs may need to be registered as securities and just a little over a year after the SEC issued an informal warning urging caution around celebrity backed ICOs. Now the SEC is cracking down.

In April 2018, the SEC filed an action against Centra founders alleging that the ICO was fraudulent and parallel criminal charges were brought by the U.S. Attorney’s Office for the Southern District of New York.

Mayweather and Khaled have agreed to pay disgorgment, penalties, and prejudgement interest, totaling just over three-quarters of a million dollars, and agreed to not participate in securities offerings for three and two year periods, respectively.

The SEC’s goal is to encourage promoters to fully disclose to investors that they are being endorsed by the company and not to appear as though they are unbiased investors themselves.

Wilson Bradshaw & Cao, LLP is a boutique securities law firm in Irvine California and New York City. We help businesses solicit investors for both public and private companies in a compliant manner. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.

The Securities and Exchange Commission (“SEC”) charged a public company promoter and his company with conducting a scheme to manipulate trading in at least 97 penny stocks.

According to the SEC’s complaint filed November 28, 2018, Eric Landis arranged with third party advertisers for publicly traded, small (often relatively infrequently traded) companies (a/k/a “microcap” companies) to distribute promotional materials for the stocks using email lists, when in fact there were no distribution lists. From the SEC’s perspective, Landis manipulated the market by creating the mirage that those companies’ securities were in high demand by trading thousands of microcap shares himself using brokerage accounts in his own name, in the name of an entity he controlled, Ridgeview Capital Partners LLC (“Ridgeview”), and in the names of several third parties. His goal was to induce others to trade in the securities by infusing the securities markets with false information concerning supply and demand of the penny stocks he was paid to promote.

The director of the SEC’s Boston Regional Office, Paul Levenson, gives this warning to penny stock investors, “microcap investors should know that sometimes market volume in a particular stock can be driven by a single fraudulent actor, as alleged here.”

The SEC’s complaint charges Landis and Ridgeview with violating the antifraud and market manipulation provisions of the securities laws. The SEC is requesting a permanent injunction stopping Landis from engaging in these practices in the future, disgorgement of all ill-gotten gains from the unlawful conduct with other penalties, and prohibiting him from participating in any offering of a microcap stock.

How could Landis have generated demand for public companies’ stock legally? Well, he shouldn’t have been buying and selling stock in companies that he had no interest in investing in. This is a recipe for fraud.

Wilson Bradshaw & Cao, LLP is a boutique securities law firm in Irvine California and New York City. We help businesses solicit investors for both public and private companies in a compliant manner. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.

The Securities and Exchange Commission (“SEC”) charged two companies, CarrierEQ Inc. (“Airfox”) and Paragon Coin Inc., (“Paragon”) who conducted Initial Coin Offerings (“ICOs”) after the SEC published its famous DAO Report of Investigation concerning the topic of ICOs.

On November 16, 2018, after an undisclosed investigation period by the SEC, two orders by the SEC forcing Airfox and Paragon to Cease and Desist their ICOs and register their tokens as securities. However, there is no guarantee that such tokens will ever make it through the registration process.

Airfox raised $15 million worth of digital assets to finance its development of a token “ecosystem” where they would start a mobile application that would create a market that would allow users to interact with advertisers. Airfox targeted users in developing countries.

Paragon raised $12 million to add blockchain technology to the cannabis industry to further legalize cannabis and related products.

As is customary with ICOs, the SEC alleges that neither company registered their tokens as securities, nor did they fit an exemption. Both companies paid $250,000 in penalties and the orders included undertakings to compensate any investors who may have been harmed as a result of purchasing tokens in the offerings.

How could Airfox and Paragon have conducted their ICOs legally? By registration, of course. How does that work? The law is still unclear. However, there has only been one ICO registration case where the SEC decided that there was no fraudulent intent, which is Munchee, Inc. The Commission did not impose a penalty or include undertakings from Munchee, which stopped its offering before delivery of tokens and returned all proceeds to the investors. The SEC highlights Munchee, Inc. as a virtuous ICO, since they disgorged their proceeds to the investors. This result is not promising.

If you would like to raise capital, then contact Wilson Bradshaw & Cao, LLP so you can raise capital in a compliant manner. We restrict our practice to securities law, in particular private and public offerings and SEC enforcement work.