Firm Settles Charges for Failing to Terminate Contingency Offering After Material Change in Terms
Commentary by Glen Barrentine
A firm settled FINRA charges for failing to promptly return investor funds following a material change in a contingency private placement offering.
According to the AWC, the firm acted as the placement agent for a contingency offering, which required the issuer to raise a minimum of $1 million by a specific date. FINRA found that the firm and the issuer made a material change by reducing the minimum contingency amount to $900,000 or less when the firm could not to meet the required minimum by the deadline. FINRA found that the firm failed to terminate the contingency offering upon this material change to its terms.
FINRA also found that the firm "had no procedures or system to address the firm's obligations if the minimum contingency was not met by the offering's termination date, the termination date is extended, or other material changes are made to the offering terms, including a lowering of the minimum contingency amount."
As a result, FINRA found that the firm violated Exchange Act Rule 10b-9 ("Prohibited representations in connection with certain offerings") and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision").
To settle the charges, the firm agreed to (i) a censure, (ii) a $20,000 fine and (iii) an undertaking to certify that it had implemented a compliant supervisory system.
Commentary
When the contingency offering minimum was lowered from $1 million to the lesser of $900,000 or the price of the asset to be purchased with the offering proceeds, the firm sought and obtained from the investors signed subscription confirmation agreements whereby the investors agreed to the lowered minimum offering amount.
In light of the AWC, it is clear that FINRA did not think this met the terms of Rule 10b-9, which requires a prompt refund of any consideration paid in the event the original consideration target is not met. Accordingly, in FINRA's view, obtaining consent from the investors to the new offering price was not sufficient and, instead, the firm should have refunded the investor funds and then commence a new offering whereby those same investors, who had already committed to the lowered offering price, would then agree to the new terms and make a new investment.