Firm Settles Charges for Failing to Register Convertible Notes Business
A firm settled SEC charges for operating as an unregistered securities dealer in the acquisition and sale of billions of shares of convertible notes from at least 23 issuers.
According to the SEC Order, the firm specialized in acquiring convertible, variable rate notes from penny stock issuers, converting these notes to stock at a substantial discount and then selling the stock in the public market. The SEC said the firm engaged in various methods to source potential financing deals, including cold calling, attending industry conferences and maintaining a secure website for select issuers and broker-dealers. The SEC said the firm's strategy involved selling the converted stock shortly after acquisition, profiting from the discounted purchase price rather than any stock price appreciation. The SEC found that the firm conducted hundreds of note conversions, selling billions of shares and generating significant income. The SEC stated that the firm's failure to register allowed it to avoid "regulatory obligations that govern the conduct of dealers in the marketplace, including the requirements to follow financial responsibility rules and maintain certain books and records." The SEC said the firm ceased purchasing new notes in 2020 and later took steps to transition its activities under the supervision of a registered broker-dealer in which the founders acquired a minority interest.
The SEC determined that the firm and its individual owners violated Exchange Act Section 15(a)(1) ("Registration and regulation of brokers and dealers").
To settle the charges, the firm and its owners agreed to (i) cease and desist from violations of Section 15(a)(1); (ii) surrender for cancellation all rights to all shares of common stock that it received in connection with convertible, variable rate notes; (iii) retain an independent compliance consultant; (iv) submit a six-month evaluation; (v) preserve records for two years; and (vi) pay disgorgement of over $2 million dollars along with prejudgment interest and a civil penalty. The owners agreed to separately pay a civil money penalty of $10,000.
In a statement, SEC Commissioner Mark T. Uyeda said that the SEC "should not be implementing policy objectives for convertible, variable rate notes through enforcement of novel theories under the 'dealer' definition," but rather through the rulemaking process. Mr. Uyeda further asserted that "under the Commission's broad definition of 'dealer,' nearly any activity that involves buying and selling securities outside of the trader exception could require registration under the Exchange Act. Yet the action against [the firm] is solely focused on its transactions involving convertible, variable rate notes." He questioned: "Why does the acquisition and resale of stock from convertible, variable-rate notes require [the firm] to register as a dealer while the acquisition and resale of discounted stock from equity lines of credit raise no such registration requirements?"