Securities Industry Commentator by Bill Singer Esq

NOTICE to Securities Industry Commentator and BrokeAndBroker.com Readers

Phishing Email Purporting to Be From FINRA / FINRA Alerts Firms to Phishing Email Requesting Them to Respond to Fraudulent FINRA Survey (FINRA Regulatory Notice)

Former Cetera Rep Sues AdvisorNet Financial Over Alleged Supervision and Compliance Failures (BrokeAndBroker.com Blog)

CEO of Financial Firm Pleads Guilty to Running Multi-Million Dollar Securities and Tax Fraud Scheme, and Operating an Unlicensed Money Services Business (DOJ Release)

FINRA Fines and Suspends Rep Over Senior-Living Real Estate Project Promissory Notes

In the Matter of Dwight L. Dykstra, Respondent (FINRA AWC)

SEC Proposes Conditional Exemption for Finders Assisting Small Businesses with Capital Raising (SEC Release)

Open Meeting on Proposed Finders Exemption - Providing Regulatory Clarity to Benefit Small Businesses (Chairman Jay Clayton)

Statement at Open Meeting on Proposed Exemptive Order for Certain Activities of Finders (Commissioner Hester M. Peirce)

Statement at Open Meeting Considering a Proposed Exemptive Order for Finders (Commissioner Elad L. Roisman)

Regulating in the Dark: What We Don't Know About Finders Can Hurt Us (Commissioner Allison Herren Lee)

Statement on Proposed Exemptive Relief for Finders (Commissioner Caroline A. Crenshaw)

FINRA warns member firms of a widespread, ongoing phishing campaign that involves fraudulent emails purporting to be from FINRA asking member firms to complete a survey (see sample below). The email was sent from the domain "@regulation-finra.org" and was preceded by "info" followed by a number, e.g., info5@regulation-finra.org. FINRA recommends that anyone who clicked on any link or image in the email immediately notify the appropriate individuals in their firm of the incident. 

The domain of "regulation-finra.org" is not connected to FINRA and firms should delete all emails originating from this domain name. 

FINRA has requested that the Internet domain registrar suspend services for "regulation-finra.org". 

FINRA reminds firms to verify the legitimacy of any suspicious email prior to responding to it, opening any attachments or clicking on any embedded links. . . .

[N]ava was at all relevant times the CEO of the Surf Financial Group LLC (Surf Financial), a financial-services firm based in La Jolla, California.  In 1994, federal securities regulators permanently banned and censured Nava from participating in the securities industry.  Despite the two-decades' old ban, Nava admitted in the plea agreement that he and other co-conspirators, including a licensed attorney, converted the debt of various publicly traded companies under materially false and fraudulent pretenses into unrestricted stock and then sold the stock for profit.  Nava further admitted that he and his co-conspirators carried out their fraudulent scheme by entering into agreements in which Nava sold shares of various entities' stock in public-market exchanges, only after fraudulently claiming an exemption from the U.S. Securities and Exchange Commission's (SEC) registration requirements for selling securities in the public marketplace.

In the plea agreement, Nava admitted that he directed at least one attorney, as well other co-conspirators, to prepare fraudulent attorney opinion letters that were used to remove restrictions on various publicly traded companies' stocks so that they could be freely traded on the open market.  These fraudulent attorney opinion letters permitted Nava and his co-conspirators to sell their shares of stock at times of their choosing and unlawfully to circumvent the SEC's regulations governing the offer and sale of securities.    

To conceal his involvement in the scheme, Nava admitted he used various nominees to ensure that, as Nava described it, he was a "ghost" in the transactions.  Brokerage firms relied on the purported truth and accuracy of the attorney opinion letters in evaluating whether to clear the sale of shares of the restricted stocks on public markets.  After the stocks were cleared for sale as a result of the false attorney opinion letters, Nava and his co-conspirators sold millions of shares of these stocks to the investing public.  Nava further admitted that, after selling these shares and securities, he transferred the proceeds derived from the securities-fraud scheme into bank accounts under his direct control.

Nava also admitted that, from approximately 2017 to 2018, he owned and operated an unlicensed MTB as a means to transmit financial proceeds from foreign locations, including Hong Kong and the Bahamas, all of which disguised the source, origin and control of such financial proceeds.  As Nava further admitted, in 2017, Nava entered into a business partnership with at least one co-conspirator who resided in Mexico and delivered dairy products for a living.  To conceal Nava's control over the MTB, Nava directed the Mexican resident to fraudulently open a deposit account in his name at a financial institution in San Diego, and to transmit funds as a nominee and as directed by Nava.  According to the plea agreement, Nava's unlicensed MTB transacted millions of dollars in international wire transfers with entities purportedly involved in investment-banking services and which sold futures and securities.  Nava failed to register his MTB with the U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCEN, as required under federal law. 

As stated in the plea agreement, Nava also falsified his tax returns for years 2014, 2015 and 2016.  He admitted that he falsely and fraudulently underreported Surf Financial's profits, and he did so for the purpose of underreporting Nava's true income and tax liability.

In October 2018, while registered through VBS, Dykstra participated in private securities transactions by soliciting investments in promissory notes issued by a limited liability company (the Issuer) raising capital to develop a senior living real estate project. Dykstra contacted prospective investors-some of whom were customers or former customers of VBS-to inform them of the investment opportunity. Dykstra then provided marketing materials to interested investors, participated in communications between the Issuer and interested investors, and facilitated the sale of approximately $2 million of promissory notes to 21 investors. The Issuer paid Dykstra $67,500 in selling compensation for his participation in the transactions. Additionally, Dykstra and his wife invested $100,000 in a promissory note sold by the Issuer. The promissory notes sold by the Issuer were securities. 

Dykstra's participation in the promissory note securities transactions was outside the regular course and scope of his employment with VBS. While registered through VBS, Dykstra-after giving notice to VBS and receiving VBS' approval-sold membership interests in a fund formed to invest in the same senior living real estate project. Dykstra, however, did not provide any prior notice to VBS of the promissory notes transactions or of his role in those transactions. 

Tier I Finders

A Tier I Finder would be limited to providing contact information of potential investors in connection with only a single capital raising transaction by a single issuer in a 12 month period.  A Tier I Finder could not have any contact with a potential investor about the issuer.

Tier II Finders

A Tier II Finder could solicit investors on behalf of an issuer, but the solicitation-related activities would be limited to: (i) identifying, screening, and contacting potential investors; (ii) distributing issuer offering materials to investors; (iii) discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice as to the valuation or advisability of the investment; and (iv) arranging or participating in meetings with the issuer and investor. 

Conditions for Both Tier I and Tier II Finders

Both Tier I and Tier II Finders would be subject to certain conditions. The proposed exemption for Tier I and Tier II Finders would be available only where:

• the issuer is not required to file reports under Section 13 or Section 15(d) of the Exchange Act;
• the issuer is seeking to conduct the securities offering in reliance on an applicable exemption from registration under the Securities Act;
• the Finder does not engage in general solicitation;
• the potential investor is an "accredited investor" as defined in Rule 501 of Regulation D or the Finder has a reasonable belief that the potential investor is an "accredited investor";
• the Finder provides services pursuant to a written agreement with the issuer that includes a description of the services provided and associated compensation;
• the Finder is not an associated person of a broker-dealer; and
• the Finder is not subject to statutory disqualification, as that term is defined in Section 3(a)(39) of the Exchange Act, at the time of his or her participation.

EXTRACTS from Chair and Commissioners' Statements

A long-standing issue in the area of small business capital formation and broker regulation is the regulatory status of finders.  Over the past decades, there have been many, repeated calls for the Commission to provide clarity in this area.[1]  The repeated calls for action arise from concerns in two areas.  First, issuers that want to comply with the rules may struggle to know in what circumstances they can engage a finder that is not registered as a broker-dealer.  Second, as a result of this uncertainty, individuals potentially could be engaging in brokerage activity, or alternatively, not serving the market because of the regulatory uncertainty associated with playing even a limited role in a capital raise. The current patchwork of staff guidance and no-action letters in this area has not provided needed clarity, and the time for Commission action is overdue.

Today's proposal provides a framework for finders to engage in certain limited activities without registering as brokers.  Finders provide a discrete but important role in facilitating capital formation for certain smaller issuers: they make connections between small businesses and people who might want to invest in them.  The need for finders is particularly acute for early-stage small businesses, which often struggle to find cost-efficient ways to raise funds from people outside of their immediate friends and family group.  Securing venture capital financing or enlisting the participation of a registered broker-dealer is not a realistic possibility for companies seeking to raise relatively small sums, so many issuers naturally turn to people with large rolodexes within their local communities. 

The lack of clarity regarding the status of finders has had detrimental effects for issuers and investors.  An issuer may be reticent to utilize the services of a finder absent certainty that its offering is not being facilitated by an unregistered broker.  But without finders, interested investors may never learn of the issuer that is offering an investment opportunity.  There has been a lot of discussion recently about how certain small businesses and entrepreneurs historically have been underserved by venture capital funding or angel investors, either due to their geographic location or founder demographics.[7]  Yet I think we can all agree that these businesses and entrepreneurs are no less deserving of growth opportunities than those that may have connections to well-established funding networks. 

The proposal relies far too heavily on the continued applicability of antifraud provisions as comfort regarding investor protection. This is tantamount to removing auto safety protocols but finding comfort in the fact that we still have ambulances. Antifraud protection is critical but insufficient. Once fraud has occurred, the damage has been done. Despite outstanding work from our Division of Enforcement, recovering funds essentially stolen by fraudsters is immensely challenging, and investors often see only pennies on the dollar in terms of recovery.

The Commission's proposal today is flawed in both substance and procedure. As to substance, the proposal would greatly expand the activities in which finders may engage without registration, while failing to deploy even minimal protections for investors. As to procedure, our exemptive authority is plainly not suited to the nuance and scale that this issue requires, and the lack of economic analysis means that the Commission proceeds with little to no empirical support. I must respectfully dissent.

Although the Notice pays lip service to meeting the needs of small issuers and women and minority-owned businesses, it provides no data indicating that underrepresented issuers, in particular, would benefit.  Further, the Notice does not impose any limitations on the amounts that can be raised from investors, the size of the offerings, or the types of issuers that can take advantage of the relief.  Instead, under the proposed approach, issuers of any size would be permitted to employ Finders to raise unlimited amounts of capital, [14] outside of the broker-dealer regulatory regime.[15]

I am not opposed to clarifying grey areas in our regulatory framework, especially where doing so may facilitate capital formation for smaller issuers and women- and minority-owned businesses.  However, any effort to provide clarity in this space should begin with collecting more data and information about the private markets where these Finders operate. 

• Securities Industry Commentator
• Bill Singer