Securities Industry Commentator by Bill Singer Esq

Two Men Indicted For Allegedly Operating Multimillion Dollar Sports Betting Pyramid Scheme In Las Vegas / Defendants Allegedly Defrauded More Than 600 Investors (DOJ Release)

Russian Cybercriminal Sentenced to Prison for Role in $100 Million Botnet Conspiracy (DOJ Release)

SEC Division of Enforcement Publishes Annual Report for Fiscal Year 2020 (SEC Release)

FINRA Fines and Suspends Rep over Borrowing from Two Customers

In the Matter of Timothy Aaron Engelmann, Respondent (FINRA AWC)

SEC Harmonizes and Improves "Patchwork" Exempt Offering Framework / Rule amendments harmonize registration exemptions, eliminating complexity and facilitating access to capital and investment while preserving or enhancing important investor protections (SEC Release)

Statement on Harmonizing, Simplifying and Improving the Exempt Offering Framework; Benefits to Small and Medium-Sized Business and Their Investors by SEC Chairman Jay Clayton

Statement at Open Meeting on Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets by SEC Commissioner Hester M. Peirce

Statement at Open Meeting on Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets by SEC Commissioner Elad L. Roisman

Statement on Amendments to the Exempt Offering Framework by SEC Commissioner Allison Herren Lee

Statement on Harmonization of Securities Offering Exemptions by SEC Commissioner Crenshaw

[F]rom September 2010 to August 2019, Thomas and Becker maintained - and advertised to investors as supposed investment funds - the following entities: Sports Psychometrics; Vegas Basketball Club; Vegas Football Club; Einstein Sports Advisory; Quantum Sports Advisory; Wellington Sports Club; and Welscorp, Inc. Thomas and Becker made false representations to investors that they would use their sports betting skills and strategy to make sports bets with the investors' money:

• For example, Thomas and Becker told investors that their " 'special insights' and ahead-of-the-curve strategies. . . can generate an Average-Profit-Per-Bet of +140% per $100 bet. . . and possibly as high as +180% or plus $180 per $100 bet. In essence, unlimited riches."
• Similarly, they advertised a "perfect investment opportunity," offering "quick access to funds - funds that can be withdrawn by wire or transfer in only one day" and "exceptionally high yield - we achieved a +10.75% ROI per betting day during 2014 Football Season."

Thomas and Becker also allegedly misrepresented to investors that their accounts were multiplying in value due to successful sports betting, when in fact no such betting occurred. And when investors tried to cash out their investments, Thomas and Becker ignored their calls and emails, and made various excuses for why they could not distribute the money, ranging from purported medical reasons to issues with banks and sportsbooks. To the extent any investors were paid out, those payments came from money deposited by other investors, rather than successful sports bets.

Thomas and Becker induced more than 600 individuals to deposit money -from less than $10,000 to over $500,000 - into their purported investment funds, for a total of at least $29 million. The estimated loss amount to investors is alleged to be at least $9 million dollars. Thomas and Becker spent investors' funds on personal expenses, including dining, housing, home improvement, and transportation.

[F]rom 2007 through 2019, Brovko worked closely with other cybercriminals to monetize vast troves of data that had been stolen by "botnets," or networks of infected computers.  Brovko, in particular, wrote software scripts to parse botnet logs and performed extensive manual searches of the data in order to extract easily monetized information, such as personally identifiable information and online banking credentials.  Brovko also verified the validity of stolen account credentials, and even assessed whether compromised financial accounts had enough funds to make it worthwhile to attempt to use the accounts to conduct fraudulent transactions. 

According to court documents, Brovko possessed and trafficked over 200,000 unauthorized access devices during the course of the conspiracy. These access devices consisted of either personally identifying information or financial account details. Under the U.S. Sentencing Guidelines, the estimated intended loss in this case has been calculated as exceeding $100 million.

"Fiscal year 2020 was a year filled with extraordinary challenges that impacted us all in countless ways. I am incredibly proud of the exceptional work of my colleagues in the face of these challenges and I am pleased to share the results of that work in our annual report," said Stephanie Avakian, Director of the SEC's Division of Enforcement. 

This year's report discusses how the Division took affirmative steps to prevent potential fraud related to the COVID-19 pandemic and bring actions against wrongdoers who attempted to capitalize on it, while at the same time continuing to focus on the multitude of existing and new non-COVID-related enforcement issues arising in the normal course. The report also describes strategic changes the Division implemented to improve its operations in several key areas, including by implementing a number of efficiencies in the whistleblower program and increasing the pace of investigations. Additionally, as in prior years, the report highlights the Division's commitment to core principles such as protection of retail investors, focus on individual accountability, and imposition of remedies that most effectively further enforcement goals.

In fiscal year 2020, the SEC brought a diverse mix of 715 enforcement actions, including 405 standalone actions.  These actions addressed a broad range of significant issues, including issuer disclosure and accounting violations; foreign bribery; investment advisory issues; securities offerings; market manipulation; insider trading; and broker-dealer misconduct. Through these actions, the SEC obtained judgments and orders totaling approximately $4.68 billion in disgorgement and penalties - a record amount for the Commission - and returned more than $600 million to harmed investors. Significantly, through the Division's efforts, the SEC awarded a record $175 million to 39 whistleblowers in fiscal year 2020, both the highest dollar amount and the highest number of individuals awarded in any fiscal year.

[I]n April 2017, Respondent borrowed $40,000 from a firm customer (Customer 1), through an LLC he partly owned, to finance a real estate venture. The terms of the loan were set forth in a promissory note. Customer 1 was not a member of Respondent's family. Respondent did not notify the firm that he had borrowed money from Customer 1 or obtain approval to do so. 

In addition, on October 31, 2017, Respondent falsely stated in a firm compliance questionnaire that he had not borrowed money from any firm customer. Respondent fully and timely repaid the loan from Customer 1. In addition, in October 2018, Respondent borrowed $75,000 from another firm customer (Customer 2), through the same LLC, to finance another real estate venture. The terms of the loan were set forth in a promissory note and required monthly interest payments beginning on November 1, 2018. Customer 2 was not a member of Respondent's family. Respondent did not notify the firm that he had borrowed money from Customer 2 or obtain approval to do so. In addition, on January 28, 2019 and August 15, 2019, Respondent falsely stated in firm compliance questionnaires that he had not borrowed money from any firm customer. Respondent has made all payments due to Customer 2 to date, as required by the promissory note. 

• Establish more clearly, in one broadly applicable rule, the ability of issuers to move from one exemption to another;
• increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits;
• set clear and consistent rules governing certain offering communications, including permitting certain "test-the-waters" and "demo day" activities; and
• harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions.

[O]ur exempt offering framework, which consists of no fewer than 10 different exemptions, was built over time, over fifty years, through various acts of Congress as well as rulemaking by the Commission.  In large part, it was built exemption-by-exemption in response to certain changes in our economy, technology and financial markets.  I believe one can view today's actions as analogous to long-overdue deferred maintenance on a home where, over time, a few additions have been added and several rooms have been redecorated during different decades.  Each step made sense at the time, but the result is a complex patchwork that does not fit together as well as it should.  In the case of our exempt offering framework, we are left with frictions, gaps and other needless inefficiencies.

Turning back to the charts, they clearly show that the staff - applying their deep understanding of the law, as well as their deep understanding of the various market segments and the many types of issuers and investors that rely on this framework - have crafted an overhaul that accomplishes three objectives:

1. remaining true to proven principles for retrospective review and modernization, improving all three components of our mission: investor protection, capital formation and market integrity; 
2. addressing the substantial changes in our marketplace, including changes in communications technology and access to capital; and
3. greatly reducing costs, particularly for smaller and medium-sized business as well their investors.

This release makes a number of other important changes.  It tackles integration, a notoriously difficult legal doctrine that introduces uncertainty into the capital raising process and can severely limit options for issuers when executing their financing strategies.  Today's modernization and streamlining of this analysis into a single rule with a clear principle, guidance on how to apply that principle, and four safe harbors is a welcome improvement.  There is room, however, for further streamlining.  For example, there appears to be a concern that issuers will conduct serial Rule 506(b) offerings to sell to more than 35 non-accredited investors over a short period of time.  Rather than relying on the anti-evasion language in new Rule 152 that would clearly prohibit such a scheme to evade the registration requirements, we are also amending Rule 506(b) to limit the number of non-accredited investors to no more than 35 within a 90 calendar day period.  This additional complexity is unwarranted, particularly given that most 506(b) offerings do not include non-accredited investors because of the heightened disclosure requirements.

[H]ow rare to see a unanimously approved temporary rule work out so well and have an opportunity shortly thereafter to adopt it permanently. While we do not make such change today, I would like to see us press forward to explore extending this relief to make it permanent, so that we could allow this positive change to continue. Crowdfunding offers an attractive avenue for businesses to raise capital early on in their life cycles. It also offers investors the opportunity to invest small amounts in businesses-often local ones-that they believe in and want to support. We should encourage this type of capital raising engagement. Doing so facilitates the entrance of companies to our capital markets and provides an opportunity for investors to support and purchase an interest in businesses that they do not see in our public markets.

Exempt private offerings have traditionally served an important role in providing capital for smaller and medium-sized companies, often along their path to the public markets. It is well understood that retail investors operate at a severe disadvantage in the private market because of information asymmetries and other power imbalances. Historically, the primary protection against this power imbalance was to limit private companies to capital raised from investors that are large or sophisticated enough to compete, or wealthy enough to bear the cost if they lose out. In recent years, however, the exception (or exemptions from registration) have swallowed rule, with statutory and regulatory changes steadily chipping away at restrictions on private offerings and exposing more and more retail investors to their risks.

Today's final rules exemplify this trend, permitting larger and more frequent private offerings to be more widely offered to the general public with the purported goal of enhancing investor opportunity. Enhancing investor opportunity might be a persuasive rationale if this rule arose out of a groundswell of support from investors, or if there was evidence that retail investors would find better opportunities in the private market. However, the evidence suggests that retail investors would actually do worse in the private markets. And, as with so many of our rulemakings in the last few years, investors - the supposed beneficiaries of the rule - largely oppose it.

They are not alone. This rule is in large part also opposed by state securities regulators - those on the front lines fighting fraud in private markets. They have made clear that these changes will make it harder to police the private market and will therefore leave more vulnerable investors at risk.

At the core of this rule is the assumption that retail investors will successfully buy offerings that professional investors reject. We apparently believe that retail investors can better assess the risk adjusted returns and find value that venture capital overlooks. This is unlikely to be true. First, it is not supported by any data. Second, smaller investors do not have the same bargaining power to compel private issuers to provide robust information disclosures, and the offering exemptions do not require issuers to do so. Third, smaller investors often lack the money or the assets necessary to create the diverse portfolios of private companies needed to successfully withstand the inevitable losses. Retail investors face plenty more disadvantages, but you get the idea.

Some might argue that although retail investors have been excluded from investing in the most promising private companies, they can make up the difference by investing in other exempt offerings. Unfortunately, because private markets are so opaque, we do not have the data to analyze this. This highlights a persistent problem with our approach to the private markets, in that issuers do not report the data needed to allow us to study them and their results, and thereby develop appropriate regulatory strategies. That won't change under this rule, and without that information, I simply cannot conclude that these changes balance our mission imperatives of facilitating capital formation while also protecting investors. Based on the evidence we do have, these changes appear likely to offer only at best marginal benefits to the companies who need the most assistance, while increasing risks but not rewards for investors.

I believe in the vital contributions offered by our country's small businesses. In particular, I am committed to helping facilitate capital formation for minority, women, and veteran-owned businesses. That's not just good policy; it's good economics. There are real problems today with access and representation that leave promising companies and the entrepreneurs behind them on the outside looking in. Unfortunately, this proposal is not tailored toward solving those problems. Instead, it proposes a variety of changes to exemptions rarely used by these underserved businesses. In the end, we are expanding offerings we have not studied, to make it easier to sell to the investors who have the most to lose if a new venture fails. I'd like to believe that some of the small businesses that raise money because of this rulemaking will succeed.  But others will fail entirely - or fail to pay retail investors the same high rate of return that venture capitalists demand to justify the risks of early venture investing.

• Securities Industry Commentator
• Bill Singer