According to the first of the two complaints, United Kingdom citizen Timothy Page, a recidivist, and his son, U.K. resident Trevor Page, schemed with associates to acquire millions of shares in U.S. publicly traded microcap companies, disguise their control over the companies, and then dump their shares into the public markets in violation of the securities laws. The Pages allegedly used nominee entities, including the five entity defendants, to conceal their holdings in the companies, and then engaged in manipulative trading and hired boiler rooms to generate artificial demand for their stock by making misleading statements to investors.

The SEC's second complaint alleges that two of the Pages' associates, Utah resident William R. Shupe and U.K. resident Daniel Cattlin, used their insider roles as officers or majority shareholders at several of the microcap companies to hide the Pages' control. At the same time, they helped the Pages secretly acquire and then sell millions of the companies' shares. Shupe allegedly enabled the Pages to disguise their control over the companies by, among other things, holding the Pages' securities through a company Shupe formed and by helping the Pages conceal their funding of the microcap companies. Cattlin is alleged to have coordinated with the Pages to provide false and misleading information in response to investigative subpoenas issued by the SEC staff, and during an interview conducted by SEC staff in June 2020.

The SEC's complaint alleges that Rice and Carebourn Capital's business model was to buy convertible promissory notes - a type of security - from penny stock issuers, convert the notes into newly-issued shares of stock, and quickly sell those shares into the public market at a profit.

The complaint further alleges that, since January 2017, Rice and Carebourn Capital purchased more than 100 such notes from approximately 40 different penny stock issuers. The complaint alleges that Rice and Carebourn Capital negotiated and received highly favorable terms for these notes, including terms that gave them deep discounts from the prevailing market price for the shares of counterparty penny stock issuers. According to the complaint, by engaging in a regular business of buying convertible notes and then selling the resulting newly-issued shares of penny stock companies' stock into the public market, Rice and Carebourn Capital operated as unregistered securities dealers and collectively generated more than $25 million in gross stock sale proceeds and over $13 million in net profits, with many deals still outstanding.

[S]tarting in late February 2021, Suyun Gu became aware of the increased market volume and volatility driven by so-called "meme stocks" - stocks that were being actively promoted on social media platforms. Gu allegedly then devised a scheme to take advantage of the "maker-taker" program offered by exchanges by trading options of these stocks with himself.

Under the maker-taker program, a trade order that is sent to an exchange and executes against a subsequently received order makes liquidity and generates a rebate from the exchange. In contrast, an order that immediately executes against a pre-existing order takes liquidity and is charged a fee.

The SEC's complaint alleges that Gu was able to generate illicit profits by using broker-dealer accounts that passed rebates back to their customers to place initial orders on one side of the market, and then using broker-dealer accounts that did not charge fees for taking liquidity for his subsequent orders on the other side of the market. When identifying a product to trade, Gu and his friend and business associate, Yong Lee, selected far out-of-the-money put options on some "meme stocks," which they thought would be easier to trade against themselves because interest in buying the "meme stocks" and related price increases would make put options on those stocks less attractive. After certain broker-dealers closed Gu's and Lee's accounts in early March 2021, Gu was able to continue the scheme through mid-April 2021 by lying to broker-dealers about his trading strategy, using accounts in the names of other people, and accessing these accounts through virtual private networks to hide his activity. The complaint alleges that Gu executed approximately 11,400 trades with himself, netting at least $668,671 in liquidity-rebates, and that Lee executed approximately 2,300 trades with himself, netting $51,334 in liquidity-rebates. In addition to collecting these ill-gotten rebates, the wash trading scheme allegedly impacted the market as it skewed the volume in certain option contracts and induced other traders to place trades in otherwise illiquid option contracts.

The SEC's complaint, filed in the United States District Court for the Northern District of Georgia, alleges that, from November 2016 until 2019, Casurluk and Star Chain raised approximately $9 million from unsophisticated investors, many of whom spoke little English and had recently emigrated from Turkey to the United States, under the guise of investing in several quick-serve restaurant franchises. Casurluk and Star Chain allegedly told investors that Star Chain and the investors would make equal capital contributions to acquire the restaurants and would be "50/50" owners. In reality, as further alleged, Casurluk and Star Chain inflated the restaurants' purchase price to make it appear that they had contributed to the purchases when only investors' funds had been used to purchase the restaurants. Moreover, contrary to their disclosures, Casurluk and Star Chain allegedly did not identify the investors as owners of the restaurants in franchise documents or otherwise. Finally, according to the complaint, Casurluk misappropriated investors' money for his own personal use and to support other businesses he owned, including a construction company and unrelated quick serve restaurants.

[S]ky Group and Betancourt falsely told investors that Sky Group would use investors' money solely to make payday loans and cover the costs of such loans, when, in reality, Betancourt misappropriated at least $2.9 million for personal use - including for his lavish wedding at a chateau on the French Riviera, vacations to Disney resorts and the Caribbean, costs associated with the purchase of a luxury Miami condominium, and service on his personal Piper airplane - and transferred at least another $3.6 million to friends and family, including his ex-wife, Angelica Betancourt, and to EEB Capital Group LLC, an entity whose bank accounts Betancourt and his current wife control. Sky Group and Betancourt also allegedly used at least $19.2 million of investors' money to make Ponzi-like payments to other investors. Finally, the SEC's complaint alleges that Sky Group and Betancourt misled investors by promising annual returns as high as 120% and representing that Sky Group's business was profitable, even though Sky Group did not generate sufficient revenue to cover principal and interest payments due to investors.

Thank you, Ed [Bernard]. I'm glad to be with the Asset Management Advisory Committee again. I appreciate the members' time and willingness to give us advice, and I look forward to hearing the readouts from today's discussions. As is customary, I'd like to note I'm not speaking on behalf of the Commission or the SEC staff.

Today, I'd like to speak about a topic that I know your Evolution of Advice Subcommittee regularly takes up: the way rapidly changing technology is changing user experiences and marketing, providing the ability to give individuals personalized advice and client service.

I'd like to discuss something underlying all of this: predictive data analytics.

We are living in a transformational time, perhaps as transformational as the internet itself. Artificial intelligence, predictive data analytics, and machine learning are shaping and will continue to reshape many parts of our economy.

To take just one example, I believe we're in an early stage of a transition toward driverless cars. Policymakers already are thinking through how to keep passengers and pedestrians safe, if and when these changes take hold.

Finance is not immune to these developments. Here, too, policymakers must consider what rules of the road we need for modern capital markets and for the use of predictive data analytics.

You see, new platforms can collect boundless amounts of data - from customers or from the world around them. With that data - say, the steps we've taken wearing our fitness bands, or the days of the week we buy pet food online - they can tune their marketing to each of us differently.

Therefore, fintech platforms have new capabilities to tailor marketing and products to individual investors, using predictive data analytics and other digital engagement practices (DEPs).

These technologies can bring increased efficiencies and greater access in finance. In many cases too, though, these individualized features may encourage investors to invest in different products or change their investment strategy.

Thus, in the case of robo-advisers or investment advisers, I question what are they doing within the predictive data analytics algorithms - if, statistically speaking, they are maximizing for our returns as investors, or, say, the revenues of the platforms.

In essence, predictive data analytics and other DEPs, including behavioral prompts and differential marketing, often are designed, in part, to increase platform revenues, data collection, and customer engagement.

This raises some key questions:

How are investors protected in light of the potential conflicts of interest that may exist when DEPs optimize for revenues, data collection, or investor behaviors?

There's a related policy question: if DEPs are affecting investors' behavior, when is that a recommendation or investment advice?

How do these new business models ensure for fairness of access and pricing? More specifically, this question arises when the underlying data used in the analytic models reflects society's data, with historical biases that may be proxies for protected characteristics, like race and gender.[1]

Advances in predictive data analytics also could raise some system-wide issues when we apply new models and artificial intelligence across our capital markets. This could lead to greater concentration of data sources, herding, and interconnectedness, and potentially increase systemic risk.

We're taking a look at these issues as part of a broader examination of predictive data analytics and the intersection between finance and technology.

In late August, the Commission published a request for public comment on the use of new and emerging technologies by financial industry firms.[2] I encourage investors in your funds to weigh in by Oct. 1.

Separately, I have asked SEC staff to develop proposals for the Commission's consideration on cybersecurity risk governance - both on the issuers' side and on the funds' side. These could address issues such as cyber hygiene and incident reporting.

I look forward to your thoughts on all these topics.

Thank you.

 

[1] See Gary Gensler and Lily Bailey, "Deep Learning and Financial Stability," available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723132.

[2] See https://www.sec.gov/rules/other/2021/34-92766.pdf.

Thank you, Ed [Bernard].  And thanks to all the hard-working Committee members and panelists.  When Chairman Jay Clayton announced the formal establishment of the AMAC nearly two years ago, he charged it with helping "the Commission ensure that our regulatory approach to asset management meets the needs of retail investors and market participants at a time when the industry is evolving rapidly."[1]  Over the next two years, the AMAC succeeded in addressing many of the pressing issues facing asset managers, and I for one have profited from the work and contribution each of you has made. 

Today's agenda is in keeping with AMAC's role to inform the Commission on pertinent matters affecting asset managers and their clients, and I am looking forward to hearing the presentations from the subcommittees on Private Investments and the Evolution of Advice.  The Private Investments Subcommittee's final report will become an important source of information and insight as the Commission continues to look for ways to increase retail investor access to the vibrant private markets.  I hope remedying the diminishing retail investor options in these markets will be added to the Commission's admittedly expansive agenda.  I am especially interested in hearing the update from the Small Advisers and Small Funds subcommittee.  Recognizing the important role that small advisers play in our markets and in the lives of our clients needs to be a key consideration in policy formulation.

One way to show our appreciation for the special challenges smaller advisers face is by taking the relatively simple step of amending our regulatory definition of just what a small adviser is for purposes of our regulatory analysis.  Currently, we define a small adviser as being a firm with assets under management of less than $25 million.[2]  As the presentation materials illustrate, almost 60% of advisers have assets under management of $100 million to $1 billion, most assets are managed by a small number of very large advisers,[3] and nearly 90% of all advisers have 50 or fewer non-clerical employees, with a median number of just eight employees.[4]  Regardless of what our rule says, these are small firms who feel keenly the cost of each additional regulatory requirement the Commission imposes.  Small advisers provide a bridge to prosperity, as they are engaged on a daily basis with retail investors in communities across the country, and it is incumbent on us to do all we can to encourage their growth and lower barriers.

I am looking forward to hearing what the subcommittees have to say, but I am even more excited to listen to the discussions that will follow.  Although I have not always agreed with AMAC's recommendations, I have always benefited from hearing the thoughts of this dynamic group. 

[1] U.S. Securities and Exchange Commission, "SEC Announces the Formation of Asset Management Advisory Committee," October 9, 2019, [Press release], https://www.sec.gov/news/press-release/2019-208.   

[2] 17 CFR § 275.0-7. 

[3] "Presentation to the SEC's Asset Management Advisory Committee," Investment Adviser Association, Sept. 27, 2021, slide 7, https://www.sec.gov/files/iaa-presentation-karen-barr-gail-bernstein-092721.pdf.  

[4] Id. slide 8.

Thank you, Carla [Garrett]. It's good to be with this Committee again. I'd like to thank the members for their time and willingness to represent the interests of America's small businesses. As is customary, I'd like to note I'm not speaking on behalf of the Commission or the SEC staff.

I look forward to your readouts from today's discussion on late-stage, private rounds of financing, as well as the pathways to our public markets.

Last time we gathered, I spoke about my father, Sam Gensler, a small business owner who never had more than a few dozen employees. He didn't tap the capital markets like many small business owners today.

As a society, the U.S. is blessed with the largest, most sophisticated, and most innovative capital markets in the world. Our companies, including small businesses, rely on our capital markets more than companies in other countries do.

Consider this: The U.S. capital markets represent 38 percent of the globe's capital markets.[1] This exceeds even our impact on the world's gross domestic product, where we hold a 24 percent share.[2]

Furthermore, corporate bonds, a $10 trillion market,[3] is about the same size of commercial bank lending in this country.[4]

Broadly speaking, as small businesses grow, they often migrate from borrowing in bank markets to borrowing in capital markets. Having that breadth and depth in our markets facilitates capital formation. That's why we want to make them as efficient as possible.

In that context, I'd like to touch on one topic this Committee will discuss today: special purpose acquisition companies (SPACs).

 

This year, there has been an unprecedented surge in SPACs, which provide an alternative to traditional initial public offerings (IPOs). As technology and markets evolve to challenge existing business models, it is important to think about how we protect investors and facilitate capital formation.

With SPACs, there are a lot of costs in between the companies and their investors. I think enhanced disclosures and other provisions can increase competition in this market.

SPACs are shell companies that raise cash from the public through what I call "blank-check IPOs." They generally have two years to find and merge with a target company.

SPAC sponsors generally receive 20 percent of shares of ownership up front - but only if they actually do a deal later. The first-stage investors can redeem when they find the target, leaving the non-redeeming and later investors to bear the brunt of that dilution.

Once they find a target company, SPACs often raise more capital through transactions known as private investments in public equity (PIPEs). These deals give new investors - mostly big institutions - an opportunity to put money into the target IPO.

These PIPE investors often can buy shares at a discount to what the share price will be after the target IPO, or receive other benefits or payments that are not available to ordinary investors.

The result? PIPE investors often get a better deal than retail investors, whose investment may be further diluted.

There are lots of costs that this structure is bearing - whether sponsor fees, dilution from the PIPE investors, and fees for investment banks or financial advisers. These costs are borne by companies trying to access markets and by regular investors. It may be that those fees are coming out of the retail public's investment dollars.

I think for small businesses considering going public via SPACs, it is important to consider these costs as well, and whether it is the best approach for the target company.

I've asked staff for recommendations about how we might update our rules so that investors are better informed about the fees, costs, and conflicts that may exist with SPACs.

I do think, however, that it is worth considering what we have learned from SPACs and direct listings, and whether there are any changes that might be appropriate for traditional IPOs.

I look forward to hearing from the public - including from this Committee - on these topics.

Thank you.

 

[1] See Securities Industry and Financial Markets Association, "2021 SIFMA Capital Markets Fact Book," available at https://www.sifma.org/wp-content/uploads/2021/07/CM-Fact-Book-2021-SIFMA.pdf.

[2] See World Bank data: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD

[3] Statistics from Securities Industry and Financial Markets Association: https://www.sifma.org/resources/archive/research/statistics/

[4] See Federal Reserve, "Assets and Liabilities of Commercial Banks in the United States," available at https://www.federalreserve.gov/releases/h8/current/default.htm.

Thank you, Carla [Garrett] and thank you to the Committee members and today's panelists.  Welcome to Andrea [Seidt] to the Committee.  I am particularly happy to have a fellow Ohioan involved.  Thanks to Mike [Pieciak] for serving on the Committee.  I am looking forward to today's discussions on small business capital formation trends at this stage in the pandemic, and the changing dynamics of pre-IPO financing and going public.  Two trends to be featured today - SPACs and the significant increase of institutional investor participation in late stage private capital raising rounds - demonstrate the hunger for growth opportunities in our markets.  Making it possible for retail investors to get access to some of this early growth remains an important matter for the Commission's consideration.

The desire to expand private investment opportunities to more individuals was on full display at our May 2021 Small Business Forum.  The Forum's Report,[1] which was released this morning, includes valuable policy recommendations by the participants, many of which have been discussed by this Committee.  The Report includes some frustratingly non-committal responses by the Commission.  History teaches us that the Commission's non-committal responses with regard to Forum recommendations could translate into no action at all.  Now is not the time for a full response to all of the Forum's recommendations, but I will address a few of them and urge this Committee to continue pushing the Commission to show more of a commitment to facilitating small business capital formation. 

Forum participants recommended that we "expand the accredited investor definition to include other measures of sophistication, such as specialized industry knowledge or professional credentials."[2]   Another recommendation similarly suggested that we expand the definition "to include an investor certification course or test whose curriculum has been approved by FINRA or the SEC."[3] 

My response:  Ideally, the Commission would get out of the business of telling Americans that they are either not rich enough or smart enough to invest their money as they wish.  Short of that approach, the Commission should entertain proposals from the public to expand the accredited investor definition to cover additional certifications, designations, and other credentials.[4]  My preference would be to avoid anointing one institution or entity to design and administer a knowledge-based exam.  We might consider instead allowing multiple tests or crediting successful completion of two or more investing-related courses at any accredited college or university, but I am open to other options. 

Forum participants also recommended that we "revise Regulation Crowdfunding to remove the GAAP financial statement requirement for businesses looking to raise a small amount," preempt state law for secondary transactions for shares issued under Reg A and Crowdfunding rules, and establish a micro-offering exemption.[5]

My response:  We need to create workable options and remove regulatory barriers that prevent small businesses from using these options.  Since the beginning of the pandemic, Regulation Crowdfunding has emerged as a vital capital formation tool, and I am pleased that the Commission provided temporary relief with respect to the financial statement review requirements in Regulation Crowdfunding.  The positive feedback from that exercise suggests that we should be open to exploring other tweaks to Regulation Crowdfunding.  Likewise, changes to Reg A may help to expand its use, and a streamlined micro-offering exemption might be particularly helpful for early-stage founders in communities without many deep pockets or easy access to specialized legal help. 

Thank you, and I look forward to your thoughts and observations as today's agenda focuses at the other end of the spectrum of private companies-those close to going public.   

[1] Report on the 40th Annual Small Business Forum (May 24-27, 2021), available at https://www.sec.gov/files/2021_OASB_Annual_Forum_Report_FINAL_508.pdf.

[2] Id. at 15. 

[3] Id. at 16.

[4] Proposals may be submitted to SEC staff at investorcredentials@sec.gov. 

[5] Id. at 11-12.