Fin-Law: What are the top priorities of the SEC?

Some recent Securities and Exchange Commission (SEC) actions should be carefully reviewed by issuers, funding platforms and portals.

This is because they provide stark warning to those who sell securities over the Internet but who do not comply with the federal securities laws.

Unregistered broker-dealer activity, yet another example

In my last regulatory action update, I discussed SEC Chairman Mary Jo White’s keynote address at the 47th Annual Securities Regulation Institute on Oct. 28, 2015.  At the Institute, Chairman White alerted us that unregistered broker-dealer activity is a top priority for the SEC’s Division of Enforcement.

On Dec. 7, 2015, Chairman White’s assertion was verified when the SEC announced that it had charged lawyers and law firms involved in EB-5 transactions with acting as unregistered broker-dealers.

See, News Release, Lawyers Offered EB-5 Investments as Unregistered Brokers, 2015-274

While not specifically involving the JOBS Act industry, the SEC analysis and the lessons to be drawn from it are instructive.  Notably, while one case did involve fraud, the bulk of the actions did not, thus highlighting that unregistered broker-dealer activity even without fraud is a priority area for the SEC.

Indeed, if individuals like lawyers can be adjudged to be unregistered broker-dealers, it seems relatively easy for the SEC’s analysis to be applied to funding platforms and other Internet offerers of securities.

The SEC action was largely based upon the fact that the lawyers, in addition to their legal fees, were receiving commissions for selling EB-5 securities.  The commissions paid constituted transactional based compensation, and was paid only when the attorneys successfully sold securities to their clients.

Transaction based compensation has always been clear cut unregistered broker-dealer activity.  But the SEC found other troubling facts too, including that the attorneys were recommending securities to their clients, acting as liaison between the investment offerer and their client-investors, and facilitating the transfer of investment funds, all without a broker-dealer license.

Section 3(a)(4)(A) of the Exchange Act generally defines a broker broadly as any person engaged in the business of effecting transactions in securities for the account of others. Individuals or entities who participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction, or who are otherwise engaged in the business of effecting or facilitating securities transactions, may be required to register as a broker-dealer.

Receiving transaction based compensation, or compensation that is related to the outcome or size of the transaction, is clear cut indicia of broker-dealer activity.  As the attorney respondents did not comport their activities to the securities law, they acted as unregistered broker-dealers in violation of Section 15(a)(1) of the Exchange Act.

The attorney respondents were ordered, without admitting or denying the SEC’s findings, to cease and desist from acting as unregistered brokers, together with disgorgement of their profits, prejudgment interest and a monetary penalty.  An Austin, Texas-based attorney and his law firm were jointly and severally ordered to disgorge $30,000, the amount of commissions earned, to pay prejudgment interest of $2,965, and a penalty of $25,000.

(See this report)

A Florida-based attorney and his law firm were ordered to pay disgorgement of $228,750, together with prejudgment interest and a monetary penalty.  

Five other lawyers and their law firms were also charged and received similar penalties.  The SEC noted these penalties included consideration that each attorney cooperated and agreed to enter into early discussions with staff to resolve the SEC investigations, thus suggesting perhaps much higher penalties for those who choose not to cooperate and are found to violate Section 15.

Rule 506(c) Securities Offering Fraud

Earlier, in late October 2015, the SEC announced an action, Securities and Exchange Commission v. Ascenergy LLC et al., Civil Action No. 2:15-cv-01974-GMN-PAL (D. Nev., October 13, 2015 where it pursued an issuer, Las Vegas- based Ascenergy LLC, and its CEO Joseph Gabaldon, for fraudulently raising approximately $5 million under Rule 506(c).

It sold its securities on its own website and the websites of several funding platforms including,,, and This matter, while earlier filed under seal, was announced to make the public aware of an ongoing general solicitation fraud. The SEC already has obtained an asset freeze and a temporary restraining order against Ascenergy and Gabaldon.

So, what makes this case fraud? Ascenergy and Gabaldon allegedly were diverting investor funds for such things like foreign travel, fast food restaurants, Apple stores and iTunes, dietary supplements, and personal care products, all clearly unrelated to its oil and gas business.

Also, the SEC alleged that the defendants made multiple, material misrepresentations about the company and the nature of the offering.  For example, Ascenergy described the investment as having “exceptionally low risk,” and an “extremely low risk profile.” In fact, this was a high-risk investment in undeveloped and unproven wells.  Ascenergy also described its investment as having no profit risk because investors were to be paid from gross revenues before operating expenses, which makes no sense.  Guaranteeing investment returns or falsely diminishing risks in your disclosures and marketing materials is a bad idea.

The SEC charged Ascenergy and Gabaldon with violations of Section 17(a) of the Securities Act of 1933,  Section 10(b) of the Exchange Act, and Rule 10b-5.  It is seeking preliminary and permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, civil penalties, and the return of all investor funds.

All Internet-based securities offerings, and their marketing materials, must comport to the requirements of law.  As is obvious, this means that the issuer cannot make misrepresentations of material fact, or omit to disclose a material fact that an investor would reasonably want to know before making an investment.  Material misrepresentations or omissions are fraud, and can be charged as such by the SEC, the Department of Justice and other criminal prosecutors, and state securities regulators.

A SEC investigation and enforcement action against a small business is frequently a harbinger of the end. It is extremely expensive and the investigations are protracted.  Plan ahead to make sure you comply with the law to protect the company you are dedicating yourself to build.  And disclose to investors all material facts.

The information and materials in this article are provided for general informational purposes only and are not intended to be legal advice. The issues discussed include complicated areas of law and legal advice should be obtained from a securities attorney about your specific circumstances.

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