Securities Industry Commentator by Bill Singer Esq

April 18, 2022
In today's blog we are left wondering. FINRA makes an exceptionally strong regulatory case against a former Morgan Stanley registered representative, who is charged with multiple violations. All in all, it's not a pretty picture that FINRA paints. It's the strength of FINRA's case that may raise an eyebrow or two when you learn that the rep was not barred from the industry. Of course a three-month suspension isn't a light slap on the wrist. Still -- you read the allegations and see what you think.

SEC Uncovers $194 Million Penny Stock Schemes that Spanned Three Continents / 16 defendants charged in international 'pump and dump' plots (SEC Release)
In three Complaints filed in the United States District Court for the Southern District of New York
the SEC charged the 16 Defendants (located in the Bahamas, the British Virgin Islands, Bulgaria, Canada, the Cayman Islands, Monaco, Spain, Turkey, and the United Kingdom) with violating the antifraud and registration provisions of the federal securities laws. As alleged in part in the SEC Release, the Defendants, located in:

[T]he charges, contained in three separate complaints, allege that several defendants played a variety of roles to accumulate the majority of shares in penny stocks via difficult to unveil, offshore nominee companies. It is also alleged that some of the defendants frequently used encrypted text and phone applications to avoid detection by regulators, and arranged to buy and sell penny stocks from multiple offshore accounts, in furtherance of the fraud.

According to the complaints, once some of the defendants had amassed a significant majority of the shares of the stocks, certain defendants secretly funded promotional campaigns to promote the stocks to unsuspecting investors in the United States and elsewhere. As alleged, when those campaigns triggered increases in the demand for and price of the stocks, some of the defendants sold the stocks via trading platforms in Asia, Europe and the Caribbean for significant profits.

SEC Charges Senior Executive of Brazilian Company with Fraud (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York the SEC charged Fernando Passos (former executive vice president of finance and investor relations of Brazilian reinsurance company IRB Brasil Resseguros S.A.) with violations of the antifraud provisions of the Exchange Act; and, in a parallel action, the Department of Justice charged Passos. As alleged in part in the SEC Release:

[P]assos, concerned about the significant decline in IRB's stock price following a short seller's report questioning IRB's financial results, fabricated and then spread a story in February 2020 that Berkshire Hathaway Inc. had recently invested in IRB. The complaint further alleges that Passos created and shared with others a fake shareholder list that showed Berkshire had made substantial purchases of IRB stock. Passos also allegedly communicated the false information to analysts and investors during meetings in both the United Kingdom and the U.S. According to the complaint, IRB's stock price rose by more than 6 percent during the 24 hours following the Brazilian and U.S. media reports that Berkshire had invested in IRB and subsequently dropped by more than 40 percent after Berkshire denied a week later that it was an investor.

Three Plead Guilty to Wire Fraud In Connection with Unlawful Virtual Currency Sales Business (DOJ Release)
Andrew Spinella, Renee Spinella, Nobody, a/k/a Richard Paul pled guilty in the United States District Court for the District of New Hampshire to to wire fraud. As alleged in part in the DOJ Release:

[B]etween approximately 2016 and 2021, the defendants opened and operated accounts at financial institutions as personal accounts in their names or as business accounts in the names of churches in order to allow their co-defendant, Ian Freeman, to use them to sell virtual currency.

Andrew Spinella pleaded guilty on April 12, 2022.  He admitted to opening personal accounts in his name for Freeman to use to sell virtual currency. He signed blank checks and gave Freeman the login information for those accounts.

Renee Spinella pleaded guilty on April 14, 2022.  She admitted that she opened a business account in the name of Crypto Church of NH, which she told the bank was an international ministry. She opened the account in person at a bank branch in New Hampshire where she was accompanied by Freeman.  Although the account was purported to be for the receipt of church donations, the account was used almost exclusively to support Freeman's virtual currency exchange business.

Nobody pleaded guilty on April 15, 2002 [sic].  He admitted that he opened accounts in his name and in the name of the Church of the Invisible Hand. At the time he opened the accounts or provided Freeman with access to the accounts, he knew they would not be used as personal accounts or for a church, but instead would be used by Freeman to trade virtual currency.

Each of the defendants was aware that banks would close these accounts if the banks knew the accounts were used to operate an unlicensed virtual currency business.

Andrew and Renee Spinella are scheduled to be sentenced on July 26, 2022.  Nobody is scheduled to be sentenced on July 28, 2022.

A total of six individuals have been charged in this case.  Freeman and two other co-defendants are scheduled to go to trial on November 1, 2022.

Bill Singer's Comment: Ummm . . . one of the Defendant's name is "Nobody"? Sort of reminds me of the scene in the Odyssey when Polyphemus a/k/a "Cyclops" asked Odysseus his name, and was told Nemo (or "Nobody"). And afterwards, when Odysseus had blinded Polyphemus and the gods asked who had blinded him, we get that age-old Greek Abbott & Costello routine that "Nobody" did.

Grading the Regulators and Homework for the Teachers: Remarks at Symposium on Private Firms: Reporting, Financing, and the Aggregate Economy at the University of Chicago Booth School of Business by SEC Commissioner Caroline A. Crenshaw

Thank you, Michael [Minnis]. I am humbled to be here today with such an impressive group of participants. The private markets and their role in the economy is an important topic and I'm glad to have this gathering of highly respected academics and industry participants thinking about the subject matter. I would also like to thank tonight's host, the University of Chicago, whose faculty profoundly impact policy-making through their research and discussion.[1] Before I get too far, let me make the standard disclosure that the views I express today are my own and do not necessarily reflect the views of the Commission or its staff.

The Importance of Data

All of us have something in common - our belief in the power of data. I gave a speech a few months back about how important data are, and should be, in driving regulatory thought and action.[2] That may even have landed me the invitation I got to speak here today. Academia can play a huge hand in helping assess not only what needs to regulated, but how effective existing regulations are. Data should be paramount in our regulatory decision-making and sitting in this room are some of the most sophisticated thought-leaders on data in the securities markets in the world. Starting from the premise that the optimal number of regulations is not zero (and I recognize that there may be those who do not start from that premise), I want to enlist your help as we think through what is the right balance in regulating the private markets, and what those rules should look like.

Plus, this gives me the opportunity to assign some homework to the professors, which I intend to do today. Although we have brilliant resources at the SEC, those resources are also limited. So, I'd like today's speech to be a call to arms of sorts - help us evaluate how the SEC's regulations are living up to the stated goals of those regulations, and help us figure out where to go next.

Private Markets are Growing

Let's start with the lay of the land. The private markets are growing at record rates. This is, of course, a trend that has been ongoing for some time. Since 2009, fundraising in the private markets has outpaced fundraising in the public markets.[3] Based on recent headlines, 2021 was no exception in terms of private market growth. In 2021:
  • Fundraising in global private markets reached a record high of nearly $1.2 trillion, an increase of nearly 20% over 2020, and a threefold increase over the past decade.[4]
  • Private assets under management reached an all-time high of $9.8 trillion as of July of this past year, an increase of ~33% from $7.4 trillion the year before.[5]
  • U.S. private fund assets have increased 70% in just five years.[6]
The number of private companies is growing and they are staying private for longer. The term "Unicorn" has become ubiquitous - private companies with valuations of a billion dollars or more. As of February of this year, the size of Unicorns has grown and the number of Unicorns has reached over 1,000, perhaps making the term "Unicorn" a misnomer.[7] In 2013, the most valuable Unicorn was Twitter at $10 billion; today, it is ByteDance (the parent company of TikTok) worth $410 billion.[8]

That all stands in contrast to the public markets, which appear to be declining in terms of overall market share. Private companies seem to be outpacing public companies both in number and in fundraising.[9] From July 1, 2020 through June 30, 2021, nearly twice as much money was raised in exempt offerings as through public offerings.[10] Another data point is the Wilshire 5000 Index, which tracks the overall performance of the U.S. stock market by holding thousands of publicly traded stocks at any given time - significantly more than the S&P, NASDAQ and the Dow. To be included in the Wilshire 5000, companies must be publicly traded and have their headquarters in the United States. And, while there were 7,500 companies in the index as of 1998, today that number has dropped to about 3,500.[11]

Harmonization Was Supposed to Improve Access to Markets and Capital For Small- and Medium-Sized Businesses. Is it Working?

I was sworn into office as an SEC Commissioner on August 20, 2020. Six days into my tenure, against my vote, the Commission adopted a rule to expand the definition of Accredited Investor.[12] Three months later, the SEC passed another rule called "Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets."[13] (Brevity is not our strong suit at the SEC.) The shorthand of that rule was that it would improve access to private capital by simplifying, harmonizing and expanding the exempt offering framework. In other words, there would be more access to capital outside of the registered, public markets, because more money could be raised through exemptions. In particular, it was to create "a more rational framework that [would] facilitate capital formation for small and medium sized businesses and benefit investors for years to come."[14] All laudable goals. To accomplish this, the rule gave greater leeway to issuers in allowing general solicitation of investors, it increased offering limits under Regulation D, Regulation A and Regulation Crowdfunding,[15] increased the frequency at which offerings could be made, and, coupled with the Accredited Investor Rule, it expanded generally the reach of exempt offerings to new investors, allowing them to access new markets. Conversely, it also provided those markets with new access to investors. But, importantly, it did so without the transparency, accountability and investor protections afforded by public markets. The adopting release also predicted that the rules would only have a marginal impact on the number of registered offerings.[16] But did the rule accomplish its goals? Will it?[17]

Last week, the SEC held its small business forum. It's one of my favorite events. We celebrate the achievements of small business owners in this country, entrepreneurs share strategies and tools for fundraising, and we consider how we can better serve these individuals, hard-working people who, in many ways, form the backbone of our country and economy. I encourage you to attend next year.

But in certain recent speeches and reports, we have been hearing out of the Office of the Advocate for Small Business Capital Formation, both anecdotally and through these data, that the private market boom is not serving everyone equally. Companies appear to be staying private longer and engaging in more and larger funding rounds before they go public (if they go public), which is where it seems much of the private capital may be going.[18] Large, traditionally public institutional investors are investing in venture and private equity markets more than ever. So, for example, although traditionally public investors invested in 5.3% of venture deals by count, they made up over 36% of venture deal value in 2020.[19] The median venture round without crossover public investors hovered below $3 million; the deal size with crossover investors was over $60 million.[20] In other words, the private market boom isn't necessarily a boon to our small and mid-sized businesses seeking capital. And, to be frank, I'm not sure we need regulation to help facilitate more capital going to Unicorns and other large private companies - they seem to be doing fine on their own. Meanwhile, smaller entrepreneurs are still struggling to get access to capital after the Angel investor stage.[21]

There may be a similar trend among private equity funds, with established names and mega-funds crowding out those seeking to break in to finance. Of the 2021 growth I described earlier, private equity funds grew the most, and represent $6.3 trillion in assets under management.[22] Many of the established names are successfully raising new flagship "mega-funds" funds with $5 billion+ assets raised.[23] However, it appears that emerging and first-time managers are having less success raising capital in this highly competitive market.[24] These newer and smaller managers are those most likely to invest in smaller and more diverse companies.[25] I worry that if they don't have opportunities, it reduces the opportunities for others.

The trends I'm describing were set in motion before the most recent round of rulemaking. This private market growth did not happen overnight and was facilitated by perhaps many things, including the legal framework put in place a long time ago.[26] But regardless of how we arrived here, I think we really need to grapple with whether we are now where we want our markets to be. Are we really facilitating capital formation for small and diverse businesses, and if not, how do we do that better? I hope you will help us collect past and emerging data on this subject. My ever-present fear is that the capital formation rules that we put in place pay lip-service to the needs of everyday American entrepreneurs, but really serve another master. And because of the less stringent disclosure requirements in private markets, they do that at the expense of actual, substantive, meaningful disclosure to investors, stakeholders and regulators.[27] Unicorns may prefer not to provide the kind of insights into their businesses that publicly traded companies have to disclose, but the result is less public data about what is actually working and what is, instead, just shifting burdens to those less able to bear them. So I am concerned that not only are we not advancing access to capital for the businesses that could most benefit, but also that the present system does not provide standardized disclosure that all investors can rely on for decision-making, reporting frameworks that form the basis of corporate accountability, and the industry data we need as regulators to inform our decisions.

Which brings me to my next question . . .

Are we Adequately Protecting Investors in the Private Markets?

It may not surprise many of you to know that I opposed the rule in part because I thought it did not appropriately advance our investor protection mission.[28] And what concerns me most about the opacity of private markets is quite simple: the potential for fraud and other harm to investors.

Indeed, our staff in the Division of Examinations put out a Risk Alert earlier this year relating to deficiencies that they were seeing at registered private fund managers. The areas that they highlighted were worrisome, to say the least. In particular, the staff noted:
  • Misleading material information about track records;
  • Inaccurate performance calculations;
  • Failure[s] to invest in accordance with fund disclosures regarding investment strategy;
  • Failure[s] to obtain informed consent from Limited Partnership Advisory Boards or Committees Required Under Fund Disclosures;
  • Lack of reasonable investigation into underlying investments or funds.
And, we are seeing a steady stream of private fund enforcement actions, including frauds relating to Ponzi-like frauds; [29] fee and expense frauds;[30] valuation practices;[31] among many other troubling cases.[32]

Retail investors, working Americans, are more exposed to the private markets than ever. Some are invested directly.[33] These investors typically do not have access to the bigger, less risky deals that big private funds and other professional investors have access to; and, they likewise may not have the reserves to withstand one or two unsuccessful ventures. The ability to have multiple investments fail in hopes of finding a winner requires both access to a broad range of promising investments and large amounts of money you can afford to lose, two attributes most small American investors don't have.

Other middle-class investors are invested through their pension funds, which by some estimates make up over 20% of private fund investors.[34] In this debate over regulation of private markets, we often hear arguments that large limited partners ("LPs") are sophisticated and have tremendous bargaining power when making investments in private funds and companies. Therefore, they can get access to whatever information, investments or investment privileges they want. But, we should not lose sight of the fact that not all LPs are created equally - the bargaining power of a sovereign wealth fund may be quite different from the bargaining power of the pensions of police, teachers or firefighters of small municipalities. And, while many of these pensions have requirements to allocate certain capital to the private markets, they may not have access to, or the ability to source, managers whose funds produce upper quartile returns, resulting in investments that do worse than the public indices.[35]

Further, working Americans also are invested through their 401(k) or other diversified holdings in mutual funds, which can invest a portion of their holdings in private funds and companies.[36] In short, a significant portion of the end dollars going into the private market comes from the retirement and the savings of our middle class. This heightens the importance of this dialogue about what level of transparency, accountability and oversight should be required in this market and whether it's actually working for America's working investors.

The influx of capital to the private side of the industry, coupled with the severity and frequency of misconduct that our agency is uncovering (even with the limited information we are able to collect) suggests to me that our recent rulemaking may not have been the right approach to serve our goals. The incomplete visibility that we have into the private markets tells me that we need more information to regulate and to ensure every American can adequately save for their children's education and their own retirement. Quite simply, we need more insight, more education, indeed more data, to be able to effectively protect investors, before the big frauds occur.

Where to from here?

I think there is a bigger debate going on right now - both inside and outside this room - about what is the right balance between the public and private markets. I read an article recently that posed the paradox succinctly - you can have two firms that are virtually identical in every respect, including shareholder base, product, business models, employee counts, operations, enterprise value, and so on. Yet, those two companies can have completely different regulatory and disclosure obligations to investors and stakeholders. Public Company A would need to provide public disclosure about financial results, operations, trends, executive compensation, corporate governance, among other disclosures; would have to have management and independent auditors certify to the effectiveness of their internal controls over financial reporting; and, would have to put certain matters to shareholder vote. Private Company B would have none of those regulatory obligations, and thus their investors cannot rely on those protections.[37]

The costs of going public are obvious - you have to pay lawyers, bankers, underwriters, and then take on the expenses of ongoing compliance.[38] The benefits may be obvious to a company that now has more immediate access to capital. But there may also be other external benefits to public companies that benefit the entire ecosystem. And, likewise, perhaps the disclosure and compliance cost savings enjoyed by private companies are not really savings at all. Rather, are private companies really just shifting the costs and risks onto investors and markets?

So, here is my question to you - are we at the right balance? I know this is an ongoing debate, but I would like it to continue and crystalize into recommendations for us at the Commission.
  • Where are retail investors putting their funds and are there adequate protections in place?
  • What are the full, systematic implications of the increasing size of our private markets, and of having so many so-called Unicorns? Are there unforeseen implications when Unicorns do go public, including how they might utilize their privately accumulated capital to influence the IPO process and their governance structure?
  • What are the barriers to accessing public markets today, and how can we alleviate such barriers without eroding investor protections and increasing the already large information asymmetry.[39]
  • Should we be taking immediate steps to better protect employee-investors of private companies, who are particularly vulnerable to liquidity and valuation challenges accompanying private companies?
  • Are there minimum corporate governance and code of ethics standards that should apply to all companies, public and private?
  • Are there other areas of our exempt offering framework that could be improved or better calibrated? For example, Regulation D and the Accredited Investor definition?
  • Should we revisit the rules under Section 12(g) of the Exchange Act?
On this last point, my colleague Commissioner Allison Herren Lee has recently suggested that we revisit the definition of "shareholder of record" in Section 12(g) to better reflect the actual beneficial ownership of companies.[40] I would like to hear from the academic community on that proposal and on others that might impact how we think about the private markets.

Finally, if you can't give me answers to my questions - because there are insufficient data or for other reasons - can you give me questions that you can answer? Using randomized trials, natural experiments, event studies, and difference in difference - what do the tools allow you to conclude with confidence about the right regulatory framework.[41]


With that, I would again like to thank you for inviting me here tonight, to speak to such an esteemed audience. I've given you a lot of homework. I hope that you will weigh in and help us think about these important subjects and how we can best serve our important mandate at the SEC. I encourage you to reach out to us and engage us in this dialogue.

[1] To give just a few of countless examples, see, e.g., Amir Sufi, House of Debt: How They (and You) Caused the Great Recession and How We Can Prevent it From Happening Again (University of Chicago Press 2014); Richard Hornbeck & Enrico Moretti, Estimating Who Benefits from Productivity Growth: Local and Distant Effects of City Productivity Growth on Wages, Rents, and Inequality, National Bureau of Economic Research Working Paper 24661 (May 2018) (Rev. Jan. 2019); Wenxin Du, Money Market Funds: the Tale of Two Diverging Paths, Fin. Times (June 24, 2021); Luigi Zingales & Bethany McLean, Capitalisn't: A Podcast from the University of Chicago's Stigler Center in Collaboration with the Chicago Booth Review.

[2] Commissioner Caroline Crenshaw, Mind the (Data) Gaps: Keynote Address at the 8th Annual Conference on Financial Market Regulation (May 14, 2021).

[3] Morgan Stanley,Public to Private Equity in the United States: A Long-Term Look(Aug. 4, 2020) ("[C]ompanies have raised more money in private markets than in public markets in each year since 2009") (citing Scott Bauguess, Rachita Gullapalli, and Vladimir Ivanov, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2017, Division of Economic and Risk Analysis, U.S. Securities & Exchange Commission (August 1, 2018)); see also Office of the Advocate for Small Business Capital Formation, Annual Report for the Fiscal Year 2021, at 11 (showing unregistered offerings at nearly twice the amount of registered offerings between July 1, 2020 and June 30, 2021) (hereinafter "Office of Advocate for Small Business 2021 Annual Report").

[4] McKinsey & Company Global Private Markets Review 2022, Private Markets Rally to New Heights, at 2 & 6, Exh. 1 (hereinafter "2022 McKinsey Report").

[5] Id. at 2, 7.

[6] Division of Examinations, U.S. Securities & Exchange Commission, Observations from Examinations of Private Fund Advisers, Risk Alert (Jan. 27, 2022).

[7] Ellen Huet, There Are Now 1,000 Unicorn Startups With $1bn or More, (Feb. 9, 2022); see also CB Insights - the Complete List of Unicorn Companies. At the time of this speech, CB Insights was reporting 1,083 Unicorns.

[8] Id. (noting also that "[i]n 2022 unicorns are being minted at a rate of more than one a day").

[9] George Georgiev, "The Breakdown of the Public-Private Divide in Securities Law: Causes, Consequences, and Reforms," NYU Journal of Law & Business, Vol. 18 at 228 & Exhs. A-2, A-4, A-5 & A-6 (Fall 2021) (hereinafter "The Breakdown of the Public-Private Divide").

[10] Office of Advocate for Small Business 2021 Annual Report at 11.

[11] Kat Tretina and Benjamin Curry, The Wilshire 5000: Invest in the Entire U.S. Stock Market, Forbes Advisor (Sept. 9, 2021).

[12] Adopting Release, Accredited Investor Definition, Rel. Nos. 33-10824; 34-89669 (Aug 26, 2020).

[13] Adopting Release, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Rel. Nos. 33-10884; 34-90300; IC-34082 (Nov. 2, 2020) (hereinafter "Harmonization Adopting Release").

[14] Press Release, SEC Harmonizes and Improves ‘Patchwork' Exempt Offering Framework, SEC Press Release No. 2020-273 (Nov. 2, 2020) (quoting Chairman Jay Clayton).

[15] See, e.g., Securities & Exchange Commission, Office of the Advocate for Small Business Capital Formation, Exempt Offerings.

[16] Harmonization Adopting Release at 8 ("[W]e estimate, as discussed further in Section IV (Economic Analysis) below, that while these amendments may encourage more exempt offerings, these offerings will have only a marginal impact on the number of registered offerings.").

[17] See Chairman Jay Clayton Statement on Harmonizing, Simplifying and Improving the Exempt Offering Framework, Benefits to Small and Medium-Sized Businesses and their Investors (Nov. 2, 2020).

[18] Huet, There Are Now 1,000 Unicorn Startups With $1bn or More, (Feb. 9, 2022); The Breakdown of the Public-Private Divide, at 227-228 (noting that the typical age of tech firms going public was 7.8 years between 1980 and 2011; since 2012, it has grown to 11 years) and 269-271 (discussing the availability of private funding which has resulted in Unicorns of today staying private longer and achieving larger sizes than their predecessors).

[19] Martha Miller, Banner Year in the Markets Solves Capital Raising Woes: Headline Clickbait and the Real Story of Access to Capital, Remarks at The SEC Speaks in 2021 (Oct. 13, 2021).

[20] Id.; seealso Cameron Stanfill,et al., Analyst Note: Crossing Over into Venture. A Look at Crossover Investors' Impact on US VC Dealmaking,PitchBook (2021);United States Securities & Exchange Commission Small Business Capital Formation Advisory Committee meeting transcript at 71 (Sept. 27, 2021).

[21] Martha Miller, Rethinking Capital Raising Policy: Opening Remarks at the SEC's Small Business Forum (Apr. 4, 2022) (describing, in the context of the "exclusivity of fundraising" that "the data and our Office's experiences have shown again and again thatwho you are-your personal network, location, education, and demographic group-often is the first hurdle to clear before investors ever learnwhat you are buildingand, critically,whether they will invest. Many founders never get in the room to tell their story to investors because ofwhothey are. I would use the phrase "the door is slammed in their face," but for most of those founders, they never get near the doorway at all.).

[22] 2022 McKinsey Report at 2.

[23] See Pitchbook - US PE Breakdown (Q1 2022) (Relating to "mega-funds," "[f]undraising in the upper echelon appears to be running smoothly. Nearly every large manager has either just wrapped up fundraising, is currently fundraising, or is planning on launching their next flagship offering imminently").

[24] See id. ("It appears emerging and first-time managers are having difficulty breaking through in this highly competitive fundraising environment.").

[25] See generally Office of Advocate for Small Business 2021 Annual Report 2021 at 39-53 (discussing trends in Women Business Owners and Investors, and Minority Business Owners and Investors, e.g., "[d]iversity among investment professionals directly impacts how the funds operate, and importantly the founders in whom the funds invest," and "[w]omen angels are backing companies roughly in proportion to their representation in the angel industry").

[26] See, e.g., Michael Ewans and Joan Farre-Mensa, The Deregulation of the Private Equity Markets and the Decline of IPOs, National Bureau of Economic Research, Working Paper 26317 (Sept. 2019) (discussing the National Securities Markets Improvement Act (NSMIA) of 1996's impact on the supply of private capital to late-stage private startups; "NSMIA is one of a number of factors that have changed the going-public versus staying-private trade-off, helping bring about a new equilibrium where fewer startups go public, and those that do are older.").

[27] Some have indicated that the growth of private equity may lead to undesirable concentration. See, e.g., John C. Coates, IV, The Future of Corporate Governance Part I, the Problem of Twelve, Harvard Public Law Working Paper No. 19-07 (Sept 20, 2018) (rev. Mar. 14, 2019). Others have discussed the potential impact of the private markets on the erosion of corporate governance gatekeepers such as exchanges. See, e.g., Commissioner Robert J. Jackson, Testimony Before the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets of the Committee on Financial Services, U.S. House of Representatives, Hearing on Oversight of America's Stock Exchanges: Examining Their Role in Our Economy (Mar. 30, 2020).

[28] Commissioner Caroline A. Crenshaw, Statement on Harmonization of Securities Offering Exemptions (Nov. 2, 2020).

[29] See, e.g., Securities & Exchange Commission v. Matthew Wade Beasley, 22-cv-612 (D. Nev.) (filed Apr. 12, 2022); Securities & Exchange Commission v. Schamens, 22-cv-1219 (D.N.J.) (filed Mar. 3. 2022); Securities & Exchange Commission v. Kay X. Yang, 22-cv-450 (E.D. Wis.) (filed Apr. 13, 2022).

[30] See, e.g., In the Matter of Alumni Ventures Group, LLC, et al., Admin. Proc. No. 3-20791 (Order Instituting Administrative & Cease-And-Desist Proceedings filed Mar. 4, 2022); Securities & Exchange Commission v. Safeguard Metals LLC, et al., 22-cv-693 (filed Feb. 1, 2022).

[31] See, e.g., Securities & Exchange Commission v. James Velissaris, 22-cv-1346 (S.D.N.Y.) (filed Feb. 17, 2022) (fraudulent scheme to overvalue assets in both mutual and private fund).

[32] See, e.g., Matter of Wahed Invest LLC, Admin Proc. No. 3-20750 (Order instituting Administrative and Cease-And-Desist Proceedings) (filed Feb. 10, 2022).

[33] See Accredited Investor Definition, Rel. No. 33-10824; see also 2022 McKinsey Report at 6 ("Retail Investors, for whom access to the private markets has long been constrained, are receiving more attention. Private markets GPs are launching new products, devising alternative vehicle structures and building out in-house wholesaling teams to tap into this vast pool of capital.").

[34] Division of Investment Management, Analytics Office, Private Fund Statistics, Second Calendar Quarter 2021 (Jan. 14, 2022).

[35] See, e.g., Letter from Institutional Limited Partners Association to Vanessa Countryman (Sept. 24, 2019).

[36] The Breakdown of the Public - Private Divide at 287 ("The big-three asset managers already invest in private companies and the biggest of them, BlackRock, has recently indicated plans for further expanding its investment in private company equity"); see also, Prequin, Giant Asset Managers Dip Their Toes into Venture Capital (Mar. 24, 2022).

[37] The Breakdown of the Public - Private Divide at 224-26.

[38] See, e.g., Commissioner Robert J. Jackson, The Middle Market IPO Tax: Remarks at the Greater Cleveland Middle Market Forum (Apr. 25, 2018).

[39] See, e.g., id.

[40] Commissioner Allison Herren Lee, Going Dark: The Growth of Private Markets and the Impact on Investors and the Economy: Remarks at The SEC Speaks in 2021 (Oct. 12, 2021).

[41] Joshua D. Angrist and Jörn-Steffen Pischke, Mostly Harmless Econometrics: An Empiricist's Companion (2009).
The SEC Press Release alleged in part that:

[A]ttorney Matthew Beasley and cohorts Jeffrey Judd and Christopher Humphries falsely told hundreds of investors, including many in their own church community, that they would earn 12.5 percent quarterly returns by making purportedly risk-free investments in J&J Consulting Services. Beasley and Judd created the company to supposedly advance funds to tort plaintiffs who had reached settlements with insurance companies. But according to the complaint, none of the $449 million raised from investors over a five-year period was used for this purpose. The alleged perpetrators instead used investor money to purchase luxury homes, cars, boats, and a private jet for themselves, and paid fictitious returns to investors in Ponzi-like fashion to keep the scheme going., the SEC charged with fraud J&J Consulting Services, Inc. (Nevada), J&J Consulting Services Inc. (Alaska), J and J Purchasing LLC, and Beasley Law Group PC, whereas the affiliated individuals are Judd, Beasley, and Humphries. Charged with acting as unregistered brokers are Judd, Humphries, Shane Jager, Jason Jongeward, Denny Seybert, and Roland Tanner. Finally, named as Relief Defendants  are The Judd Irrevocable Trust, PAJ Consulting Inc, BJ Holdings LLC, Stirling Consulting L.L.C., CJ Investments, LLC, Rocking Horse Properties LLC, Triple Threat Basketball, LLC, ACAC LLC, Anthony Michael Alberto, Jr., and Monty Crew LLC.
In a Complaint filed in the United States District Court for the District of Massachusetts, the SEC charged Damon Elliott with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of and Rule 10b-5 thereunder. Without admitting or denying the SEC's allegations, Elliott consented to a partial judgment permanently enjoining him from violating the above provisions of the securities laws and from participating in the issuance, purchase, offer, or sale of any security in an unregistered offering by an issuer, and where any financial remedies would be determined by the Court at a later date. As asserted in part in the SEC Release:

On April 8, 2022, the Court granted the SEC's motion seeking financial remedies against Elliott. The Court's order requires Elliott to pay disgorgement and prejudgment interest of $6,348,314 as well as a civil monetary penalty of $97,523. On January 27, 2022 and April 7, 2022, respectively, the Court issued final judgments by consent against relief defendant Sharon Elliott, ordering her to pay $1,310,552 on a joint and several basis with her husband, and against relief defendant Paul Rose, ordering him to pay $1,377,852.86. In addition, the Court issued an amended final judgment against Piptastic on April 8, 2022 permanently enjoining it from violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and ordering it to pay disgorgement and prejudgment interest totaling $5,937,335, on a joint and several basis with Elliott, and a civil monetary penalty of $5,289,028 The Court had previously entered a final judgment ordering relief defendant DSE Retail Limited to pay, on a joint and several basis with Piptastic, disgorgement plus prejudgment interest of $2,650,839.

The SEC Release alleges in part that:

[E]lliott, operating through his co-defendant entity Piptastic Limited, falsely represented to investors that he would use their money for an overseas fund that purportedly engaged in a trading strategy known as "spread trading" or "spreadbet trading," which involves speculating on the price movement of a security or other financial instrument. According to the complaint, Elliott knowingly misused investor assets for his own personal benefit, as well as that of his wife, relief defendant Sharon Elliott, and others including his associate, relief defendant Paul Rose. As further alleged, from at least 2019 through May 2020, when investors tried to redeem their money from Piptastic, Elliott lied about the status of the investments. Specifically, Elliott allegedly claimed that he had won profits for the investors through spread betting and that the funds were safely held in trading accounts for the benefit of the investors when, in fact, he used the money for personal expenses and payments to the relief defendants, as well as to make payments to investors as part of his Ponzi scheme. Elliott also allegedly provided fictitious account statements that purported to reflect the investors' preserved assets.
Without admitting or denying the allegations in an SEC Complaint filed in the United States District Court for the District of Massachusetts, Carl Iberger and his son Timothy Iberger consented to the entry of judgments that permanently enjoin each of them from violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. Timothy Iberger is ordered to disgorge $68,350, representing his trading profits, $3,305 in pre-judgment interest, and pay a $68,350 civil penalty.Carl Iberger is ordered to pay a civil penalty of $69,223, an amount equal to the trading profits of Timothy Iberger and the other individual tipped by Carl Iberger. Also, Carl Iberger consented to the entry of a judgment barring him from serving as an officer or director of a public company for five years. As alleged in part in the SEC Release:

[C]arl Iberger, a resident of Massachusetts, provided his son Timothy Iberger, also a resident of Massachusetts, and another individual with confidential information about an agreement whereby Connecticut-based medical diagnostics company, Precipio, Inc. would distribute a COVID-19 serology antibody test that had received Emergency Use Authorization from the U.S. Food and Drug Administration. The complaint alleged that Carl Iberger was at the time the CFO of Precipio and learned this confidential information through his position as CFO. According to the complaint, on July 30, 2020, the company announced the agreement and Precipio's stock price rose substantially. Allegedly, the day before the announcement, Timothy Iberger purchased 25,000 shares of Precipio stock and the other individual tipped by Carl Iberger purchased 450 shares of Precipio stock, and both traders profited when the company's stock price increased as a result of the COVID-19 test announcement.

SEC Charges Four Defendants in Microcap Fraud Scheme (SEC Release)
In a Complaint filed in the United States District Court for the Southern District of New York, the SEC charged Dean Shah, Henry Clarke, Julius Csurgo, and Antevorta Capital Partners, Ltd. with violating the registration and antifraud provisions of Sections 5(a), 5(c), 17(a)(1), and 17(a)(3) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rules 10b-5(a) and (c) thereunder. Also, the Complaint charges Csurgo and Antevorta with violating the antifraud provisions of Section 17(a)(2) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder. As alleged in part in the SEC Release:

[B]etween 2013 and 2018, Shah and Clarke concealed their control of microcap company Zenosense, Inc. by deceptive means, including by dispersing the shares they owned among various nominee accounts. Shah and Clarke allegedly partnered with Csurgo to promote Zenosense's stock to increase the proceeds from their illegal sales. According to the complaint, Csurgo also engaged in fraud in connection with selling stock of Zenosense and three other microcap companies, including by parking his shares in others' accounts to conceal his ownership of the stock and using fabricated documents to induce third parties such as transfer agents and brokerage firms to facilitate his stock sales. The defendants allegedly generated proceeds of over $18 million from their unlawful conduct.

Statement Regarding SPAC Matter by SEC Commissioner Hester M. Peirce

Alberton Acquisition Corporation (the "SPAC") filed a Form 8-K yesterday[1] announcing that SolarMax Technology, Inc. ("SolarMax") intends to terminate its merger agreement with the SPAC.[2]  The press release explains that SolarMax reasonably believed that the proposed merger would not be completed by April 26, 2022, the date by which the merger must be completed for the SPAC's securities to remain listed on Nasdaq.[3]  The press release does not say why meeting Nasdaq's deadline would be problematic.  It states only "[a]s of April 13, 2022, the registration statement on Form S-4 . . . with a proxy statement containing information about the Merger was not declared effective by the U.S. Securities and Exchange Commission . . . ."[4] (emphasis added).  Therein lies the question that troubles me: Why exactly did the SEC not take the routine step-one typically taken on delegated authority by the staff without input from the Commission-to declare the registration statement effective?

Commission inaction on a request for acceleration of the effective date of a registration statement is highly unusual.  Rule 461(b) of the Securities Act of 1933 explains the statutory considerations for the Commission when determining to accelerate the effective date of a registration statement, lists specific situations in which the Commission "may refuse to accelerate the effective date," and states that "it is the general policy of the Commission, upon request, . . . to permit acceleration of the effective date of the registration statement as soon as possible after the filing of appropriate amendments, if any."[5]  Here, no Commission action has been taken, so there is no obligation to explain why the registration statement was not declared effective.

The failure to take an otherwise routine step makes sense only in the larger context of the Commission's newfound hostility to SPAC capital formation.  The SPAC completed its IPO in October 2018 with the intent to complete a business combination within 18 months.[6]  SPAC shareholders approved two extensions of that timeline prior to a merger agreement being entered into in October 2020 with SolarMax, a solar energy company with operations in China.[7]  SPAC shareholders subsequently approved two further extensions of the timeline within which to complete the business combination, resulting in the current deadline of April 26, 2022.[8]  Meanwhile, the SPAC filed eight amendments to its registration statement relating to the business combination since October 2020, including the most recent April 4, 2022 amendment.[9] 

During that period, a lot of other things were happening too.  Subsequent to the SPAC's merger agreement being announced, Commission staff issued a statement addressing the proper accounting for warrants that led many SPACs to restate their financial statements.[10]  Additionally, in July 2021, Chair Gensler issued a Statement on Investor Protection Related to Recent Developments in China, which was followed by a detailed Sample Letter to China-Based Companies published by the Division of Corporation Finance in December 2021.[11]  Most significantly, the Commission voted last month to propose sweeping rules pertaining to SPACs, including a proposed non-exclusive safe harbor under the Investment Company Act of 1940.[12]  At the open meeting, Division of Investment Management Director William Birdthistle, when asked what the proposal would mean for SPACs, warned:

For SPACs that are able to satisfy the conditions of the safe harbor with respect to their activities, the holdings of their portfolio, and the duration of their project, then they would enjoy a certain amount of certainty with respect to their situations.  For those SPACs that aren't, that do not satisfy those conditions, we would expect that those SPACs should be consulting closely with their advisors and considering carefully their compliance obligations.  And finally, I would just say, certainly for those SPACs that also fall outside the safe harbor, I would expect that the staff would also be taking a look at them.[13]

As Director Birdthistle stated, "This proposal is the first time that the Commission has specifically addressed the question of whether SPACs are investment companies."[14]  After all, SPACs have been around for a long time, and the Commission has not suggested that it thinks that any of them, let alone many of them, are investment companies.  Without affording some notice, the Commission cannot turn on a dime and start treating SPACs that do not meet an arbitrarily determined timeline as investment companies.  Because of the timing-less than a month after the release of the SPAC proposal, one cannot help wondering, however, whether this SPAC might be a victim of the parameters of a non-exclusive safe harbor that have not yet been adopted.  After all, the SPAC has been going back and forth with staff in our Division of Corporation Finance for months.  With the end of the road finally in sight, when the SPAC sought to have its registration statement go effective, it did not get the response that virtually everyone gets at this stage of the process.  That appears to be the death knell of the SPAC, which robs the investors of the opportunity to decide whether they approve the merger agreement.

Will other SPACs seeking to consummate their business combination face existential questions from the Commission at the eleventh hour?  If so, why not let them know earlier in the process that there is a problem?  It is not a good look for the Commission to run a SPAC through the gauntlet of addressing disclosure comments only to say, "Oh, and by the way, now you are too old to be anything other than an investment company."[15]  We must always engage registrants in the same good faith that we expect of them.  A failure to do so would undermine the credibility of this agency.

[1] Alberton Acquisition Corp., Current Report (Form 8-K) (Apr.  14, 2022),

[2] Alberton Acquisition Corp., Exhibit 99.1 to Current Report (Form 8-K) (Apr. 14, 2022),

[3] See id.

[4] See id.

[5] See 17 CFR § 230.461(b).  The statutory considerations referenced in the rule are found in Section 8(a) of the Securities Act of 1933.  See 15 U.S.C. § 77h(a) (". . . having due regard to the adequacy of the information respecting the issuer theretofore available to the public, to the facility with which the nature of the securities to be registered, their relationship to the capital structure of the issuer and the rights of holders thereof can be understood, and to the public interest and the protection of investors.").

[6] See Alberton Acquisition Corp., Notice of Effectiveness for Form S-1, File No. 333-227652 (Oct. 23, 2018),

[7] See Alberton Acquisition Corp., Item 5.07 to Current Report (Form 8-K) (Apr. 23, 2020), (extending date from April 27, 2020 to October 26, 2020); Alberton Acquisition Corp., Item 5.07 to Current Report (Form 8-K) (Oct. 26, 2020), (extending date from October 26, 2020 to April 26, 2021); Alberton Acquisition Corp., Item 1.01 to Current Report (Form 8-K) (Oct. 28, 2020), (announcing the merger agreement).

[8] See Alberton Acquisition Corp., Item 5.07 to Current Report (Form 8-K) (Apr. 26, 2021), (extending the date from April 26, 2021 to October 26, 2021); Alberton Acquisition Corp., Item 5.07 to Current Report (Form 8-K) (Oct. 22, 2021), (extending the date from October 26, 2021 to April 26, 2022).

[9] See Alberton Acquisition Corp., Registration Statement (Amendment No. 8 to Form S-4) (Apr. 4, 2022),

[10] See John Coates, Acting Director, Division of Corporation Finance and Paul Munter, Acting Chief Accountant, Office of the Chief Accountant, Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies ("SPACs"), (Apr. 12, 2021),  See also supra note 9 at 198-99 (disclosing restatements of financial statements by Alberton in response to the statement).   

[11] See Chair Gary Gensler, Statements on Investor Protection Related to Recent Developments in China (July 30, 2021),; Division of Corporation Finance, Sample Letter to China-Based Companies, SEC (Dec. 20, 2021),

[12] See Proposing Release No. 33-11048, Special Purpose Acquisition Companies, Shell Companies, and Projections (Mar. 30, 2022),; Commissioner Hester M. Peirce, Damning and Deeming: Dissenting Statement on Shell Companies, Projections, and SPAC Proposal (Mar. 30, 2022),

[13] SEC Open Commission Meeting (Mar. 30, 2022), (discussion at 43:25-44:45).

[14] Id.

[15] See generally Pragues's Kafka International Named Most Alienating Airport, The Onion (Mar. 24, 2009),