FINRA Settles Two Cases Concerning Contingency Offerings
August 18th | 2020
FINRA recently settled two cases related to contingency offering of securities, which may signal a potential trend in enforcement. In the first case, the broker dealer failed to place investor funds into a bank escrow account and failed to return funds to investors in a timely manner after the required minimum contingency was not met by the date specified. In the second case, the broker dealer failed to establish and maintain sufficient supervisory systems reasonably designed to achieve compliance with disclosure requirements relating to private placements for contingency offerings.
The common thread in these case is Securities Exchange Act of 1934 (SEA) Rule 10b-9, which generally requires that in connection with contingent offerings, investors be told that consideration paid for securities will be promptly refunded unless the minimum number of securities is sold at a specified price within a specified time, and the total amount due to the seller is received by the seller by a specified date. In addition, if it receives funds, a broker-dealer acting as a placement agent for such an offering must comply with the requirements of SEA Rule 15c2-4.
Thus, in the first case, the Firm apparently met the disclosure obligation but fell down in handling the proceeds in 15c2-4, as the guidance around the rule requires broker dealers with a $5,000 net capital requirement escrow the funds at a bank. In the second case, the issue was with the lack of disclosure and the Firm’s supervisory procedures related thereto. Apparently, the Firm relied on outside counsel to prepare the offering documents but did not have a process other than that for ensuring the required disclosures were actually in the documents.
Private placements are a continual area of concern for FINRA and typically make the list of examination priorities. These two cases illustrate that FINRA’s priorities are not just aspirational, FINRA does follow through, particularly in these kinds of cases where the potential for investor harm is high.