On January 31, 2014 (revised February 4, 2014), the SEC issued a no-action letter to a group of attorneys who requested assurance on an issue that has long been on the minds of securities lawyers: are people who facilitate the sale of a controlling interest in a business involving a transfer of stock — which the Supreme Court has held to be a sale of securities under federal securities laws — required to register as broker-dealers under the Securities Exchange Act of 1934, with all of the attendant expenses and obligations?
Finder's Fees Archives
Neogenix Oncology: A Good Case Study on Securities Law (Non)Compliance by a High Growth Company – Part 3: When the Genie Can’t Be Put Back in the Bottle
In my previous posts, I described the events leading up to the Chapter 11 bankruptcy and supervised asset sale of Neogenix Oncology. To recap, Neogenix’s payment of fees to unregistered “finders” to raise money in some of its earlier rounds of financing called into question the company’s compliance with federal and state securities laws. Under such laws, just about any arrangement in which someone is paid a contingent or variable fee to raise capital for a company is prohibited, unless that person is registered as a broker-dealer or is a registered representative of a broker-dealer. After the SEC commenced an investigation into Neogenix’s practices, the company’s accountants concluded that potential investor lawsuits and/or governmental enforcement actions could give rise to large contingent liabilities on the company’s balance sheet. This uncertainty led to Neogenix being unable to raise further funds, necessitating the company’s bankruptcy filing. In this post, I’ll explore the likely reason why Neogenix had to take the drastic step of filing for bankruptcy to cure its securities violations. [Read more…]
Neogenix Oncology: A Good Case Study on Securities Law (Non)Compliance by a High Growth Company – Part 2: What Neogenix Did
In my previous post, I described the events leading up to the Chapter 11 bankruptcy and supervised asset sale of Neogenix Oncology. To recap, Neogenix’s use of unregistered “finders” in some of its earlier rounds of financing called into question the company’s compliance with federal and state securities laws. After the SEC commenced an investigation, Neogenix’s accountants concluded that potential investor rescission rights could give rise to large contingent liabilities on the company’s balance sheet. This uncertainty led to Neogenix being unable to raise further funds, necessitating the company’s bankruptcy filing. In this post, I’ll explore how exactly Neogenix violated securities laws and the lessons this case study provides to startups and other growth stage companies. [Read more…]
Neogenix Oncology: A Good Case Study on Securities Law (Non)Compliance by a High Growth Company – Part 1: How It All Happened
In the past, I have written about the importance of entrepreneurs and startups complying with federal and state securities laws when raising capital for their businesses. The consequences for failing to do so can be significant. The business owner risks civil and potentially criminal charges. In addition, he could also face potential lawsuits from disgruntled investors. But one consequence that is frequently overlooked is the possibility that the mere presence of securities law violations can deter future investors, choking off needed infusions of capital. No one wants to invest in a company that has potential fines and lawsuits waiting in the wings. [Read more…]