Securities Law Blog

The SEC’s Office of Investor Education and Advocacy issued an Investor Alert on April 30, 2019 to warn prospective investors of misrepresentations by so-called fraudsters asserting that a securities offering filing has been “approved” by the SEC when it has not actually been approved. The SEC indicated that sponsors of initial coin offerings and other investment opportunities have allegedly touted SEC forms and filings as indications that the investment was approved by the SEC.  The SEC’s Investor Alert warns investors that:

[Y]ou should know that a filing does not mean that the SEC has in any way validated or approved of the offering. Indeed, the SEC never “approves” an offering.

While the SEC staff reviews certain forms and filings for compliance with disclosure obligations, the SEC does not evaluate the merits of any offering nor does it determine if any securities offered are “good” investments.

Apparently, fraudsters have used Form D notice filings – which report private stock issuances to investors – to claim SEC registration or that an offering was approved by the SEC, both of which are untrue because a Form D provides notice of an offering that is exempt from registration and the SEC does not necessarily review and does not approve Form D filings.

Similarly with Regulation A+ offerings, apparently fraudsters have asserted that the filing of an offering statement on Form 1-A alone means that the offering has been qualified by, or registered with, the SEC, or if notice of qualification has been issued following an SEC staff review of a Regulation A+ offering statement, the SEC has approved the offering. Likewise, with crowdfunding offerings, the filing of an offering statement on Form C, as to which the SEC staff does not take any formal action, does not represent approval by the SEC. The SEC is clear that lack of SEC comments on such filings does not mean that the SEC has signed off on and has no issues with the filings.

The SEC’s Investor Alert did not, however, refer to registered offerings on Form S-1 and other Form S or Form F registration statements, where SEC “approval” may be a matter of semantics.  In such filings, the SEC does not “approve” the filings, but instead declares them effective.  Item 501(b)(7) of Regulation S-K requires a prominent legend on the outside front cover page of an offering prospectus that indicates that neither the SEC nor any state securities commission has approved or disapproved of the securities or passed upon the accuracy or adequacy of the disclosures in the prospectus and that any contrary representation is a criminal offense.  A substantially similar legend is required to be displayed on the cover page of a Regulation A+ offering circular, which must also state that the securities are being offered pursuant to an exemption from registration as to which the SEC has not made an independent determination that the securities offered are so exempt.

Despite these statutory disclaimers, the SEC has been sensitive to the claim that its filing review and comment process of registration statements and other reviewed offering and disclosure documents (including proxy statements) is equivalent to or otherwise implies the SEC’s substantive approval of such documents, the disclosure contained in them and the related securities offering or transaction. In part, this is because defendants have historically attempted to use the SEC’s review of a filing as a defense in a legal proceeding instituted by the SEC or others questioning the adequacy of disclosure under the federal securities laws.

To avoid any implication it has approved the disclosure and preclude the possibility that its “approval” will be asserted as a defense in any subsequent action, the SEC includes the following statement in its comment letters (after no longer requiring a company’s “Tandy” representations in review correspondence in 2016):

We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.

The SEC sensitivity with regard to its approval of offering documents is not unfounded. In the instances where the SEC staff reviews and comments on a securities offering filing such as a Form S-1 and Form 1-A, it is clear that the SEC’s final order of effectiveness has meaning as securities offerings will not proceed without SEC effectiveness.  In fact, when the SEC was closed and unable to clear filings during the government shutdown in early 2019, Nasdaq did not appear amenable to listing the shares of an IPO company absent the SEC’s affirmative order of effectiveness.  In essence, Nasdaq, investors and others rely on the SEC staff as “experts” in reviewing disclosure documents and commenting on them to make the disclosure accurate and complete in all material respects.

While companies cannot use the SEC’s review as a stamp of approval, clearly fraudsters have capitalized on the authority accorded to the SEC by stock exchanges and the investor community in trying to raise capital in financings that do not even have a formal SEC review process.  In the SEC’s view, the actions of these fraudsters have become so rampant that they necessitated the need for this Investor Alert.