SEC Charges Firm with Illegal Fund Raising for Penny Stock Companies
We recently came across a litigation release where the SEC charged a firm with illegal fund raising for penny stock companies. This turns out to be one of those rare situations where you have to ask yourself, what took the SEC so long? I very quickly recognized the name Edward Bronson, and his firm E-Lionheart Associates, LLC., which was also doing business under the name Fairhills Capital, Inc.
I meet Edward Bronson in the summer of 2006 when Coral Capital Partners was consulting for a biodiesel company that was looking for an investment banking firm to represent it. We were in New York meeting with several investment banking firms. One of the firms that the CEO of the biodiesel company wanted to meet with was Edward Bronson’s firm. I had heard of Mr. Bronson before and it was pretty easy to figure out at the time that he was engaging in toxic fundings. A quick look at the charts of the companies that Edward Bronson had been involved with showed that they all basically had some form of an inverted parabolic curve where their share prices very quickly headed towards zero. At some point in time prior to our meeting in 2006, another client had asked Coral Capital Partners to review an agreement for a proposed funding by Ed Bronson’s firm. It was not hard to see that the funding agreement was for a toxic funding, as any convertible instrument that converts at a discount to the market price with no minimum price level of conversion is toxic to the client company.
The meeting with Edward Bronson was notable for a variety of reasons. We meet Mr. Bronson at a fairly sizable office in Midtown Manhattan that was fully furnished, dark, and had no one in it but us. For someone who claimed to be a major provider of funding to small cap companies, he was remarkably poorly dressed. Despite being a late morning or early afternoon meeting he looked like he had just rolled out of bed. His clothing was rather disheveled; I remember he had on a warn leather coat and it was early summer. Worse yet his socks were not even close to matching. He had on one bright red sock, and one bright green sock. His firm was not a NASD (the predecessor to FINRA) member. Basically there were red flags all over the place. What I remember about the conversation is that it quickly became very clear that what Mr. Bronson was proposing was a toxic funding. When the CEO of the biodiesel company asked about dilution and loss of control, Edward Bronson suggested a preferred stock issuance with super-voting rights. Needless to say, this structure would have destroyed the investment of all the prior investors in the company. This was not something I ever wanted to be any part of, or ever associated with.
Over the course of the next six (6) years clients would occasionally ask Coral Capital to review agreements for proposed fundings from Fairhills Capital. It did not take much to figure out what the results would be for companies that participated in funding with Fairhills Capital. A search of the EDGAR filings would easily turn up a list of companies that had worked with Fairhills Capital, and the results in the public markets were always disastrous.
The Securities Exchange Commission (SEC) has charged Mr. Bronson and his firm e-Lionheart Associates, LLC. with Violations of Sections 5( a) and 5(c) of the Securities Act, as well as the common law claim of Unjust Enrichment. What I find interesting about the complaint is its brevity, or shortness. While Section 5 of the Securities Act is a very broad section, I am surprised at the absence of claims for violations of other sections of either the Securities Act of 1933 or the Exchange Act of 1934. The complaint by the SEC alleges that Mr. Bronson’s firm fraudulently used an exemption under Rule 504 of Regulation D to obtain free trading shares with the help of various attorneys who supplied inaccurate legal opinion letters. Why haven’t these attorneys been charged? Are they not supposed to be the gate keepers who keep people from committing wrong doings by virtue of there review of legal statutes and the opinions they issue? The SEC must be pretty sure that it has an iron-clad case against Ed Bronson and his firms.
We wish the SEC a lot of luck in pursuing this litigation. However we are skeptical about the SEC’s ability to shut down this activity until it takes aggressive action against the attorneys who are writing these fraudulent legal opinion letters that allow the restrictions to be removed on the shares issued in violation of Rule 144.
If you have any questions about the above blog post, please feel free to visit our web site, www.coralcapital.com and check out we have to offer. Feel free to contact us if you have any questions. We can be reached at 404-816-9220 and are always willing to speak with you.
About Coral Capital Partners
Coral Capital Partners is an independent consulting and advisory firm focused on companies and participants in the lower and middle markets. We partner with our clients to provide cost effective solutions to real world issues and situations. Our experienced team brings a diverse set of skills that allows us to service a wide variety of needs. Our area of services and expertise focuses on bringing services and solutions to our clients that are normally only available to much larger firms. Coral Capital Partners, Inc. provides services to Investment Banks, Private Equity Funds, investors, and both privately held and publicly traded companies, as well as various stakeholders in those organizations. This has included international public companies with operations on three (3) continents to smaller privately held domestic companies. Our experience in the areas of corporate advisory, due diligence reviews, and regulatory compliance allows for a cost effective and efficient solution to the issues at hand. Please feel free to contact our offices to see how we may be of assistance.
A copy of the SEC’s Litigation Release can be found at: http://www.sec.gov/news/press/2012/2012-165.htm
A copy of the SEC’s complaint in this action can be viewed at: http://www.sec.gov/litigation/complaints/2012/comp-pr2012-165.pdf
We do applaud the SEC’s efforts to police this type of activity.