A Case Study: Eureeca Capital
Eureeca was formed in the Cayman Islands in May 2013 to host securities offerings from non-U.S. companies. To access information about offerings listed on Eureeca’s website, users had to register and provide some basic information, such as their names, dates of birth, email addresses, countries, and phone numbers. Of note, Eureeca did not request any information regarding the users’ accredited investor status or provide any disclaimer or definition of accredited investor on its website. Moreover, Eureeca did not implement any procedures reasonably designed to prevent U.S. investors from using its services, e.g., preventing persons who selected the U.S. as their “country” from registering and investing. In 2013, Eureeca accepted funds from three U.S. registered users and permitted them to invest approximately $20,000 total in four separate unregistered offerings. Eureeca sent an email to two of those investors asking them to confirm that each was an accredited investor, which they did (not that it’s enough), while it did not even do so with respect to the third investor.
If you read our previous posts on exempt offerings, you probably noticed that there are several problems with what Eureeca did (if you haven’t you can find our prior blog articles at www.mcbrideattorneys.com). The SEC alleged that Eureeca willfully violated Sections 5(a) and 5(c) of the Securities Act of 1933, which make it unlawful for any person, directly or indirectly, to sell or offer to sell a security without registration or an applicable exemption. Additionally, the SEC alleged that Eureeca violated Section 15(a) of the Exchange Act by acting as an unregistered broker-dealer to U.S. registered users on its website. Posting of securities offerings on the Internet constitutes general solicitation, which is generally not permitted under the federal securities laws, unless there is a specific law or rule that allows such general solicitation. Rule 506(c) of Regulation D, which went into effect on September 23, 2013, is a rule that allows general solicitation and advertising in certain exempt securities transactions, so long as all the purchasers of the securities are accredited investors. This is an exemption that Eureeca could have attempted to use. However, like all exemptions, the use of the exemption is conditioned upon compliance with the terms of the exemption. For instance, Rule 506(c) requires reasonable steps to verify the accredited investor status of the purchasers. While the reasonableness of the steps taken would depend on the context of the particular facts and circumstances of each purchaser and transaction, and the SEC does not insist on any one method, allowing investors to self-certify in an email that they are accredited investors, without even defining or explaining what that term means, nor taking any additional steps, such as requesting and reviewing proof of income or net worth, would not seem to fall into the realm of reasonableness, absent other facts or knowledge. And the SEC reached the same conclusion.
In anticipation of the institution of the proceedings, Eureeca undertook voluntary remedial actions and submitted an offer of settlement, including civil penalties of $25,000, which the SEC determined to accept. Eureeca’s website now features a prominent disclaimer and information page that provides information about what constitutes “U.S. persons,” among other things, and asks the user to confirm that they not a U.S. person before they can proceed to view any information on the website. While this is certainly a step in the right direction, it is a step that could have been taken before Eureeca got on the agency’s radar had it sought the assistance of competent legal counsel.
If you have any questions about the content of this blog series or other securities law issues not discussed here, please contact us.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; firstname.lastname@example.org, or www.mcbrideattorneys.com.
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