U.S. authorities are continuing to tackle investment schemes involving pre–initial public offering (pre-IPO) company investments that, they allege, are duping investors.
The U.S. Securities and Exchange Commission (SEC) settled charges against three sales reps from a purported private equity investment firm, StraightPath Venture Partners, for engaging in unregistered broker activity by soliciting investors for unregistered funds that purported to invest in pre-IPO companies.
The trio settled the SEC’s allegations, without admitting or denying the SEC’s findings, and agreed to pay over US$2.8 million in disgorgement and penalties, along with industry bans.
According to the SEC’s orders, the reps allegedly advised investors, provided them with marketing materials and took transaction-based compensation despite not being registered as brokers.
Combined, they took in about US$17 million from investors and received about US$2.1 million of that in compensation from the investment funds, the SEC alleged.
The SEC has previously charged several others (in 2022 and 2023) in connection with purported pre-IPO investments offered by StraightPath, including one of the reps who settled charges today.
“Today’s resolutions demonstrate our continued efforts to hold accountable unregistered brokers, including those who facilitate the sale of pre-IPO investments to retail investors,” said Sheldon Pollock, associate director in the SEC’s New York office, in a release.
“The division of enforcement continues to scrutinize the registration status of individuals selling pre-IPO shares to retail investors,” he said.
In a separate case, U.S. authorities filed criminal charges against the alleged operators of a couple of unregistered fund managers that pitched investment funds that focused on pre-IPO companies.
In a federal court in Brooklyn, three executives at investment firms Max Infinity Management LLC and Elder Fund Management LLC were indicted, along with a couple of the firms’ senior salespeople, on charges of conspiracy, securities fraud, investment adviser fraud and money laundering conspiracy for their roles in a scheme that allegedly charged large undisclosed markups on pre-IPO fund investments, which raised approximately US$60 million from investors.
According to the indictment, the funds’ investors were defrauded, authorities alleged, when investors were promised the funds charged no upfront fees, that the funds acquired pre-IPO shares directly from the companies, and that the firms were registered with the SEC.
It’s alleged that the funds charged large markups and paid huge commissions to their salespeople, representing about US$27 million of the US$60 million that they raised from investors.
“As alleged, based on false promises the defendants bilked investors out of millions of dollars,” said Breon Peace, U.S. attorney for the Eastern District of New York, in a release.
“They lied about how they made money and promised near-certain returns on investment when, in truth, they charged astonishing markups, at times greater than 95%, and defrauded investors,” he said.
The allegations in that case have not been proven, and the accused are presumed innocent of the charges against them.