The below FINRA Enforcement Action provides a summary of certain issues that broker/dealers must take into consideration when involved in a contingency or best efforts offering.
Newbridge Securities Corporation (CRD #104065, Boca Raton, Florida) and Bruce Howard Jordan (CRD #1223556, Boca Raton, Florida):
Recently, FINRA announced that a Letter of Acceptance, Waiver and Consent (AWC) was issued in which the Newbridge Securities Corporation was censured and fined $30,000 and Mr. Jordan was fined $5,000 and suspended from association with any FINRA member in any principal capacity for one month.
Without admitting or denying the findings, the firm and Jordan consented to the sanctions and to the entry of findings that the firm failed to comply with escrow requirements, the firm’s supervisory system was not reasonably designed and the firm and Jordan failed to enforce the firm’s written procedures governing contingency offerings. The findings stated that the firm acted as the placement agent for a contingency offering on behalf of an issuer. The firm’s written procedures specified that in contingency offerings, the firm would use a bank that had agreed in writing to hold all such funds in escrow and assigned specific responsibility to Jordan, the managing director of investment banking. However, for one offering, the firm and Jordan failed to deposit investor funds with a bank. Instead, the offering utilized a law firm as the escrow agent. Moreover, the firm and Jordan failed to use the standard escrow agreement required as specified in the firm’s procedures. The findings also stated that the firm improperly counted a non-bona fide investment toward the minimum contingency calculation, the firm’s supervisory system was not reasonably designed and the firm and Jordan failed to enforce relevant procedures. Without the non-bona fide investment, the minimum contingency would not have been met. The firm’s written procedures for contingency offerings specified that only bona fide investments should be counted toward an offering minimum but provided no guidance as to what constituted a bona fide investment. Jordan was assigned responsibility to determine whether an investment was bona fide. The firm, acting through Jordan, failed to review the investment to determine whether it should be considered a bona fide investment. Instead, after receiving the investment, the firm and Jordan declared the offering sold and released funds from escrow. As a result, the firm willfully violated Rule 10b-9 of the Securities Exchange Act and FINRA Rule 2010. The findings also included that the firm failed to return investor funds when minimum contingency was not met by the termination date in the offering documents, the firm’s supervisory system was not reasonably designed and the firm and Jordan failed to enforce the firm’s relevant procedures. In a second contingency offering, the issuer offering memorandum required a certain amount of the securities to be sold by a particular date for the offering to close. The offering memorandum also provided that if the minimum was not subscribed by the termination date, then all funds would be returned to investors and all subscription documents deemed rejected. The firm’s written procedures for contingency offerings specified that if the minimum contingency is not sold within the deadline specified by the offering documents, all funds should be promptly returned to investors. The firm’s written procedures failed to address circumstances where an issuer sought to extend the deadline for the minimum contingency through written confirmation by the investors, nor did it provide any guidance for the process of obtaining such written confirmation. The firm’s written procedures assigned specific responsibility for determining whether the minimum contingency had been met to Jordan. The minimum for the second offering was not met by the closing date, and the firm and the issuer agreed to extend the closing date. The firm and Jordan, however, did not send written reconfirmation offers to the investors disclosing the extension of the offering period prior to the original closing date. Instead, investors were provided with a supplement notifying them of the extension and instructing them to contact the firm if they did not wish to participate in the offering. No investor funds were returned, and no investors confirmed in writing their decision to continue their investments. The minimum was subsequently met by the extended closing date, and the firm, acting through Jordan, released the funds from escrow to the issuer of the second offering. Therefore, the firm willfully violated Rule 10b-9 of the Securities Exchange Act and FINRA Rule 2010. The suspension was in effect from December 6, 2021, through January 5, 2022. (FINRA Case #2019063371901).