$80 Million Equity Crowdfunding Fraud: SEC Charges 8 in Reg A Pay-To-Play Scheme

The complaint alleges Palm Beach Ventures newsletter and several Reg A issuers of engaging in a massive pay-to-play scheme.

The SEC recently filed a 30-page complaint in federal court alleging 8 individuals of conspiring in an elaborate $80 million equity crowdfunding fraud, including writers of the newsletter and several Reg A issuers. The complaint is centered around a newsletter costing $4000 a year called “Palm Beach Venture,” which reportedly provides unbiased stock picks in various Reg A issuers. However, the complaint alleges Palm Beach Ventures was not providing unbias stock picks at all but rather receiving millions of dollars in compensation for promoting the companies in its newsletter. Jonathan Mikula, a Georgia Resident, and repeat securities law violator, used various middlemen and offshore accounts to funnel the money to himself under the guise of a consulting agreement and other tactics.

The four Reg A issuers alleged are Elegance Brands, Emerald Health, Cloudastructure, Inc., and Hightimes Holding Corporation. Elegance Brands and Emerald health, as well as several of the middlemen, have agreed to pay a combined $2.5 million to settle the charges, along with various other non-monetary penalties against them. Mikula, and a few others, did not settle and are currently set to go to court.

The complaint alleged after Palm Beach Ventures sent out its newsletter in these various offerings, nearly $80 million was subsequently invested into the various Reg A offerings. Despite the Newsletter explicitly claiming not to receive compensation for promoting these offerings, Mikula and others were secretly receiving millions of dollars through fake invoices for consulting services and money routed through offshore accounts owned by various middlemen.

Charges were ultimately brought against all defendants under Sections 17 and 10 of the securities act. Section 10 outlines the elements required to find someone guilty of securities fraud generally, while Section 17 is focused on elements of fraud and non-disclosure as it relates to not disclosing consideration and compensation received from an issuer for publicizing articles and messaging on the internet about the issuer. Section 17 is an incredibly broad provision of the securities act generally encompassing the idea stated by SEC official Michele Wein Layne, Director for the SEC’s Los Angeles office, that

“Payments for the promotion of securities — including securities offered pursuant to the Reg A exemption — must be fully and accurately disclosed…Such disclosures are necessary to permit investors to consider the personal motivations of the author so they can make informed investment decisions.”

As it relates to Section 17, and all else equal, it is actually legal to promote securities to people over the internet via publication or in a private newsletter. It becomes illegal when you fail to disclose any “consideration” or compensation received, as that is a material fact that could lead someone to invest. 17(b) disclosures throughout media articles, on crowdfunding pages and sites, and so on are actually very common. Companies often pay for press releases, paid spokespeople, and articles for SEO and marketing purposes. Failing to disclose that can quickly end you in a press release of your own authored by the SEC. This provision is incredibly broad, and most people might not realize they are in violation of this provision. While the SEC is typically moreso focused on multi-million dollar frauds like this, even simple marketing agreements can result in breaches of this provision and potentially rope you in with the wrong crowd.

Palm Beach Ventures newsletter is apparently still running, but Mikula has seemingly since been replaced and removed from the platform.

To read the full complaint, find out more here:

https://www.sec.gov/litigation/complaints/2022/comp-pr2022-182.pdf