Sec. & Exch. Comm'n v. Longfin Corp.
| Decision Date | 01 May 2018 |
| Docket Number | 18cv2977 (DLC) |
| Citation | 316 F.Supp.3d 743 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. LONGFIN CORP., Venkata S. Meenavalli, Amro Izzelden Altahwi a/k/a Andy Altahawi, Suresh Tammineedi, and Dorababu Penumarthi, Defendants. |
| Court | U.S. District Court — Southern District of New York |
For the plaintiff: Kevin C. Lombardi, Sarah H. Concannon, Stephan Jacob Schlegelmilch, Securities and Exchange Commission, 100 F Street NE, Washington, District of Columbia 20549.
For defendant Longfin Corp.: Jay K. Musoff, John A. Piskora, Cheng Linna Chen, Loeb & Loeb LLP, 345 Park Avenue, New York, New York 10154.
For defendants Venkata S. Meenavalli, Andy Altahawi, Suresh Tammineedi, and Dorababu Penumarthi: Robert Gerard Heim, Meyers & Heim LLP, 444 Madison Avenue, 30th Floor, New York, New York 10022.
DENISE COTE, United States District JudgeThe Securities and Exchange Commission ("SEC") has shown that it is likely to succeed on the merits of its claims that defendants Andy Altahawi, Suresh Tammineedi, and Dorababu Penumarthi sold unregistered securities in violation of Section 5 of the Securities Act of 1933 ("Securities Act") between December 15, 2017 and March 28, 2018. The SEC has shown that it is likely to prove at trial that these defendants participated in an unregistered, illegal public offering of the stock of Longfin Corp. ("Longfin"). Accordingly, the SEC's motion for a preliminary injunction is granted.
On April 4, 2018, a court order froze the proceeds of these defendants' sales of Longfin shares, among other things. The SEC has sought a preliminary injunction to extend that freeze pending trial. On April 19, this case was reassigned to this Court. The preliminary injunction motion became fully submitted on April 23. The SEC has submitted three declarations attaching numerous exhibits in support of its motion. The three defendants whose assets have been frozen submitted declarations and supporting exhibits, as well as declarations from defendant Venkata Meenavalli, the CEO and founder of Longfin, and non-party Philip Magri, an attorney retained by defendant Altahawi with respect to his sales of certain Longfin shares. Having considered this evidence, this Opinion constitutes the Court's findings of fact and conclusions of law.1
Longfin first received SEC approval to publicly offer its shares on June 16, 2017, and engaged in a public offering after that date. This public offering took place pursuant to provisions in the Jumpstarting Our Business Startups Act of 2012 ("JOBS Act"), which amended our nation's securities laws. Pub. L. No. 112-106, 126 Stat. 306. Before describing the events at issue here, the pertinent statutory framework created by the JOBS Act will be outlined. A more detailed description of the relevant legal standards follows the findings of fact.
The JOBS Act was designed in part to permit early-stage companies to raise capital from public offerings with less expense than normally accompanies initial public offerings ("IPOs"). Title IV of the JOBS Act directed the SEC to create an exemption from the registration requirements of Section 5 of the Securities Act for companies to publicly sell shares in an offering of securities in an amount up to $50 million with fewer requirements than those applicable generally to companies undertaking an IPO. 126 Stat. 306, 324 (codified at 15 U.S.C. § 77c ). It provides in relevant part that:
Id. (emphasis supplied).
The SEC promulgated amendments to its Regulation A to provide for such offerings.2 The amended regulation is now commonly referred to as " Regulation A+." Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A), Securities Act Release Nos. 33-9741, 34-74578, 39-2501, 80 Fed. Reg. 21,806 (Apr. 20, 2015) ("Regulation A+ SEC Release"). Under Regulation A+, there are two tiers of offerings: "Tier 1," for offerings under $20 million, and "Tier 2," for offerings under $50 million. Id. at 21,807. The SEC requires that, for both tiers, an offering circular be provided to prospective investors. 17 C.F.R. § 230.251. In addition, an offering statement must be reviewed by the SEC, and "qualified" by their staff.3 Id. Once the offering is qualified, the company, or "issuer," may sell shares to the public. Id.
Regulation A+ also streamlines the path to register shares that will be traded on public exchanges for Tier 2 offerings. To register a class of securities under Section 12 of the Exchange Act of 1934 ("Exchange Act") pursuant to Regulation A+ for a Tier 2 offering, the company need only file a short form registration statement ("Form 8-A") concurrently with the filing and qualification of other forms a company is required to file under Regulation A. 17 C.F.R. § 249.208a. Once a Form 8-A is effective, the company becomes subject to the Exchange Act reporting obligations required of all companies that trade on the public stock exchanges, and ceases to have duties to file the financial reports otherwise required under Regulation A+. See Regulation A+ SEC Release, 80 Fed. Reg. at 21,852 -53; 17 C.F.R. § 230.257.4
Longfin's founder Meenavalli describes Longfin as an "independent financial technology company that specializes in trade commodity solutions." Longfin was incorporated on February 1, 2017 in Delaware, with Meenavalli, who is a citizen of India and a resident of the Republic of Singapore, as its CEO. Longfin is now headquartered in New York City. According to Meenavalli, since its founding, Longfin has earned revenue from the sale of physical commodities and by providing services to customers that use its trading platform. Longfin represented to the SEC in 2017 that, as of February 28, 2017, it had total assets of $298,861 and liabilities of $293,827, with most of the assets consisting of trade receivables.
The day Longfin was incorporated it entered into a consulting agreement ("Agreement") with Altahawi's company Adamson Brothers Corp.5 Meenavalli had met Altahawi in late 2016. Altahawi is a United States citizen and resides in Florida. Altahawi explains that he has over twenty-four years' experience in the securities industry.
According to the Agreement, Altahawi specializes in "Reg ‘A’ drafting and filings" and will assist Longfin "to initiate a "Reg ‘A+’ tier II Direct Public Offering (‘DPO’)."6 Altahawi agreed to assist Longfin "for the sole purpose of filing Reg ‘A’ tier II qualification statement with the SEC." He agreed to draft an offering "for up to $50 million." The term of the Agreement was set at twelve months.
For Altahawi's services, Longfin agreed to pay Altahawi $65,000 and stock in four components:
Accordingly, Altahawi's services pursuant to the Agreement required him to "draft" and manage the SEC process for a Regulation A offering worth up to $50 million, including the duty to file a Tier 2 qualification statement with the SEC.
In a filing with the SEC made on March 10, 2017, Longfin disclosed the existence of the Agreement, and described it in the following terms.
The company has entered into an agreement with Mr. Andy Altahawi/Adamson Brothers for the provision of filing Reg A tier 2 and structuring for which Adamson Brothers will charge 3% of the issued shares post shares swap7 after the successful completion of fund raising. Mr. Altahawi is not affiliated with the company or its officers and directors in any way.
(Emphasis supplied.)
On March 10, 2017, Longfin made a Form 1-A filing with the SEC indicating its intent to offer up to 20 million shares of its common stock on a "best efforts" basis. With each share priced at $2.50 per share, it intended to raise a maximum of $50 million for Longfin. The filings explained that the sale of shares would commence two days after the Offering Statement filed with the SEC "is qualified." It warned that there was currently no trading market for Longfin's common stock and that its securities were speculative and carried "significant" risks. It explained that as of February 28, it had 7.5 million shares outstanding.
In that same filing, Longfin announced that it had entered into an agreement to acquire a Singaporean company, Stampede Tradex Pte Ltd. ("Stampede Tradex"), through a "share swap." Longfin was to issue 100 million shares of its common stock to shareholders of Stampede Tradex in exchange for 100% of Stampede Tradex's stock, making Stampede Tradex a subsidiary of Longfin. The SEC filing explained that Stampede Tradex had been operating since 2014, and had...
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