Raising Capital Properly – A Case Study

Raising Capital Properly – A Case Study

 

On June 29, 2021, the Securities and Exchange Commission (“SEC”) charged Matthew J. Skinner (“Skinner”) of Santa Clarita, California, and five entities he owns and controls, for conducting four unregistered and fraudulent real estate investment offerings between 2015 and 2020.  In these offerings, Skinner raised more than $9 million from over 100 investors.

In its complaint, the SEC alleges that Skinner proclaimed himself to investors as a successful real estate investor and dealmaker.  In actuality, Skinner has a criminal history that includes being convicted of assault with a deadly weapon.  Skinner has also never held any securities licenses, and has never been registered with the SEC in any capacity.  In a video posted on one of his investment websites, Skinner claimed to own a multi-family real estate portfolio worth tens of millions of dollars even though neither he nor any entity he has controlled has ever owned such a portfolio.

More importantly, the SEC’s complaint further alleges that Skinner made multiple misrepresentations and misappropriated millions of dollars in investor funds.  The SEC alleges that Skinner told investors that their investments in Skinner’s entities would be guaranteed to generate double-digit annual returns.  For example, in his Bayside Offering, Skinner told investors that he “anticipate[s] producing approximately 90% return within 18 months for the partners” (emphasis added).  Skinner also allegedly told investors that the investments would be “simple,” “easy,” and less risky than the stock market.  Skinner essentially told investors they could “select…the rate of return [they’d] like to make” after choosing their investment time horizon.  Skinner’s Simple Growth website included a headline that read “How to Predictably Beat Wall Street Every Year With Less Risk And More Consistency Without Adding Any Extra Work To Your Already Busy Schedule” and also stated that investors could beat the stock market every year by investing in Simple Growth.  The website further stated that investors would receive a “predetermined, fixed, and predictable return on their investment that is paid out no-matter-what, and is not dependent on a certain project or property’s performance.”

Skinner also allegedly told investors that their money would be used to finance specific real estate projects and to invest in short term loans to affiliated and non-affiliated parties.  In actuality, Skinner used investor funds to finance personal expenses and to fund his marketing and fundraising efforts.  In one instance, Skinner allegedly sent over $371,000 of investor money to his personal bank account and used the funds to make payments on an Aston Martin and a Maserati, to make support payments to his ex-wife, and to pay for other living expenses, including rent for his personal residence and meals at restaurants.  In another instance, he allegedly used investor funds to pay off approximately $323,000 in credit card debt, which included credit card charges for a Laguna Beach resort, European vacations, and his marketing/fundraising expenses.  Skinner also made Ponzi-like payments to some investors in multiple instances; he used new investor money to make quarterly distribution payments to earlier investors though he had claimed that the distribution payments would be sourced from rental income from the real estate projects.

Finally, the SEC alleges that Skinner made false statements to certain investors about why he could not return their money at their maturity dates.  Skinner allegedly told some investors that the COVID-19 pandemic caused some liquidity issues and that he would need to extend the terms of their investment, which the investors refused.  When some investors asked where their money was, Skinner claimed that it was “invested in real estate deals” and that he expected some assets to sell that did not.  Ultimately, he did not return investor money and unilaterally extended the investment terms.  In another instance, he told an investor that one of the investment properties sold, that the investor’s funds were rolled over into a 12% interest bond, and that the investor would have to wait several more months to withdraw funds.  The investor never consented to Skinner holding the investor’s funds after the investment property sold.  More critically, Skinner had never actually transferred the investor’s funds to an account holding 12% interest bonds.  Additionally, the sale of the investment property was not profitable for the investor.  Overall, Skinner owes the investors millions of dollars and it appears that many of the investors will lose a significant portion (if not all) of their investment.

 

The Applicable Law

 

The SEC alleges that Skinner violated the following securities laws:

 

1. Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder:

 

1. Section 10(b) reads: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement [1] any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

 

1. Rule 10b-5 reads: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

 

1. The SEC alleges that Skinner violated these laws because he made multiple false and misleading statements to investors in his offerings.  He stated that he would invest in real estate and he guaranteed double-digit returns.  Instead, Skinner misappropriated investor funds for his other businesses, personal expenses, general payroll, and Ponzi-like payments.  In the Simple Growth offering, Skinner did not invest in any real estate at all.

 

1. Section 17(a) of the Securities Act of 1933:

 

1. Section 17(a) reads: It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement (as defined in section 78c(a)(78) [1] of this title) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—(1)to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

 

1. The SEC alleges that Skinner violated this law for the same reasons mentioned in section 1c above.

 

1. Sections 5(a) and 5(c) of the Securities Act of 1933:

 

1. Section 5(a) reads: Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.

 

1. Section 5(c) reads: It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 77h of this title.

 

1. The SEC alleges that Skinner violated this law because he did not file a registration statement with the SEC and did not meet the registration statement exemption requirements.  More specifically, “he directly solicited investors and was a necessary participant and substantial factor in the Offerings. He directly offered and sold securities through a general solicitation, drafted the Offering documents, [and] made video and live presentations to prospective investors. He raised money from unaccredited investors and did not take reasonable steps to verify whether investors were accredited or sophisticated. He did not furnish investors with financial statements or an audited balance sheet or equivalent.”

 

1. Section 15(a) of the Securities Exchange Act of 1934

 

1. Section 15(a) reads: (1) It shall be unlawful for any broker or dealer which is either a person other than a natural person or a natural person not associated with a broker or dealer which is a person other than a natural person (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) unless such broker or dealer is registered in accordance with subsection (b) of this section.  (2) The Commission, by rule or order, as it deems consistent with the public interest and the protection of investors, may conditionally or unconditionally exempt from paragraph (1) of this subsection any broker or dealer or class of brokers or dealers specified in such rule or order.

 

1. The SEC alleges that Skinner violated this law because he acted as an unregistered broker for his offerings.  “Skinner solicited investors, supervised salespeople, drafted and/or distributed offering documents, and [was] involved in handling and responding to investor concerns. Skinner was not registered with the Commission as a broker-dealer in accordance with Section 15(b) of the Exchange Act, or associated with a registered broker-dealer.”

 

In its complaint, the SEC is seeking permanent injunctions against Skinner, including a ban from participating in any unregistered offerings and from obtaining any additional funds for his entities or the real estate projects in which the entities are invested.  The SEC is also seeking a disgorgement of all funds Skinner received from his illegal conduct, together with prejudgment interest, as well as civil penalties.  

Furthermore, a willful violation of securities laws is a felony offense, punishable by up to five years in federal prison.  Skinner may be criminally liable for his actions.

 

Implications for Your Company’s Offering

 

Some of Skinner’s violations may seem obvious, but there are numerous intricacies involved in conducting a proper private offering.  The attorneys at Wilson Bradshaw LLP can help you 1) to understand the necessary investor disclosures, possible exemptions from registering an offering, and the appropriate use of investor funds, and 2) to prepare a proper private placement memorandum (PPM), which will outline all the necessary information investors need to know about your offering.  With proper advice, you can establish trust between you and your investors, stay in compliance with securities laws, and ultimately avoid Skinner’s pitfalls. 

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