The Securities and Exchange Commission has charged an individual and three entities they controlled for selling pre-IPO shares at significant markups that were not disclosed.
According to an SEC release, Andrew Spaventa and The Spaventa Group LLC, TSG Capital Advisors LLC, and TSG Alpha Partners LLC raised more than $74 million from retail investors across the United States for eleven private funds. The pitch was to provide access to private securities in companies that would potentially pursue a public offering soon.
The private securities market is hot, but offerings are often available only to accredited investors. The defendants purportedly purchased shares in these private firms and then sold them to their funds at marked-up prices, passing the increase on to investors “in the form of hidden fees.”
Spaventa apparently enlisted a “boiler room” of over 100 individuals to pitch and sell the offering. The individuals were told there were either no upfront fees or, at most, a 12.5% charge, but according to the SEC, investors were actually paying, on average, 46% more than the prices Spaventa and his firms paid.
The SEC states that the defendants collected $23 million in fees from the investors. Spavent allegedly kept $4 million while forwarding $12 million to the “sales agents.”
While private securities have grown in popularity for both accredited and non-accredited investors, platforms that provide access to this asset class must disclose any markups or fees for the underlying security.
The SEC filed its complaint in the U.S. District Court for the Southern District of New York and charges defendants with violating the antifraud, securities registration, and broker-dealer registration provisions. The complaint also charges Spaventa with control person liability and aiding and abetting violations. The complaint seeks permanent injunctions, disgorgement of ill-gotten gains and prejudgment interest, and civil penalties from all of the defendants, and conduct-based injunctions against Spaventa.
