I first looked at the First Choice Investments action by the Securities and Exchange Commission because it involved a real estate investment company. I thought it would be another to case to help me explore “What’s a Security“. Instead I found a train wreck, at least if what the SEC alleges is true. The company was selling high-yield notes that could be converted to shares in the company. This was a real estate based investment, but the company was not selling real estate interests. There is no argument that the company was selling securities.
In the SEC complaint, First Choice is accused of misusing funds and misleading advertising. The misuse of funds comes across as standard corporate fraud, raising cash for one purpose but pocketing it for your own compensation and outside uses.
The advertising and promotion was blatantly in violation of securities laws and shows some of the concerns of crowdfunding and removing the ban on general advertising.
Right on the public webpage, First Choice offers a 10% return paid quarterly and touts that First — Choice is about to go public shortly. With the ban on general advertising, there is a big red flag on this company’s web page. First Choice is advertising the securities offering. Also, according to the SEC complaint, First Choice was cold calling potential investors. So they are violating both the general advertising and general solicitation restrictions currently in place for Regulation D Rule 506 offerings.
Also targeted in the complaint is an affiliated company, Acorp Development. It was offering $5 million of equity. It decided to put the SEC logo on its investor’s lounge with a link to its Form D filing. You should not use the SEC logo in a way that indicates something is approved by the SEC.
The Investor Presentation is a strange mix of concepts, questionable math, and false promises. After a handful of case studies, the presentation shows the pro forma returns for an investment, showing a target cap rate of 13.41%. All of the preceding case studies had lower cap rates.
The First Choice “Investor Principal Protection” caught my as incredibly strange. Somehow through a consulting agreement, Goldberg-Goldberg offers an “Investment Enhancement Program” that provides an “assured return of investment during the high risk stage of the business.” I scratch my head wondering how a consulting agreement is supposed to offer investor principal protection.
The First Choice notes state that they can be converted to equity. But with no formula for conversion, the windfall touted by First Choice would seem to be non-existent.
In a world where non-accredited investors should be shielded from private offerings, the First Choice materials are full of red flags that should make any reasonably savvy investor walk away. However, First Choice was still able to raise $3 million. The public availability of information is a red flag to regulators that the company is operating outside the bounds of the securities laws.
Post-repeal of the advertising ban and the post-enactment of equity crowdfunding, this types of fraudulent offering may be more common and more public. Hopefully, the SEC can find the right balance to limit the ability of bad actors that play in the securities offering playground.