UNITED STATES OF AMERICA
|In the Matter
|ORDER INSTITUTING PUBLIC
MAKING FINDINGS, AND ISSUING
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") against Theodore Sotirakis ("Sotirakis").
In anticipation of the institution of this administrative proceeding, Sotirakis has submitted an Offer of Settlement ("Offer") which the Commission has determined is in the public interest to accept. Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission, or in which the Commission is a party, Sotirakis, without admitting or denying the findings contained herein, except admitting the jurisdiction of the Commission over him and the subject matter of these proceedings, consents to the entry of this Order Instituting Public Administrative Proceedings, Making Findings, and Issuing Cease-and-Desist Order ("Order").
Accordingly, IT IS ORDERED that public administrative proceedings pursuant to Section 8A of the Securities Act be, and hereby are, instituted.
On the basis of this Order and the Offer, the Commission finds that:
Sotirakis lives on Staten Island, New York. Sotirakis, under the name Kinesis International, Inc. ("Kinesis"), conducts business relating to the development of a device called a continuously variable transmission. Kinesis has never been incorporated.
B. SOTIRAKIS' OFFER AND SALE OF "FREE" KINESIS STOCK
In September 1998, Sotirakis created an Internet website for his Kinesis business. The website contained an offer to issue "free" Kinesis stock to anyone who linked a website to the Kinesis website and who registered on the Kinesis site. The Kinesis website also stated that people could receive Kinesis stock by referring others who linked to the Kinesis site. Visitors to the Kinesis site who did not have a website could obtain a smaller number of Kinesis shares simply by registering on the Kinesis site. At least 200 people completed an on-line registration form to receive Kinesis stock, and a number of them linked their websites to the Kinesis site. Most of these registered on the Kinesis site during the week ending April 16, 1999. Some of the registrants also referred others to the Kinesis site. The Kinesis site continued to accept registrants for "free" stock at least through April 16, 1999. No Kinesis stock has ever been issued since Kinesis was never incorporated.
No registration statement was filed or in effect as to the sale of or offer to sell Kinesis stock, and no Form D was filed claiming an exemption from the registration requirements of Section 5. Sotirakis did not register the Kinesis stock in any state, nor did he file any disclosure documents with any state or deliver any such disclosure document to any investor prior to the sale of Kinesis stock. Moreover, Sotirakis did not limit the offering of "free" Kinesis stock to accredited investors.
Sections 5(a) and 5(c) of the Securities Act prohibit the use of the mails or any interstate means to sell or to offer to sell any security unless a registration statement is in effect or has been filed with the Commission as to that security, or an exemption from the registration provisions applies.
Section 2(a)(3) of the Securities Act defines a "sale" as every contract of sale or disposition of a security or interest in a security, for value. Section 2(a)(3) of the Securities Act defines "offer to sell," "offer for sale," and "offer" as every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. The lack of monetary consideration for the shares does not mean that there was not a sale or offer for sale for purposes of Section 5. See, e.g., Capital General Corp., Securities Act Rel. No. 7008, 54 SEC Docket 1714, 1728-29 (July 23, 1993) (Capital General's "gifting" of securities constituted a sale because it was a disposition for value, the "value" arising "by virtue of the creation of a public market for the issuer's securities"). See also SEC v. Harwyn Industries Corp., 326 F. Supp. 943 (S.D.N.Y. 1971). Thus, a gift of stock is a "sale" within the meaning of the Securities Act when the purpose of the "gift" is to advance the donor's economic objectives rather than to make a gift for simple reasons of generosity.
Sotirakis' promises to give Kinesis securities to the public in exchange for the recipients' agreement to register and/or to link the Kinesis web site to their respective web sites constituted sales of securities. Individuals who registered for Kinesis stock and/or created a link to the Kinesis web site on the registrant's web site conferred value upon Sotirakis in the form of free advertising and enhanced name recognition for Kinesis. Sales of Kinesis stock occurred even though Kinesis stock certificates did not exist and were not delivered. See Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 559 (2d Cir. 1984) ("[A] contract for the issuance or transfer of a security may qualify as a sale under the securities laws even if the contract is never fully performed").
Sotirakis utilized the means or instruments of transportation or communication in interstate commerce or the mails while engaging in the conduct described above. See American Library Ass'n v. Pataki, 969 F. Supp. 160, 173 (S.D.N.Y. 1997) (Internet is an instrument of interstate commerce).
There is no exemption from the registration requirements of Section 5 available to Sotirakis for the offer and sale of Kinesis stock. Because Sotirakis offered the "free" Kinesis shares over the Internet, Sotirakis engaged in a general solicitation and Section 4(2) and the exemptions under Rule 505 and 506 of Regulation D are inapplicable. Rule 504 exempts certain offerings that do not exceed an aggregate annual amount of $1 million and, until recently, permitted general solicitation and advertising. Effective April 7, 1999, the Commission amended Rule 504 to limit the circumstances where general solicitation is permitted to transactions (1) registered under state law requiring public filing and delivery of a disclosure document to investors before sale or (2) exempted under state law permitting general solicitation and advertising so long as sales are made only to accredited investors. Rule 504(b)(1) of Regulation D; see Revision of Rule 504 of Regulation D, the "Seed Capital" Exemption, Securities Act Release No. 7644 (Feb. 25, 1999). Sotirakis has not satisfied either of the two criteria. He offered and sold Kinesis securities nationwide over the Internet without making any of the requisite state filings or disclosures. Moreover, he did not limit sales of Kinesis stock to accredited investors.
Accordingly, Sotirakis' sale of and offer to sell "free" Kinesis stock violates Sections 5(a) and 5(c) of the Securities Act. VI.
Based on the foregoing, the Commission finds that Sotirakis committed violations of Sections 5(a) and 5(c) of the Securities Act.
In view of the foregoing, the Commission deems it appropriate to accept Sotirakis' Offer.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the Securities Act, that Sotirakis cease and desist from committing or causing any violation and any future violation of Sections 5(a) and 5(c) of the Securities Act.
By the Commission
Jonathan G. Katz
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