UNITED STATES OF AMERICA
|In the Matter of
|ORDER INSTITUTING PUBLIC
PROCEEDINGS, MAKING FINDINGS,
AND ISSUING CEASE-AND-DESIST
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Joe Loofbourrow ("Loofbourrow").
In anticipation of the institution of this administrative proceeding, Loofbourrow 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, Loofbourrow, 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 issuance of this Order Instituting Public 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 and Section 21C of the Exchange Act be, and hereby are, instituted.
On the basis of this Order and the Offer, the Commission finds that:
A. Loofbourrow, who resides in Oklahoma City, Oklahoma, is the founder of the entity known as American Space Corporation ("ASC"). ASC is a company that purported to engage in various activities related to the commercialization of the U.S. and Russian space programs. ASC is not incorporated and it has never made any filings with the Commission or any state.
B. This proceeding involves two violations of the registration provisions of the securities laws, set forth in Section 5 of the Securities Act, by virtue of Loofbourrow's offering of securities in ASC. First, Loofbourrow undertook an offering of so-called "financial partner" interests in which he hoped to raise well in excess of $1 million. Second, Loofbourrow offered and sold so-called "free stock" over the Internet to persons who visited the ASC web site, when in fact he received value for those shares. Loofbourrow failed to register either of these offerings with the Commission, and there was no applicable exemption from registration. Loofbourrow also violated the antifraud provisions of the securities laws, set forth in Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, by knowingly or recklessly making material misrepresentations about ASC's prospects and business.
OFFER OF "FINANCIAL PARTNER" INTERESTS
C. From July 1995 to May 1999, Loofbourrow established and maintained Internet web sites that solicited the public to purchase "financial partner" interests in ASC. Through these web sites, Loofbourrow promised that ASC financial partners would receive fixed annual returns in exchange for a set minimum investment amount. Between July 1995 and October 1996, Loofbourrow's web site indicated that ASC planned to raise "seed capital" of $60 million. From October 1996 to May 1999, Loofbourrow's web site indicated that ASC planned to raise "seed capital" of $4 million. No one invested money in ASC in connection with Loofbourrow's "financial partner" offers.
OFFER OF "FREE" STOCK
D. From at least April 7, 1999 to May 1999, Loofbourrow represented on his current web site that ASC would give ten shares of so-called "free" stock to each individual who filled out an on-line registration form. In addition to requiring registrants to provide their names, home addresses, and Email addresses, the form included a series of questions aimed at insuring that registrants had read through portions of Loofbourrow's web site that discussed the "financial partner" offers. For a period of time after April 7, 1999, Loofbourrow also represented on his web site that individuals would receive additional shares of "free" stock in exchange for referring others to his web site.
E. Many individuals registered for free stock in ASC between April 7, 1999 and May 1999. As a result of the "free" stock offer, at least two other web sites were created by ASC "shareholders" that contained links to Loofbourrow's web site and numerous messages were posted on newsgroups announcing that ASC was offering "free" stock over the Internet.
F. The primary purpose of the "free" stock offering was to generate publicity for ASC and encourage members of the public to become "financial partners" by investing capital in ASC.
FRAUDULENT STATEMENTS ON WEB SITES
G. Between July 1995 and May 1999, Loofbourrow posted statements on his web sites that had no reasonable basis in fact. For example, Loofbourrow claimed that: ASC had "100 times" greater potential than companies such as Wal-Mart, Microsoft, and Home Depot; ASC had plans to set up a NASDAQ-affiliated office; ASC had plans to build the world's largest aerospace manufacturing plant; and ASC had an "extensive plan" to resume lunar exploration no later than the year 2004. From at least October 1996 until May 1999, Loofbourrow announced through his web site that ASC had plans to establish a Research and Development Facility which would be capable of finding cures for aging, all addictions, and all diseases.
H. Between April 1999 and May 1999, Loofbourrow indicated through his web sites that ownership of so-called "free" stock in ASC provided "an ideal way" for investors to save for "a future college education or for retirement." During this period, Loofbourow also represented that the ASC "free" stock had a current value of $1 per share.
I. In reality, ASC never had any offices, employees, or contracts. Loofbourrow never had any business plan for ASC aside from what was posted on his web sites. Loofbourrow had no experience in the areas of aerospace engineering or space exploration. Loofbourrow never took any steps towards establishing the NASDAQ-affiliated office, manufacturing plant, or Research and Development Facility. ASC never incorporated. Loofbourrow set the $1 per share value for ASC's so-called "free" stock without having any basis for making that value determination.
LOOFBOURROW'S VIOLATIONS OF SECTIONS 5(a) AND 5(c) OF THE SECURITIES ACT
J. By engaging in the conduct described above, Loofbourrow violated Sections 5(a) and 5(c) of the Securities Act. Section 5(a) of the Securities Act prohibits the sale of securities or the delivery of securities after a sale through jurisdictional means unless a registration statement is in effect as to such securities. Section 5(c) of the Securities Act, in part, prohibits the use of jurisdictional means to offer to sell securities unless a registration statement has been filed.
K. Section 2(a)(3) of the Securities Act defines "sale" or "sell" to "include every contract of sale or disposition of a security or interest in a security for value." The "financial partner" interests were clearly offers to dispose of securities "for value" in the form of the capital that Loofbourrow required individuals to invest in ASC. A more detailed analysis, however, must be performed with respect to the "free" stock offers and sales.
L. The lack of monetary consideration for the "free" shares does not mean that there was not a sale or offer for sale for purposes of Section 5. See, e.g., Capital General Corporation, 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. Loofbourrow benefited from the "free" stock give away because it attracted additional people to his web site and increased the chances that members of the public would invest capital in ASC through the "financial partner" offering. Furthermore, by allocating shares of so-called "free" stock to the public, Loofbourrow increased the possibility that a market would exist for ASC shares when and if he decided to incorporate and issue the stock he promised.
M. There was a sale of ASC stock to the registrants even though no stock certificates were delivered. See Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 559 (2d Cir. 1984) (a contract for the issuance of a security may qualify as a sale under the securities laws even if the contract is never fully performed).
N. ASC made use of the jurisdictional means for the offer of the "financial partner" interests and the offer and sale of the "free" stock because these securities were being offered over the Internet, an instrument of interstate commerce. American Library Ass'n v. Pataki, 969 F. Supp. 160, 173 (S.D.N.Y. 1997).
O. There is no exemption from the registration requirements of Section 5 available to ASC. Because ASC offered the "financial partner" interests and "free" shares over the Internet, ASC 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 Securities Act Release No. 7644 (February 25, 1999). The "financial partner" offering fails to qualify under both the amended and unamended versions of Rule 504 because Loofbourrow's web sites indicated that ASC planned to raise capital in excess of $1 million. The $1 million limit imposed by Rule 504 was therefore exceeded. To the extent that the "financial partner" and "free" stock offerings were in effect after April 7, 1999, ASC also failed to satisfy the post-amendment Rule 504 requirements for offerings involving general solicitations. ASC offered and sold securities nationwide over the Internet without making any of the requisite state filings or disclosures.
P. Accordingly, Loofbourrow committed or caused violations of Sections 5(a) and 5(c) of the Securities Act by offering "financial partner" interests and offering and selling "free" stock in ASC.
LOOFBOURROW'S VIOLATIONS OF SECTION 17(a) OF THE SECURITIES ACT, SECTION 10(b) OF THE EXCHANGE ACT, AND RULE 10b-5 THEREUNDER
Q. Section 17(a) of the Securities Act prohibits, in the offer or sale of securities, the omission or misstatement of a material fact, or the use of any device, scheme or artifice to defraud, or the use of any practice which operates as a fraud. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder provide essentially the same prohibition in connection with either the purchase or sale of securities. 1 To establish a violation of the antifraud provisions, the misstatements and omissions must be material. Basic v. Levinson, 485 U.S. 224 (1988). In addition, these provisions require a showing of scienter. Aaron v. SEC, 446 U.S. 680, 701-02 (1980). The scienter requirement may be satisfied by a showing of recklessness on the part of the respondent. Anixter v. Home-Stake Production Co., 77 F.3d 1215, 1232-33 (10th Cir. 1996).
R. Loofbourrow's conduct satisfied all of these requirements because he made numerous statements regarding ASC's prospects and business that he either knew to be, or was reckless in failing to recognize as, materially misleading, and the web sites omitted to state material information that would have made the statements not misleading. Loofbourrow therefore committed or caused violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
Based upon the foregoing, the Commission deems it appropriate to accept Loofbourrow's Offer of Settlement.
Accordingly, it is HEREBY ORDERED, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, that Loofbourrow cease and desist from committing or causing any violation and any future violation of Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.
By the Commission.
Jonathan G. Katz
|1||Loofbourrow's fraudulent statements were made in connection with the sale of securities for purposes of Section 10(b) and Rule 10b-5 even though no stock certificates were ever delivered because sales occurred when individuals registered with Loofbourrow's website for "free" stock. Sulkow v. Crosstown Apparel Inc., 807 F.2d 33, 36 (2d Cir. 1986) (neither Section 10(b) nor Rule 10b-5 expresses any requirement that stock actually has been issued, so long as a contract to sell has been formed).|
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