UNITED STATES OF AMERICA
|In the Matter of
RICHARD L. DAVIS
|ORDER INSTITUTING PUBLIC PROCEEDINGS,
MAKING FINDINGS, AND IMPOSING A
The Securities and Exchange Commission ("Commission") deems it appropriate that a public cease-and-desist proceeding be, and hereby is, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") to determine whether Richard L. Davis ("Davis" or "Respondent") violated Sections 17(a)(1), 17(a)(3) and 5(c) of the Securities Act.II.
In anticipation of the institution of this proceeding, Davis has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except that Respondent admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, Davis consents to the issuance of this Order Instituting Public Proceedings, Making Findings, and Imposing a Cease-and-Desist Order ("Order") and to the entry of the findings and the imposition of the relief set forth below.III.
On the basis of this Order and Respondent's Offer, the Commission finds the following:Respondent
A. Davis, age 28, resides in Duncanville, Texas and is the founder of a company known as Mindhunt.com. Mindhunt.com purports to be in the process of creating an Internet web site geared to children 16 years old and younger. Mindhunt.com was incorporated in the state of Texas on June 24, 1999. Mindhunt.com has never made any filings with the Commission.Introduction
B. Davis violated the antifraud provisions of the securities laws, set forth in Sections 17(a)(1) and 17(a)(3) of the Securities Act, by offering Mindhunt.com securities over an Internet auction site run by eBay, Inc. ("eBay"), while making material misrepresentations about Mindhunt.com. Davis also violated the registration provisions of the securities laws, set forth in Section 5(c) of the Securities Act, by offering Mindhunt.com securities over the eBay Internet site. Davis failed to register this offering with the Commission, and there were no applicable exemptions from registration.Davis' Offer of Mindhunt.com Securities
C. eBay runs an Internet auction site (http://www.ebay.com) that permits users to buy and sell items 24 hours a day, seven days a week, through on-line auctions. Sellers post descriptions of items they wish to sell on the site. Potential buyers may, in turn, access these descriptions. Over the course of the next several hours or days, potential buyers may bid on the items on-line. At the close of each auction, the highest bidder wins and must purchase the item. eBay receives a flat fee from the seller for posting the item on its site and a percentage of the final sale price.
D. On May 5, 1999, Davis posted an offer to sell a 5% interest in Mindhunt.com on the eBay Internet auction site. The posting stated that Davis had "purchased a public shell" and that Mindhunt.com would "be public within 4 to 5 months." Davis offered the 5% interest for $250,000. There were no bids in response to Davis' offer during the ten days it ran on the eBay auction site.
E. The term "public shell" that Davis used in his posting refers to a company that typically has no current business operations and few, if any, assets and liabilities, but whose shares have been registered with the Commission. In some instances, rather than go through the process of registering shares with the Commission, a privately-held company may look to purchase, or merge with, a public shell in order to take advantage of the shell company's ability to issue new stock to the public.
F. At the time of his posting on the eBay auction site, Davis had not purchased a public shell and there was no reasonable basis for his claim that Mindhunt.com would "be public within 4 to 5 months."Davis' Violation of Sections 17(a)(1) and 17(a)(3) of the Securities Act
G. Section 17(a)(1) of the Securities Act prohibits, in the offer or sale of securities, the use, with scienter, of any device, scheme or artifice to defraud. Section 17(a)(3) of the Securities Act prohibits, in the offer or sale of securities, any transaction, practice or course of business which operates or would operate as a fraud or deceit upon the purchaser. No scienter is required for violations of Section 17(a)(3).
H. In offering the Mindhunt.com securities, Davis claimed that he had "purchased a public shell" when, in fact, he had not done so. In addition, Davis claimed that Mindhunt.com would "be public in 4 to 5 months." Because Davis knew that he had not yet purchased a public shell, he also knew that he had no reasonable basis for the claim that Mindhunt.com would be public in 4 to 5 months.
I. Because he made material misstatements of fact in the offer of the Mindhunt.com securities, with scienter, Davis violated Sections 17(a)(1) and 17(a)(3) of the Securities Act.Davis' Violation of Section 5(c) of the Securities Act
J. Davis also violated Section 5(c) of the Securities Act. Section 5(c), in part, prohibits any offer to sell securities through the mails or by making use of the means or instruments of transportation or communication in interstate commerce, unless a registration statement for the securities has been filed with the Commission.
K. In this case, at the time of Davis' offer, no registration statement for the Mindhunt.com securities had been filed with the Commission. By offering the securities over the Internet, Davis made use of the means or instruments of communication in interstate commerce.
L. There is no exemption from the registration requirements of Section 5(c) available for the offer of the Mindhunt.com securities. Because Davis offered the Mindhunt.com securities over the Internet, Davis engaged in a general solicitation. As a result, Section 4(2) of the Securities Act and the exemptions under Rules 505 and 506 of Regulation D are inapplicable.
M. Rule 504 exempts certain offerings that do not exceed an aggregate amount of $1 million and, until recently, permitted general solicitations 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 so long as sales are made only to accredited investors.
N. Davis offered the Mindhunt.com securities nationwide over the Internet without making any of the requisite state filings or disclosures. As a result, Davis' offer, which commenced on May 5, 1999, fails to qualify for exemption from registration under amended Rule 504.
O. Accordingly, Davis violated Section 5(c) of the Securities Act by offering to sell Mindhunt.com securities over the Internet.IV.
On the basis of this Order and the Offer submitted by Respondent, the Commission finds that Davis violated Sections 17(a)(1), 17(a)(3) and 5(c) of the Securities Act.V.
Accordingly, it is hereby ordered, pursuant to Section 8A of the Exchange Act, that Davis cease and desist from committing or causing any violation, and any future violation, of Sections 17(a)(1), 17(a)(3) and 5(c) of the Securities Act.
By the Commission.
Jonathan G. Katz
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