UNITED STATES OF AMERICA
|In the Matter of
MINOTAUR CAPITAL, INC. and
|ORDER INSTITUTING PUBLIC
PURSUANT TO SECTION 8A OF THE
SECURITIES ACT OF 1933 AND
SECTION 21C OF THE SECURITIES
EXCHANGE ACT OF 1934, MAKING
FINDINGS, AND IMPOSING
A CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate that a public administrative proceeding be, and hereby is, 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 Minotaur Capital, Inc. and David J. Feingold ("Respondents").
In anticipation of the institution of these administrative proceedings, the Respondents have submitted Offers of Settlement (the "Offers") which the Commission has determined 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, and without admitting or denying the findings, the Respondents consent to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order.
On the basis of this Order and the Respondents' Offers, the Commission makes the following findings:
This matter involves violations of the registration requirements of the Securities Act and the tender offer provisions of the Exchange Act. On April 6, 1999, Minotaur Capital, Inc., a Florida corporation recently formed by David J. Feingold, announced a tender offer for 51% of the shares of Ride, Inc., a company that manufactures and sells snow boards. Minotaur offered shareholders $1.25 per share in cash, payable in the form of a balloon payment secured by a promissory note due and payable within one year of the April 30, 1999 expiration date of the offer. On April 7, the day after it announced its tender offer, Minotaur indirectly purchased 15,800 shares of Ride stock at $1.245 per share. Feingold purchased these shares of Ride stock, on behalf of Minotaur, through RAF Enterprises, a limited partnership that he controlled.
Minotaur violated Section 5(c) of the Securities Act when it offered a security -- the promissory note in its tender offer -- without having filed a registration statement for that security. Feingold, who was Minotaur's president, chairman and sole shareholder, violated Section 5(c) of the Securities Act when he offered the promissory note in Minotaur's tender offer without having filed a registration statement for the note. Minotaur also violated Rule 10b-13 of the Exchange Act when, through RAF Enterprises, it indirectly purchased 15,800 Ride shares after announcing its tender offer. Feingold violated Rule 10b-13 when he, through RAF Enterprises, purchased 15,800 Ride shares for Minotaur after Minotaur had announced the tender offer.
David J. Feingold,age 33, is the president, chairman and sole shareholder of Minotaur.
Minotaur Capital, Inc. is a Florida corporation that Feingold formed in March 1999, for the specific purpose of commencing a tender offer for Ride. Minotaur has no officers or employees other than Feingold, and its principal office is located in Feingold's office.
1. Feingold Decides to Make a Tender Offer for Ride
In March 1999, Feingold identified Ride as a possible takeover target after reviewing documents from a subscription stock screening service. Subsequently, Feingold read Ride's SEC filings and reports on the snow boarding industry. This research convinced Feingold that Ride was substantially undervalued, and he decided Ride would make an appealing takeover target.
Feingold then began the process of forming Minotaur, the entity that would make the tender offer, and began to prepare the necessary tender offer documents. Feingold personally drafted the documents.
Prior to announcing the tender offer, Feingold decided to acquire an equity position in Ride. Feingold told his broker to purchase Ride stock through RAF Enterprises, a limited partnership that he controlled, because he was unsure whether the Minotaur incorporation process had been finalized. Between March 30 and April 5, 1999, the day before announcing the tender offer, Feingold acquired, on Minotaur's behalf, 105,000 shares of Ride. During this period, Feingold regularly spoke to his broker to place orders and to confirm the blocks of shares he had purchased.
2. Minotaur's Tender Offer for Ride
On Tuesday, April 6, Minotaur announced a tender offer for 51% of the outstanding common stock of Ride for $1.25 per share. Minotaur stated in its offer to purchase that it would pay for the shares by giving tendering shareholders a promissory note that became due one year from the date of the closing of the offer. At no time did Minotaur file a registration statement for its notes.
On April 7, Feingold, on behalf of Minotaur, purchased 15,800 shares of Ride stock at $1.245 per share in his RAF account. On April 19, Minotaur amended its tender offer to shorten the term of the notes to eight months. On April 20, Minotaur amended its tender offer again, changing it to an all cash offer subject to financing. On April 26, Feingold withdrew Minotaur's tender offer. No shares had been tendered at the time the tender offer was withdrawn.
1. Section 5 of the Securities Act
Section 5(c) of the Securities Act makes it unlawful for any person to offer to sell or offer to buy a security unless a registration statement has been filed. In its tender offer, Minotaur initially offered to purchase shares of Ride stock in exchange for a promissory note due and payable within one year. Subsequently, Minotaur amended its tender offer to shorten the term of the notes to eight months.
A note is presumed to be a security under Section 2(a)(1) of the Securities Act, unless the economic substance of the transaction shows that it was not entered into for the purpose of investment and it bears a resemblance to instruments that are recognized not to be securities. Reves v. Ernst & Young, 494 U.S. 56, 65 reh'g denied, 494 U.S. 1092 (1990). Whether a transaction was entered into for investment or another purpose depends on: (1) the purpose of the notes, i.e., to raise capital versus to effect a commercial or consumer transaction; (2) the plan of distribution of the notes; (3) the reasonable expectation of the public concerning the notes; and (4) whether another regulatory scheme applies. Id. at 66-67.
Minotaur's notes were securities. Minotaur's promissory notes were not sold to effect a commercial or consumer transaction; they were issued to acquire securities from shareholders in a tender offer. It was intended that the notes would be widely distributed to Ride's shareholders, which gives the notes the character of a security. Reasonably, investors would expect that the notes were securities, rather than commercial paper or another instrument that would not be a security. Finally, a regulatory scheme other than the federal securities laws is not applicable to the notes.
The promissory notes offered by Minotaur were not exempt from registration. Section 3(a)(3), which exempts from registration any "note" "which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding nine months" is inapplicable. Not only did the term of Minotaur's notes initially exceed nine months, but after the term was shortened, the notes still failed to satisfy the requirements that the notes be "prime quality negotiable commercial paper of a type not ordinarily purchased by the general public . . . issued to facilitate well recognized types of current operational business requirements, and of a type eligible for discounting by Federal Reserve banks." Interpretation of Section 3(a)(3), Securities Act Release No. 33,4412, 26 Fed. Reg. 9158, 9159 (Sept. 20, 1961).
Minotaur did not file a registration statement for the notes before the company offered the notes to Ride's shareholders. Minotaur, therefore, violated Section 5(c) of the Securities Act. Feingold also violated Section 5(c) because, as Minotaur's president, chairman, sole shareholder and the person responsible for the tender offer, he offered a security for sale without having filed a registration statement.
2. Rule 10b-13 of the Exchange Act
Rule 10b-13 of the Exchange Act prohibits any person who makes a cash tender offer or exchange offer for any equity security from, directly or indirectly, purchasing, or making any arrangement to purchase, any such security otherwise than pursuant to the tender offer. The prohibition on purchases extends from the time the tender offer is publicly announced until the expiration of the period during which securities tendered pursuant to the tender offer may, by the terms of such offer, be accepted or rejected.
Minotaur violated Rule 10b-13 when, through RAF, it indirectly purchased 15,800 shares of Ride on the open market after the tender offer announcement. Feingold, who apparently was unaware of Rule 10b-13, also violated Rule 10b-13 because he, on behalf of Minotaur, purchased shares of Ride stock through RAF Enterprises.
Minotaur's purchase on April 7, during the pendency of the tender offer, accounted for nearly 5% of the Ride trading volume. Thus, investors seeking to measure the impact of the tender offer on the market interest in Ride stock would not have seen a completely accurate picture of the market. The adopting release to Rule 10b-13 states that purchases outside the tender offer "can deceive the investing public as to the true state of affairs. Their consequences can be various, depending upon conditions in the market and the nature of the purchases." Prohibition Against Purchase of Securities During Tender Offer, Exchange Act Release No. 34-8712, 34 Fed. Reg. 15,838, 15,838 (Oct. 8, 1969). The release also states that purchases outside the market "could further the tender offer by raising the market price to the point where ordinary investors sell in the market to arbitrageurs, who in turn tender." Id. at 15,839.
Based on the forgoing, the Commission deems it appropriate to accept the Respondents' Offers and to impose the cease-and-desist order specified in the Offers.
Accordingly, IT IS ORDERED that, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Minotaur Capital, Inc. and David J. Feingold cease and desist from committing or causing any violation, and any future violation, of Section 5(c) of the Securities Act and Rule 10b-13 of the Exchange Act, until the rescission of Rule 10b-13 and effectiveness of successor Rule 14e-5 of the Exchange Act, at which time respondent shall cease and desist from committing or causing any violation, and any future violation, of Rule 14e-5.
By the Commission.
Jonathan G. Katz
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