UNITED STATES OF AMERICA
|In the Matter of
CGI CAPITAL, INC.,
|ORDER INSTITUTING PROCEEDINGS
PURSUANT TO SECTION 8A OF THE
SECURITIES ACT OF 1933 AND
SECTION 15(b)(4) OF THE SECURITIES
EXCHANGE ACT OF 1934,
MAKING FINDINGS, IMPOSING
REMEDIAL SANCTIONS AND
The Commission deems it appropriate and in the public interest that proceedings be, and hereby are, instituted pursuant to (i) Section 8A of the Securities Act of 1933 ("Securities Act") to determine whether CGI Capital, Inc. ("CGI Capital") violated or caused violations of Section 5 of the Securities Act and (ii) Section 15(b)(4) of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether CGI Capital willfully violated Section 5 of the Securities Act and seeking to determine the appropriateness of sanctions pursuant to Section 15(b)(4) of the Exchange Act.
In anticipation of the institution of these administrative proceedings, CGI Capital has submitted an Offer of Settlement that the Commission has determined to accept. Solely for the purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, and prior to a hearing and without admitting or denying the findings set forth herein, CGI Capital consents to the entry of this Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 15(b)(4) of the Securities Exchange Act of 1934, Making Findings, Imposing Remedial Sanctions, and Cease-and-Desist Order ("Order"). The Commission has determined that it is appropriate and in the public interest to accept the Offer of Settlement from CGI Capital, and accordingly is issuing this Order.
This proceeding involves violations of the Securities Act registration provisions by CGI Capital. From August 1999 through December 1999, CGI Capital solicited thousands of individuals to invest in two private placement securities offerings. CGI Capital disseminated certain preliminary information about the offerings to prospective investors through e-mail messages and provided access to detailed information by giving investors a password to its website. However, some of the individuals contacted by CGI Capital did not have any pre-existing substantive relationship with CGI Capital, and CGI Capital failed to determine adequately whether they were either sophisticated or accredited investors prior to giving them access to view the online offerings on CGI Capital's website. In addition, CGI Capital failed to take adequate steps to restrict access to its website. Because the securities being offered were not registered with the Commission or exempt from registration, CGI Capital violated Section 5 of the Securities Act.
Based on the foregoing, the Commission finds that:
CGI Capital, Inc.
CGI Capital is a Florida corporation located in Mundelein, Illinois. CGI Capital is registered with the Commission as a broker-dealer.
B. CGI Capital's Sale of Unregistered Securities
In August 1999, CGI Capital sent e-mail messages to several thousand potential investors regarding a private placement offering of the common stock of an internet startup company. CGI Capital obtained the e-mail addresses though various internet promotions, including a "free website" design offer. Some of the individuals contacted by CGI Capital did not have any pre-existing substantive relationship with CGI Capital, and CGI Capital failed to determine adequately whether all of the individuals were sophisticated or accredited investors.
The e-mail messages contained a link to CGI Capital's website, which required users to enter a password to access the offering presentation. The password was supplied to every recipient in the text of the initial e-mail solicitation, and there was no warning or restriction that prevented the recipients from forwarding the password to other potential investors. The website provided, among other things, a brief sales presentation and a subscription form for the offering. The stock offering raised approximately $950,000.
In December 1999, CGI Capital sent several hundred e-mail messages via the internet to a list of potential investors regarding a private placement offering of the common stock of an on-line computer hardware and software company. As with the prior offering, the e-mail messages contained a link to CGI Capital's website, which required a password to access the offering presentation. The password was supplied to every recipient of the initial e-mail solicitation, and there was no warning or restriction that prevented the recipients from forwarding the password to other potential investors. The website provided a brief sales presentation, access to the offering circular, and a subscription form for the offering. The stock offering raised approximately $100,000.
Section 5 of the Securities Act makes it unlawful for any person to sell securities by making use of means or instruments of transportation or communication in interstate commerce unless a registration statement for the securities has been filed with the Commission. 15 U.S.C. §77(e). CGI Capital violated Section 5 of the Securities Act because the stock that it offered and sold over the internet was not registered with the Commission and was not exempt from registration.
The registration exemptions set forth in Section 4(2) of the Securities Act and Rules 505 and 506 of Regulation D were not applicable to CGI Capital's offerings of common stock because CGI Capital used general solicitation in connection with those transactions.2 As set forth above, CGI Capital sent e-mail messages to several thousand individuals, some of whom did not have any pre-existing substantive relationship with CGI Capital, and CGI Capital failed to verify whether they were either sophisticated or accredited investors.3
CGI Capital also engaged in a general solicitation by failing to take adequate steps to restrict access to the offerings on its website.4 In particular, CGI Capital (1) sent its e-mail solicitations to several thousand potential investors and included in each e-mail a password to the password-protected page of its website containing the offering materials; (2) allowed these potential investors to access the offering materials on its website before CGI Capital had made a determination that any particular potential investor was accredited or sophisticated; (3) failed to gather information from certain potential investors in order to form a reasonable basis for believing such investors to be accredited or sophisticated; and (4) allowed these potential investors to purchase securities in offerings that had been posted on the password-protected page of its website before CGI Capital had made a determination that such potential investors were accredited or sophisticated. As a result, CGI Capital's internet offerings were not exempt from registration, and CGI Capital's activities violated Section 5 of the Securities Act.
Based on the above, the Commission finds that CGI Capital willfully5 violated Section 5 of the Securities Act.
Accordingly, IT IS HEREBY ORDERED that,
A. CGI Capital be, and hereby is, censured;
B. CGI Capital cease and desist from committing or causing any violations of, and committing or causing any future violations of, Section 5 of the Securities Act; and
C. CGI Capital pay a civil money penalty of $25,000 within ten (10) days of the entry of the Order, by U.S. Postal money order, certified check, bank cashier's check, or bank money order, made payable to the Securities and Exchange Commission and shall be hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312, under cover of a letter that identifies the respondent and the name and file number of this proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to Scott W.
Friestad, Esq., Securities and Exchange Commission, Division of Enforcement, 450 Fifth Street, N.W., Washington, D.C. 20549-0703.
By the Commission.
Jonathan G. Katz
|2||Rule 502(c) expressly prohibits the use of general solicitation in offerings conducted pursuant to Rules 505 and 506 of Regulation D.|
|3||Rule 504 previously allowed a general solicitation for offerings made for less than one million dollars. However, effective April 7, 1999, the Commission adopted revisions to Rule 504 which now limit general solicitations in the use of a Rule 504 exemption "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." The Rule 504 exemption was not available for CGI Capital's stock offerings because CGI Capital did not register the offerings in any state. In addition, one of the offerings exceeded the dollar limitation of Rule 504.|
|4||Cf. No-Action Letter of Divisions of Corporation Finance and Market Regulation to IPONET (July 26, 1996); Interpretive Release on Use of Electronic Media, Securities Act Rel. No. 33-7856 (April 28, 2000).|
|5||In applying the term "willful" in Commission administrative proceedings instituted pursuant to Sections 15(b), 15B, 15C, 17A, and 19(h) of the Securities Exchange Act, Section 9 of the Investment Company Act, and Section 203 of the Investment Advisers Act, the Commission evaluates on a case-by-case basis whether the respondent knew or reasonably should have known under the particular facts and circumstances that his conduct was improper. In this case, as in all Commission administrative proceedings charging a willful violation under these statutory provisions, the Commission applies this standard to persons -- specifically, securities industry professionals -- who are directly subject to Commission jurisdiction and who have a responsibility to understand their duties to the investing public and to comply with the applicable rules and regulations which govern their behavior.|
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