Securities Act of 1933
Release No. 8309 / October 23, 2003
Administrative Proceeding
File No. 3-11311
In the Matter of Research Capital, LLC, Respondents. |
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ORDER INSTITUTING PUBLIC CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 8A OF THE SECURITIES ACT OF 1933 |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), against Research Capital, LLC ("Research Capital"), Carl L. Smith, III ("Smith"), Richard Craig Hall ("Hall"), IR Specialists, Inc. ("IR Specialists") and Wayne H. Jenkins ("Jenkins") (collectively "Respondents").
II.
In anticipation of the institution of these proceedings, 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 to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 ("Order"), as set forth below.
III.
On the basis of this Order and Respondents' Offers, the Commission finds1 that:
FACTUAL SUMMARY
1. This matter involves a common abuse found among certain small publicly held companies. In recent years, many such companies have hired stock promoters to tout their shares on stock-picking websites and through mass-mailed e-mail messages (commonly known as "spam"). The promoter is often compensated in the form of purportedly unrestricted shares of the company's common stock, which the promoter sells after its touting has attracted investor interest in the company.
2. Under the federal securities laws, a public company cannot distribute unrestricted stock to public investors without first registering the offering with the Commission or having a valid exemption from registration for the transaction. Registration requires a company to provide important information about its finances and business to potential investors, and allows the Commission to review the company's disclosures. In an attempt to circumvent those registration requirements, certain issuers have sought alternate sources of purportedly "free trading" company stock in order to compensate the stock promoters. In such arrangements, the issuers and promoters are nonetheless participating in an unregistered offering of securities to the public in violation of the federal securities laws, as described below.
RESPONDENTS
3. Research Capital is a Florida venture capital company that seeks to invest in genomics-based biotechnology companies.
4. Smith, 34, of Osprey, Florida, is the managing member and sole owner of Research Capital.
5. Hall, 33, of Sarasota, Florida, is the President of Research Capital.
6. IR Specialists, a Rhode Island corporation, promotes small cap companies on its website, TipReporter.com.
7. Jenkins, 36, of Hope, Rhode Island, is the sole officer and director of IR Specialists.
OTHER RELEVANT ENTITIES
8. Research Investment Group, Inc. ("RIG"), a Florida corporation, promotes small cap companies by hiring others to mass distribute e-mail messages and faxes touting its corporate clients.
9. Scott H. Wilding ("Wilding"), 42, of Pembroke Pines, Florida, is the sole officer and director of RIG.
10. Tyler T. Fleming ("Fleming"), 33, of Las Vegas, Nevada, promoted small cap companies from 2000 through 2002 on his website, WallStreetWest.com, and through an electronic newsletter, Wall Street West Newswire. Fleming conducted his stock promotion business through two corporate entities he controls, SmallCap Solutions, Inc. and Complete Financial and Operations, LLC.
11. SmallCap Solutions, Inc. ("SmallCap Solutions"), is a Nevada corporation used by Fleming to conduct his stock promotion business. Fleming is SmallCap Solution's sole officer and director.
12. Complete Financial and Operations, LLC ("Complete Financial") is a Colorado company also used by Fleming in his stock promotion business. Complete Financial registered the trade name WallStreetWest.com, LLC with the state of Colorado. Fleming is the sole member of Complete Financial.
THE UNREGISTERED DISTRIBUTION
13. In or around November 2001, Research Capital hired RIG to promote an issuer, whose common stock was traded on the OTC Bulletin Board (the "Issuer").
14. Research Capital was affiliated with the Issuer. Research Capital and its principals, Smith and Hall, owned approximately 18% of the Issuer's outstanding shares, and agreed to provide the Issuer with $1 million in working capital and to establish a public relations campaign for the Issuer. The Issuer had no significant revenue-generating activity and was nearly completely funded by, and dependent on, Research Capital.
15. Research Capital and RIG entered into an agreement under which RIG would establish a promotional campaign for the Issuer in exchange for an option to purchase up to 4,000,000 purportedly unrestricted shares of the Issuer from Research Capital and its principals at $0.025 per share. At the time, the Issuer's stock was trading at approximately $0.075 per share.
16. Shortly thereafter, RIG's sole officer and director, Wilding, exercised a portion of this option and purchased 3,300,000 shares of the Issuer from Research Capital and its principals. The shares, which came from Hall's and Smith's personal holdings, were deposited into Wilding's personal brokerage account.
17. RIG's Wilding subcontracted with Fleming and his company, SmallCap Solutions, to perform a portion of the promotional work in exchange for 150,000 purportedly unrestricted shares of the Issuer. Smith transferred 150,000 of his shares of the Issuer to SmallCap Solutions on December 27, 2001. The shares were deposited into SmallCap Solutions' brokerage account. Fleming, as the sole officer and director of SmallCap Solutions, was the sole signatory on the company's brokerage account.
18. RIG also subcontracted with Wayne H. Jenkins and his company, IR Specialists, to perform a portion of the promotional work in exchange for 400,000 purportedly unrestricted shares of the Issuer. Under the agreement, IR Specialists would "e-mail blast" messages touting the Issuer to 8,000,000 potential investors, and arrange for profiles about the Issuer to be posted on its website and on other stock-promotion websites. As compensation, IR Specialists received 400,000 shares of the Issuer from Smith on January 2, 2002. The shares were deposited into IR Specialists' brokerage account. As IR Specialists' sole officer and director, Jenkins was the sole signatory on the company's brokerage account.
19. SmallCap Solutions posted a profile of the Issuer on the SmallCap Solutions website on or about January 5, 2002. That website was operated by SmallCap Solution's President, Fleming, under the business name Complete Financial. IR Specialists' promotion began at around the same time. Within several days, daily trading volume of the Issuer's shares rose over 600% above the volume in the preceding month.
20. Between January and April 2002, Fleming sold the shares of the Issuer that SmallCap Solutions had received from Smith on the open market for $6,005. Between March and July 2002, IR Specialists and Jenkins sold most of the stock they had received from Smith on the open market for $5,980. In addition, in the weeks following the promotional activities, Wilding sold the shares that RIG had received from Smith for $121,715.
21. No registration statement was filed with the Commission or was in effect as to the shares of the Issuer's stock sold by RIG, SmallCap Solutions, or IR Specialists. Because these stock promoters had obtained the shares from persons directly or indirectly controlling or controlled by the Issuer, or under direct or indirect common control with the Issuer, with a view to distributing the stock to the public, the stock was not exempt from registration. As a result, the securities were restricted and could not be sold to the public within a year after they were acquired by the promoters. Therefore, the securities transactions described above violated Sections 5(a) and 5(c) of the Securities Act.
VIOLATIONS
As a result of the conduct described above, Respondents violated Sections 5(a) and 5(c) of the Securities Act, which prohibit the offer or sale of securities through the mails or in interstate commerce, unless a registration statement has been filed or is in effect as to such securities.
IV.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondents' Offers.
Accordingly, it is hereby ORDERED that:
A. Respondents cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) of the Securities Act.
B. IT IS FURTHERED ORDERED that IR Specialists, Inc. and Wayne H. Jenkins shall, within 10 days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $6,337.22 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Mail Stop 0-3, Alexandria, Virginia 22312; and (D) submitted under cover of a letter that identifies IR Specialists, Inc. and Wayne H. Jenkins as Respondents in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Robert L. Mitchell, Assistant District Administrator, Securities and Exchange Commission, San Francisco District Office, 44 Montgomery Street, Suite 1100, San Francisco, California 94104-4691.
By the Commission.
Jonathan G. Katz
Secretary
Endnotes
1 The findings herein are made pursuant to Respondents' Offers and are not binding on any other person or entity in this or any other proceeding.