Lesson of the Month: The black box acquisition

Following up from last month’s I’m-not-going-to-call-it-fraud series, here’s another recent one. As always, identifying details changed.

This one’s (which is “this one” problem is a clear omission of information required by the form filed with the SEC. Form C says that if you raise funds in order to acquire another company, you must provide the target’s financials.

This one (again) didn’t. Now you might argue that in light of the Supreme Court case earlier this year that held pure omissions were not actionable under Rule 10b-5 this isn’t fraud, that case referred to omissions that did not make anything that the issuer did say not misleading. I would argue that’s not the case here; this omission was so fundamental that it pretty much made everything in the Form C misleading in nature. 

Now, not everyone is going to agree with that conclusion, but there are still lessons to be learned from this offering.

Lesson for issuers: Make sure you understand the rules that relate to disclosure of planned acquisitions. Get legal advice.

Lesson for portals: Double-check those financial disclosures.

Lesson for investors: If you are investing in a company that intends to buy another company, you’ll want to see information about that target company to make sure what the acquiror is saying is true, right? Right?  “Source: trust me bro” is no basis for an informed investment decision.

And again: CrowdCheck’s proprietary diligence reports would have prevented this happening.

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