NC Secretary of State LPO Crowdfunding Option Extended
The sun has risen on the Local Public Offering (LPO) option of the state crowdfunding law (NC PACES), which could light the way for small businesses to grow across North Carolina.
Administrative rules for the LPO option, providing small businesses a means for raising up to $250,000 through a securities offering to North Carolina investors, have been temporarily extended effective July 1, 2020. This temporary extension will allow small businesses to conduct investment crowdfunding offerings while the Secretary of State’s Office pursues permanent rulemaking to extend this provision for at least another five years.
The Secretary of State’s Office sought to extend the sunset provisions of the LPO option in order to provide North Carolina small businesses, experiencing the disruption and devastating effects of the Coronavirus pandemic, an avenue to raise additional financial capital, create jobs, and support economic development.
“The Local Public Offering option has tremendous potential to help small businesses and shore up local economies across the state, especially as we navigate these challenging times,” said NC Secretary of State Elaine Marshall. “NC PACES and the LPO option offer businesses a flexible tool for capital formation while maintaining strong investor and public protection.”
The LPO Option is one of the NC PACES Act’s two tiers. NC Paces Offerings or NCPOs, which have no sunset provision, allow issuers to offer securities of less than $2 million. NCPOs are similar to federal crowdfunding in that they allow for direct solicitation of and communication with investors, but only through the internet. This “internet-only” crowdfunding option prohibits general solicitation and limits advertising. LPOs allow advertising and in person solicitation of and communication with investors.
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AARP NC Tele-Town Hall Puts Spotlight on World Elder Abuse Awareness Day
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Secretary Marshall joined AARP North Carolina and Owen Donley of the US Securities and Exchange Commission's Office of Investor Education and Advocacy on June 15th for a Tele-Town Hall marking World Elder Abuse Awareness Day (WEAAD) 2020. If you missed that event you can listen to the audio of the event in its entirety
here
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Protecting the Most Vulnerable: How FINRA Enforcement Prioritizes Senior Investors
The most recent edition of the FINRA
UNscripted
podcast
focuses on that agency's work to protect seniors.
In recent years there's been a substantial increase in the number of cases involving the exploitation of senior investors, often with devastating effects, especially for seniors who may be out of the workforce and living on a fixed income. That’s why protecting senior investors is a priority for FINRA Enforcement.
In this episode, Deputy Head of FINRA Enforcement and Sales Practice Enforcement, Chris Kelly, shares how FINRA is working to protect this segment of the population and what firms can do to work with FINRA in this important effort.
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COVID-19 Related Early Withdrawals from Retirement Accounts: Be Careful of Fraudsters and Other Bad Actors Targeting Your Retirement Savings
The CARES Act of 2020 provides significant relief for businesses and individuals affected by the COVID-19 pandemic. This includes allowing retirement investors affected by the coronavirus to
gain access to up to $100,000
of their retirement savings without being subject to early withdrawal penalties and with an expanded window for paying the income tax they owe on the amounts they withdraw.
Unfortunately, unscrupulous promoters have used these CARES Act benefits to encourage investors to take money from their 401(k)s or traditional IRAs, not for current emergency financial needs, but to buy investments (often riskier ones) in an account at a firm the promoter recommends or in the investor’s existing account.
Coronavirus-Related Hardship Withdrawals and Loans Under the CARES Act—Terms, Conditions and Intended Benefits
Ordinarily, if you take a hardship withdrawal from your retirement plan, you permanently reduce your retirement savings balance. In other words, you are not allowed to put the money withdrawn back in the retirement account after the hardship has passed and you must pay income tax on it. Depending on your company’s policies, you also might not be able to resume contributing for six months or more. In addition, you must pay a 10 percent penalty if you withdraw funds before reaching age 59½.
The CARES Act provides significant, temporary relief from these provisions, including for individuals who experience adverse financial consequences as a result of COVID-19 related events. The CARES Act allows qualified individuals impacted by the coronavirus pandemic to pay back funds withdrawn from a qualified retirement plan over a three-year period, and without having the amount recognized as income for tax purposes. The new law also temporarily waives the 10 percent early withdrawal penalty for coronavirus-related distributions (CRDs) made between January 1 and December 31, 2020. In addition, the CARES Act exempts CRDs from the 20 percent mandatory withholding that normally applies to certain retirement plan distributions.
The CARES Act also doubles the ordinary retirement plan loan limits for qualified individuals to the lesser of $100,000 or 100 percent of the participant’s vested account balance. You will not owe income tax on the amount borrowed from the 401(k) if you pay it back within five years. In addition, qualified individuals with an outstanding loan from their plan (meaning a loan taken before the CARES Act was enacted) that has a repayment due between March 27 and December 31, 2020, can delay their loan repayments for up to one year. However, interest will continue to accrue on these delayed payments.
These CARES Act benefits greatly reduce the costs of accessing funds held in retirement accounts, particularly for short term needs, such as severe economic hardship, when the investor expects to return the funds. Unfortunately, fraudsters and other bad actors are using these CARES Act benefits, which are intended for those facing economic hardship from COVID-19, to promote high-risk, high-fee investments and other inappropriate products and strategies. These include products and strategies that have high fees and costs, are not designed to be temporary and, as a result, are unlikely to provide investors with the intended benefits of the CARES Act, particularly over time. For additional details on CARES Act loans and withdrawals, please the
IRS’s Question and Answers page at IRS.gov
.
What You Can Do: Make Sure the Promoter or Investment Professional is Licensed and Look Out for Fraudulent Promotions
If you are contacted by a promoter or investment professional who recommends that you withdraw money from your retirement savings to invest in securities—either through their firm or in your own self-directed investment account—be sure to first confirm whether they are licensed to give advice or sell investments. You can verify the status of investment professionals and find out whether they have a history of customer harm by contacting
the North Carolina Securities Division at (800) 688-4507 or (919) 814-5400
or using tools available from the
SEC
and
FINRA
.
Also, always be on the lookout for the
red flags of a fraud
, such as high guaranteed returns and high-pressure sales tactics. Keep in mind that every investment carries some degree of risk. Many investment frauds are pitched as high-return opportunities with little risk. Ignore these so-called opportunities or, better yet,
report them
to the SEC, FINRA, or your state securities agency.
Factors to Consider Before Selling or Borrowing Against Your Retirement Accounts to Make New Investments in Securities
If you are thinking about withdrawing or borrowing money from your retirement plan(s) for the specific purpose of investing—especially if at the urging of a promoter or investment professional—please first consider these factors:
You May Pay High Fees to the Promoter.
The promoter may charge you a fee or commission for the investments they are offering. In addition, the promoter or a person or company related to the promoter may impose ongoing costs and fees on the investment. High initial and ongoing fees for retirement investments are a red flag. Ask if there are any up front or ongoing fees or commissions. In other words, ask how much of your money is working for you and how much is going to others.
It May be Difficult or Costly to Sell the Promoted Investment.
The promoted investments may have fees for early withdrawals or may otherwise make access to your savings costly or difficult. Ask if there are any fees or restrictions on early withdrawal or any sale.
Selling at Low Prices Locks in Your Losses.
Taking money from your retirement account usually requires you to sell some of the investments in your account—and you might not be able to choose which ones. In many plans, the money is taken in equal portions from each of your different investments. For example, if you have money in four mutual funds, 25 percent of the loan total comes from each of the funds. If you liquidate investments when the market is down or prices are otherwise low, you will lock in losses.
You May Lose Out on Compounding.
Withdrawing money from a retirement account, even without a 10 percent penalty, can have significant impacts on your future retirement savings because you lose out on the compound growth from any funds you withdraw.
You May Significantly Increase Your Risk.
When you buy securities with money from a 401(k) loan, you are investing with borrowed funds. While this can increase your buying power, it also increases your exposure to market risk at the very same time you are hoping your investment will increase in value. If the investment sours, including as a result of high fees and costs, you not only stand to lose the amount you invest, but you also might have difficulty repaying the funds withdrawn or loaned within the respective three- or five-year time periods. You further compound your risk if you put your money in higher-risk and higher-fee investments than those available in your 401(k) plan.
Eligibility and Availability Are Designed to Address Hardships, Not Increase Investment Options
.
The CARES Act relief described above is available to individuals: (1) diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experience adverse financial consequences as a result of certain COVID-19 related events. You will be required to sign a certification of the reason for the CRD, although your plan administrators are not required to verify such certifications. Your employer might or might not do so. Importantly, your employer may, but is not required to, offer COVID-19-related distributions and loan relief under its plans. Be sure to find out before taking any action.
Always do your research before making any investment decision, including a decision to withdraw or borrow money from your retirement account for the purpose of investing in securities. Know who you are dealing with, be wary of fraudulent investment scams, and be sure you understand how the investment fits into your overall financial plan.
FINRA, the North American Securities Administrators Association (NASAA) and the SEC Office of Investor Education and Advocacy
FINRA, NASAA, and the staff of the SEC’s Office of Investor Education and Advocacy have joined together to provide this warning to investors about promoters targeting retirement accounts, as well as to provide a few key considerations for investors thinking of using 401(k) withdrawals or loans to purchase securities.
Want to read more about other investment-related topics? Check out our
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Charlotte Man Pleads Guilty To Wire Fraud For Investment Scheme
Joseph Maurice Deberry, a/k/a Joseph Maurice Dewberry, 56, of Charlotte, appeared before U.S. Magistrate Judge David S. Cayer on June 11, 2020, and pleaded guilty to wire fraud, for orchestrating an investment scheme that defrauded victims of hundreds of thousands of dollars,
announced
Andrew Murray, U.S. Attorney for the Western District of North Carolina.
John A. Strong, Special Agent in Charge of the Federal Bureau of Investigation (FBI), Charlotte Division, and Tommy D. Coke, Inspector in Charge of the Atlanta Division of the U.S. Postal Inspection Service (USPIS) which oversees Charlotte, joined U.S. Attorney Murray in making this announcement.
According to admissions Deberry made in plea documents and the June 11th plea hearing, from 2016 through June 2019, Deberry fraudulently obtained hundreds of thousands of dollars from more than a dozen investors. As part of the scheme, Deberry induced victims to invest in entities with which he was affiliated, such as Pinnacle Investment Properties, LLC and Place Capital Group LLC, among others. Deberry typically represented to investors that their money would be used to further projects related to the construction of student housing at certain colleges in the Carolinas and other ventures.
To further promote the fraudulent scheme and to induce his victims to part with their money, Deberry lied about his education, employment background, involvement in prior lawsuits and regulatory actions, previous success in student housing projects, and about how he would use the victims’ money. For example, Deberry falsely claimed that he studied at the London School of Economics when he had never studied there, and falsely claimed that he had a successful career as an investment banker at Goldman Sachs, when he had never worked there.
As Deberry admitted in court and in related filings, rather than use the victims’ money as he had represented, Deberry used a significant portion of their funds to pay for personal expenses like rent, entertainment and travel. Further, Deberry actively concealed from his victims the fact that he was under a
Cease and Desist Order
from the North Carolina Secretary of State's Securities Division prohibiting him from offering for sale, soliciting offers to purchase, or selling any securities in North Carolina. Deberry concealed this information from victims by, among other things, telling them that his name was Maurice Dewberry.
Deberry pleaded guilty to wire fraud. The charge carries a maximum prison sentence of 20 years and a $250,000 fine. A sentencing date for Deberry has not been set. The FBI’s Charlotte Field Office and the USPIS handled the investigation. Assistant U.S. Attorney Daniel Ryan of the U.S. Attorney’s Office in Charlotte is prosecuting the case.
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One Call Could Save Your Life Savings!
Is that individual offering you an investment opportunity licensed to sell securities in North Carolina? Is the investment opportunity itself registered? Know before you sign!
While registration in and of itself is no guarantee against fraud, not being registered is a very big red warning flag.
We urge you to take five minutes to call our NC Investor Hotline at 1-800-688-4507 to see if the person you have been dealing with – perhaps even for years – is properly registered and/or has a disciplinary history. You can also check to see if the actual investment itself is properly registered.
Pick up the phone and call us. You owe it to yourself and your family to check. And please also consider sharing the information in this newsletter with
YOUR
contacts or your social networks. Doing so will help keep your friends and loved ones safe, too. More information can be found at
https://www.sosnc.gov/divisions/securities/for_investors
.
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Webinar on Business Identity Theft
Individuals aren’t the only ones who can experience identity theft. Businesses can also fall victim to what’s called “business identity theft,” where criminals steal your sensitive information to commit various crimes, including:
- tax or credit card fraud,
- taking out loans in the name of the business,
- holding websites and business trademarks for ransom,
- changing business registration information,
- and a whole host of other exploits that can have huge financial impacts on small and medium-sized businesses.
The National Cyber Security Alliance is hosting a free webinar on
Tuesday, July 14
th
at 11 a.m.
with partners at Generali Global Assistance to provide an overview of what Business Identity Theft is, and provide tips on how you can prevent this from happening to your business. To register for this free webinar, click the "Register" button below or visit
https://staysafeonline.org/events/
.
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Financial Regulators Modify Volcker Rule
Five federal regulatory agencies
finalized a rule
on June 25 modifying the Volcker rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds—known as covered funds. The final rule is broadly similar to the proposed rule from January.
The Volcker rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.
Like the proposal, the final rule modifies three areas of the rule by:
- Streamlining the covered funds portion of rule;
- Addressing the extraterritorial treatment of certain foreign funds; and
- Permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker rule was intended to address.
The rule will be effective on October 1.
SEC Updates Filing Threshold to Rule 17h Reporting Requirements for Broker-Dealers
The Securities and Exchange Commission issued an
order
on June 29th to update the filing threshold for broker-dealers’ Form 17-H filings made pursuant to Exchange Act Rules 17h-1T and Rule 17h-2T. The threshold, which had not been updated in nearly 30 years, will exempt certain smaller broker-dealers from the reporting requirements of the rules while continuing to provide important information to the Commission on the financial condition of covered broker-dealers and their affiliates.
The order follows the recommendation of the SEC’s Office of Inspector General, published earlier this year, that raising the reporting threshold would, among other things, increase the overall efficiency of the Form 17-H filing intake and review processes and reduce the reporting burden on smaller broker-dealer firms.
“This Commission order will reduce the regulatory burden for certain smaller broker-dealers in a targeted, measured manner that preserves reporting by firms representing approximately 98 percent of the total capital of firms currently subject to our 17h Rules,” said Brett Redfearn, Director of the SEC’s Division of Trading and Markets. “This action will modernize the application of the 17h Rules and enhance the efficiency and efficacy of our oversight of the broker-dealers that continue to be subject to those rules. I would like to thank all of the SEC staff that worked on this action.”
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- On April 16, 2020, the North Carolina Department of the Secretary of State, Securities Division entered into a Final Consent Order ("Order") with Ferry Capital Management, LLC ("FCM") and Paul Edward Ferry. The Order found that Respondents transacted business in North Carolina as an investment adviser and an investment adviser representative without being registered, in violation of the North Carolina Investment Advisers Act ("Act"). Pursuant to the Order, FCM and Ferry agreed to immediately cease and desist from violating any provisions of the Act and any related administrative rules; keep FCM's Form ADV updated; hire a third-party compliance auditor; attend the Securities Division's Investment Adviser Best Practices Workshop; and pay both a civil penalty and the cost of investigation. For more information, click here.
- On February 18, 2020, the North Carolina Department of the Secretary of State, Securities Division entered into a Final Consent Order (“Order”) with Joseph M. Murtagh, Jr. and Joseph M. Murtagh, Jr. d/b/a The Source. The Order states that The Source and Murtagh violated North Carolina law during at least some of the years they transacted business in North Carolina as an investment adviser and an investment adviser representative without registering pursuant to the North Carolina Investment Advisers Act. Pursuant to the Order, The Source and Murtagh agreed to immediately cease and desist from violating any provisions of the North Carolina Investment Advisers Act or Securities Act and any related administrative rules, to pay a registration fee, to pay a civil penalty, and to pay a sum to the Investor Protection and Education Trust Fund. For more information, click here.
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NC Department of the Secretary of State
Securities Division
Investor Protection & Education Services
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