Houlihan Capital, LLC, headquartered in Chicago, Illinois, as well as Andrew Smith, its president, and chief compliance officer, were censured and fined by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm and Smith made false statements, omissions, and unwarranted statements concerning the benefits and risks of private placement offerings. Letter of Acceptance, Waiver and Consent, No. 2015045347101 (Oct. 19, 2016).
According to the AWC, in 2015, Smith and his firm facilitated a private placement offering on behalf of an entity which provided photography based services to customers. Apparently, the entity wished to accumulate five million dollars in capital through issuance of convertible subordinated promissory notes. The AWC stated that the promissory notes contained terms requiring an eighteen-month commitment in return for an annual ten percent interest rate, in addition to an extra fifty percent return on maturity as well as shares of equity in the entity. The AWC stated that the offering purportedly would enable investors to recognize a forty-two percent internal rate of return.
According to the AWC, the marketing materials and subscription agreements which were distributed through the firm and Smith indicated that a national drug store and the issuer agreed upon a pilot program for the issuer’s services to be provided at ninety-five of the drug store’s stores in February of 2015. Information concerning the offering was reportedly disseminated to an estimated twenty prospective investors.
Apparently, the drug store reduced the participating stores down to thirteen stores, and postponed the start of such program until April. The AWC stated that after Smith learned about the drug store’s cutting back of participating stores and delay of the start of the pilot program, only four prospective investors were contacted.
FINRA found that when Smith communicated with prospective investors through the transmittal of offering documents or marketing materials, he made inaccurate, overblown, and inappropriate statements. Specifically, Smith apparently communicated with prospective investors in two March 2015 e-mails, where he made inaccurate remarks concerning the issuer’s financial status; he claimed that the issuer was debt-free. The AWC stated that the company actually had a convertible note which it owed $650,000.00 on, and held three loans which totaled more than $425,000.00.
Smith seemingly informed prospective investors that the issuer would actually perform much better than projected, and that investors’ funds in a mezzanine level debt investment would provide great returns and be very safe. Smith apparently portrayed to prospective investors that an offering to accredited investors would soon be complete; however, Smith was the only investor who committed to the investment at the time of such statement.
Further, the AWC stated that Smith referred to the drug store and issuer having contractual relations, when there was merely a vendor arrangement in place which did not contain obligations on the drug store’s part to participate in the pilot program in the ninety-five stores, nor commit to any time frame with the issuer on implementation or national expansion.
According to FINRA, Smith and his firm utilized materials that portrayed the issuer in an excessively positive light, and made lavish assumptions concerning revenues and the issuer’s expansion. Apparently, Smith’s communications prevented prospective investors from having a legitimate basis to evaluate the issuer, as several key facts regarding the investment’s risks were omitted. Particularly, investors were deprived of information pertaining to issuer’s lack of experience in operations, illiquidity concerns, and risks concerning repayment. Furthermore, the projections provided to investors apparently relied upon a substantial increase in pilot program stores, which was essential for investors to be able to retrieve the one-hundred and fifty percent bonus upon the maturity of the investment.
FINRA found that Smith’s remarks concerning the potential for investors to earn a terrific return were unwarranted and promissory. Smith’s remarks concerning the issuer having no debts was also considered by FINRA to be misleading and false, as was the information pertaining to the offering which had not been updated for prospective investors to account for the negative adjustments in the pilot program.
FINRA additionally found that the firm’s remarks portraying a contract between the issuer and drug store was misleading, unwarranted, and false. The AWC stated that Smiths’ statement concerning the issuer’s ability to outperform metrics were exaggerated. FINRA found that Smith’s communications prohibited customers from properly evaluating the issuer’s cash flow projections and other risks which could preclude the issuer from obtaining revenues. Finally, Smith’s remarks concerning the internal rate of return was considered by FINRA to be unwarranted, as such statement relied on the initial pilot program’s success.
Apparently, the notes sales through Houlihan Capital were slim. In addition to Smith’s own personal investment, two residents of China each contributed $50,000.00 in March. The AWC stated that only one payment had been made in connection with the offering, which occurred in July of 2015 for $1,250.00.
FINRA found that the firm and Smith’s conduct was violative of FINRA Rule 2010. Houlihan Capital, LLC was censured and fined $25,000.00. Smith was fined $5,000.00 and suspended from associating with any Financial Industry Regulatory Authority (FINRA) member in any capacity in connection with his misconduct.
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