Five Mistakes Longfin Made and Why The SEC Froze $27 Million In Assets

On April 4, 2018, the United States Securities and Exchange Commission (“SEC”) obtained a temporary restraining order (“TRO”) freezing more than $27 million in trading proceeds from allegedly illegal distribution and sales of restricted shares of Longfin Corp. (“Longfin” or the “Company”) stock involving Longfin, Meenavalli (its Chairman, Founder and CEO), and three other affiliates, Amro Izzelden “Andy” Altahawi, Dorababu Penumarthi, and Suresh Tammineedi. This blog highlights five mistakes made by Longfin as described in the complaint filed by the SEC.

1. LONGFIN AND AFFILIATES VIOLATED THE REGULATION A EXEMPTION

Under Regulation A, issuers may publicly sell securities under procedures that are less burdensome than those that would otherwise apply if the sales were registered as required by Section 5 of the Securities Act of 1933 (15 U.S.C. §77e) (the “Securities Act”). Longfin was qualified to sell up to 10 million shares of its Class A common stock pursuant to the Regulation A exemption. This means that Longfin was qualified to sell shares of Class A common stock, not Altahawi. Despite this, Altahawi sold Class A common shares that he received in exchange for services and the shares sold were restricted securities that could not be resold, except under limited circumstances. Altahawi sold restricted shares in the public market reaping illegal profits of over $25 million from these sales. Tammineedi and Penumarthi also sold restricted shares reaping illegal profits of $2.8 million. No registration statement or offering statement for these sales had been filed or was effective or qualified, and no exemption from registration or qualification applied to Altahawi, Tammineedi and Penumarthi’s transactions. Therefore, the sales of securities were conducted in violation of the Securities Act, which prohibits sales of unregistered securities unless a specific exemption applies.

2. LONGFIN AND AFFILIATES ILLEGALLY SOLD RESTRICTED SHARES

According to the Opinion and Order, Longfin, Altahawi and Meenavalli directed Longfin’s transfer agent to issue restricted shares to Tammineedi and Penumarthi. To prevent affiliates from circumventing the registration requirements, stock acquired by affiliates from the issuer or another affiliate is restricted. Stock certificates usually carry a restrictive legend that prohibits the stock from being further sold to the public unless and until the registration requirements of Section 5 are met. A “transfer agent,” a person with specific responsibilities under the Securities Exchange Act of 1934 (“Exchange Act”), may remove the restrictive legend when presented with evidence that the stock is no longer restricted.

3. LONGFIN FAILED TO COMPLY WITH SECTION 12(B) OF THE SECURITIES EXCHANGE ACT

On December 13, 2017, Longfin’s Class A shares began trading on The Nasdaq Stock Market, LLC (the “Nasdaq”) and it was this voluntary Nasdaq listing that triggered Longfin’s requirement to register its shares pursuant to Section 12(b) of the Exchange Act. Longfin’s Section 12(b) registration required the company to comply with the periodic reporting requirements of the Exchange Act. The Company was supposed to file a quarterly report on or before January 8, 2018, but it failed to do so. The Company’s first report occurred when it filed its annual report on Form 10-K for 2017 on April 2, 2018.

4. LONGFIN ACQUIRED A CRYPTOCURRENCY COMPANY AND ITS STOCK PRICE JUMPED 2,662%

Longfin’s stock price opened at $9.76 per share on December 15, 2017, and its closing price was $142.82 per share on December 18, 2017. This astronomical rise of 2,662% in stock price occurred after the company announced that it had acquired Ziddu.com, a cryptocurrency business with no ascertainable value and no revenue. Longfin acquired Ziddu.com from Meridian Enterprises Pte. Ltd., an entity at least 92%-owned by Meenavalli.

5. LONGFIN FAILED TO DISCLOSE INFORMATION TO THE SEC

During Longfin’s Regulation A qualification process with the SEC, the Company did not disclose any intent or plan to acquire Ziddu.com. In addition, Longfin had not disclosed sufficient financial information under the Exchange Act for any exemption from registration to be available with respect to the illegally sold shares.

SOME UPDATES SINCE THE TRO

According to the Opinion and Order, the TRO has been extended with respect to defendants Altahawi, Tammineedi, and Penumarthi. The TRO was vacated as to defendants Longfin and Meenavalli after the SEC determined that neither had assets subject to the freeze order. Furthermore, early last week, Cohen Milstein Sellers & Toll PLLC announced that they are conducting an investigation to determine whether Longfin Corp. (“Longfin” or the “Company”) and certain of its officers and directors made false and misleading statements and/or omissions in violation of Sections 10(b) and 20(a) of the Exchange Act.