A panel of the Ontario Securities Commission (OSC) recently approved a settlement agreement with NextBlock Global Limited (NextBlock) and Alex Tapscott which highlights the risks of providing investor presentations and similar materials to prospective investors.
In announcing the settlement agreement, Jeff Kehoe, Director of Enforcement at the OSC stated, “We will not tolerate market participants who play fast and loose with the facts when providing offering memoranda to prospective investors, including marketing decks.”
“This settlement reinforces an important message: We will take action to address misleading disclosure and the serious harm it causes to Ontario investors and our markets, even if investors suffer no financial losses,” added Mr. Kehoe.
NextBlock was engaged in the business of investing in blockchain companies and digital assets. Mr. Tapscott was a director and the Chief Executive Officer of NextBlock.
Relying in part on investor presentations provided to prospective investors, NextBlock raised $20 million from over 100 accredited investors in 2017. The investor presentations listed prominent individuals in the blockchain community as NextBlock’s advisors, although four of these individuals had not agreed to act as NextBlock’s advisors or to be named in the investor presentations. The OSC concluded that by including the names of these individuals in the investor presentations, NextBlock made misleading and untrue statements in contravention of the Ontario Securities Act.
NextBlock agreed to pay an administrative penalty of $700,000 plus $100,000 toward the costs of the OSC investigation. Mr. Tapscott agreed to pay an administrative penalty of $300,000.
The administrative penalties in this case were likely mitigated by a number of factors: (a) NextBlock and Mr. Tapscott responded within a few days after the misrepresentation came to light, (b) NextBlock returned the initial investments along with profits of $28 million, representing a 140% return on investment, (c) Mr. Tapscott declined $3 million in payments he was entitled to, agreed to perform community service and agreed to publish an open letter about his misconduct in a national news publication.
It is likely that the administrative penalties imposed by the OSC would have been more significant if the mitigating factors noted above had not been present. NextBlock and Mr. Tapscott could have also faced significant liability if investors had sued utilizing their statutory rights of action.
In addition to the administrative penalties imposed by the OSC, the misleading statements had fatal consequences for this once-promising company. NextBlock was preparing to go public with a $50 million concurrent financing. Canaccord Genuity Group Inc. and CIBC World Markets Inc. were engaged as lead agents in connection with the concurrent financing, and generated more than $200 million in orders. However, not long after the misleading statements came to light, NextBlock abandoned these plans and commenced wind-up proceedings.
Market participants should think twice before providing investor presentations or similar materials to prospective investors. Any such materials should be carefully discussed and reviewed with legal counsel to ensure that they do not violate applicable securities laws.
This settlement also serves as a reminder that a wide range of documents can be considered an “offering memorandum” under relevant securities laws and therefore carry with them potential liability for misrepresentations. In making that determination, the regulators will look to the document’s content and purpose, not its format or label.
DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.