By Amanda Maine, J.D.
An SEC administrative law judge denied a motion for summary disposition by Ironridge Global Partners, LLC (Global Partners) and its subsidiary. The ALJ rejected the argument that the Ironridge subsidiary was not a dealer under the Exchange Act and was not subject to the Act’s registration requirements. This development is the latest setback for Ironridge, which has filed a motion in federal court to enjoin the SEC’s administrative claims against it on constitutional grounds (In the Matter of Ironridge Global Partners, LLC, November 5, 2015, Grimes, J.).
Administrative proceeding. In June 2015, the SEC initiated an administrative proceeding against Global Partners and its subsidiary, Ironridge Global IV (Global IV, collectively, “respondents”). Global IV’s business model involved buying the debt of microcap issuers and then settling the acquired claims against the issuers through exchanges under the Securities Act Section 3(a)(10) exemption. Global IV participated in over 30 exchanges involving claims of $35 million and acquired and sold over five billion shares of issuers’ stock. The SEC brought an administrative proceeding against Global IV and Global Partners, asserting that Global IV operated as a “dealer” by engaging in serial underwriting activity without registering as a dealer as required by the Exchange Act. The respondents moved for summary disposition on the ground that Global IV is not a dealer, and if it were a dealer, it would be exempt from registration on other grounds.
Dealer allegations. ALJ James E. Grimes noted that the “definition of the term dealer casts a wide net.” Covered persons and entities include those who engage in the business of buying and selling securities for their own account. He acknowledged that there was a facial appeal to the respondents’ arguments that Global IV is neither an underwriter nor a dealer, but as the inquiry is fact-specific, summary disposition would be inappropriate. The facts alleged in the SEC’s order instituting administrative proceedings could support the inference that Global IV’s business model involves acquiring and selling securities.
ALJ Grimes rejected the respondents’ assertion that the definition of the term “distribution” regarding securities should be that under Regulation M, which distinguishes a distribution from “mere trading” by the magnitude of the offering, noting that the respondents cited no precedent for that limitation. He also advised that no-action letters relied upon by the respondents in support of their position are merely persuasive and cannot require a particular outcome sufficient to warrant summary disposition. Finally, he noted that the respondents argued that they are exempt from registration through Section 3(a)(10) of the Securities Act, but concluded that Global IV is not exempt from the dealer registration provisions of the Exchange Act by virtue of having acquired shares through a Securities Act exemption.
Foreign dealer exemption. The respondents argued that Global IV, a foreign company located in the British Virgin Islands, should be exempted from the registration requirement under Exchange Act Rule 15a-6. ALJ Grimes rejected this assertion at the present stage of the proceeding, finding that the alleged facts were sufficient to show that Global IV’s participation in the securities transactions would put it outside the exemption.
Controlling persons. Finally, ALJ Grimes advised that Global Partners could not, at this stage in the proceeding, claim not to be subject to liability under Section 20(b) of the Exchange Act as an entity that “controlled” its subsidiary. He pointed out that Section 20(b), unlike Section 20(a), does not contain the word “control.” Even if “control” is an element of a claim under Section 20(b), it is a question of fact that is not appropriate for summary disposition at this point, ALJ Grimes wrote.
As the SEC had shown that material facts were in dispute, ALJ Grimes found that summary disposition would be unwarranted and denied the respondents’ motion.
The release is No. AP-3298.