Kentucky Issues Stop Order Against Rule 506 Offering

The Kentucky Department of Financial Institutions (DFI) has issued a stop order against a Rule 506 offering based on inaccurate and inconsistent information contained in the issuer's notice filing with the state. A Kentucky corporation had filed a copy of federal Form D and the offering's private placement memorandum (PPM) with the DFI in order to claim an exemption from state registration for the sale of joint venture interests in a well completion project. The DFI suspended the offer and sale of the securities in the public interest, concluding that the action was necessary to protect investors who might be induced to invest based on the false or misleading information contained in the offering documents.

Among its several administrative findings and conclusions of law, the DFI determined that the PPM contained material misstatements or omissions because it failed to disclose to investors an administrative action brought against the corporation and its president by the Pennsylvania Securities Commission. Additionally, the PPM did not disclose the amounts to be paid as salaries or administrative and management costs, even though the Form D disclosed that $100,000 had been earmarked for this purpose; failed to disclose relevant production history or revenue for wells in the project; and did not provide any background information related to the corporation's officers or management. The DFI also concluded that the corporation falsely represented in Form D that no commissions were to be paid in connection with the offering. The agency found that the corporation had represented elsewhere in Form D that commissions would be paid to certain individuals, several of whom were seeking registration as the corporation's agents and whose applications themselves were either misleading or incomplete.

In re Energy Exploration, Inc. (Ky. Order 2009).