Small Public Company Forum

This summer, the SEC issued an administrative cease-and-desist order against RAM Capital Resources, LLC (“Ram Capital”) and two members/owners involved in the business of RAM Capital.

From 2001 through 2005, RAM Capital and its members had acted as intermediaries in the PIPE financing market, largely by engaging in the business of identifying potential investors in PIPE offerings. Once potential investors were identified (typically hedge funds), they were solicited to invest. RAM Capital also engaged in structuring the PIPE investment and negotiating the terms of the investments with the investors and the issuer. For instance, the accompanying SEC order indicates that the principals of RAM Capital often drafted and distributed to issuers and potential investors PIPE offering term sheets, and provided input on definitive documentation such as purchase agreements. Furthermore, RAM Capital often advised issuers about the structure which a particular PIPE offering should take (e.g., common or preferred equity or convertible debt, etc.).

Occasionally, issuers or registered placement agents would notify RAM Capital about pending PIPE offerings in hopes of obtaining investments from RAM Capital’s investor contacts. RAM Capital was never registered with the SEC as a broker-dealer.

Investors in PIPE offerings compensated RAM Capital by paying a certain percentage of the gross amount invested and by allocating to RAM Capital a certain percentage-based portion of warrants received in the subject PIPE offering.

The SEC issued a cease-and-desist order against RAM Capital and two individual defendants; censured RAM Capital; and suspended the two individual defendants from affiliating or associating with any broker or dealer for up to a 12-month period. The individual defendants were also ordered to pay disgorgement of approximately $365,000 each, with prejudgment interest and a civil penalty ranging form $60,000 to $90,000.

Although the mix of factors cited in the SEC order do not appear to alter the analysis of when a finder may be acting as an unregistered broker-dealer (please see our July 14, 2009 website posting “The Use of Finders in Financing Transactions”), the SEC action is noteworthy because it was undertaken without any other “bad acts” on the part of RAM Capital, the two individual defendants, or any particular issuer. In the context of enforcement actions, it is far more common for the SEC to take enforcement action in the presence of other alleged illegal behavior such as violations of the anti-fraud securities laws. In the RAM Capital case, the SEC’s sole interest appears to have been the enforcement of Section 15(b) of the Securities Exchange Act of 1934, which may signal increased SEC interest in and scrutiny of broker-dealer registration issues.