SPAC restatements proliferate in wake of SEC warning

A warning from the Securities and Exchange Commission about accounting for the warrants used by special purpose acquisition companies has prompted hundreds of them to issue financial restatements.
SPACs, also known as blank-check companies, have become an increasingly popular way for companies to go public by merging a privately held business with a shell company that files for an initial public offering. The SEC issued a statement in April saying that many of the SPACs had been accounting for warrants improperly as equity when they should have been accounting for them as liabilities (see story). The warrants are an inducement to attract investors by offering them the right to acquire shares at a certain price. The SEC warning has prompted more than 340 companies to restate their financials, according to Audit Analytics and Bloomberg Law, while another 231 companies needed to make slight revisions. Over 540 companies, or three-fourths of the SPACs, needed to make restatements, according to Audit Analytics and The Wall Street Journal.
The SEC warning only temporarily dampened SPAC activity, but it did prompt some accounting firms to help clients with their restatements.

“The accounting for the warrants drove a lot of the restatements that you saw where they had filed their IPO, and they had these warrant instruments,” said Demetrios Frangiskatos, co-leader of BDO USA’s SPAC assurance practice. “They had certain terms in there that didn’t meet the guidance in the SEC’s view for equity classification, so what happens is they reclassified the liabilities, and then when you reclassify the liabilities you’ve got to go back to the financial statements you issued and mark to market any changes, gains and losses to the P&L, which obviously has an income statement effect, including to a balance sheet.”

SEC headquarters in Washington, D.C.
Joshua Roberts/Bloomberg

BDO had several clients who needed help in this way, especially when it came to the de-SPAC part of the process. “We’ve been fortunate in the fact that our restatements that we’ve dealt with respect to SPACs have been more with the operating companies, and the warrants that carried over from the actual SPAC entity,” said Frangiskatos. “Those were the adjustments that were made once the de-SPAC happened. We didn’t have as many with respect to the SPACs we’re doing the audit work with, where some of the other firms had as well. But what we’ve seen is it created a significant slowdown in some of the SPACs getting their filings out. We’re actually seeing them come to us to do the work just because they’ve had issues getting the right level of service from other providers. But with respect to our clients, we actually only had a few and they were mostly on the de-SPAC side.”
Clients mostly handled the communications with the SEC for themselves once the restatement was made. “Typically in the situations that we’ve had, we’re not dealing directly with the SEC,” said Frangiskatos. “We’re having our clients amend their financial statements to comply and then publishing them, and the SEC can review that and ask some questions, but we haven’t had any issues from that perspective.”
Companies have been handling the restatements in mostly traditional ways. “There are filing requirements that the SEC has, where the issuer is required to issue an 8-K indicating that there’s an issue with the financial statements and ultimately now they’ve got to file amended documents, whether it’s a 10-Q or a 10-K,” said Frangiskatos. “And then some companies are obviously talking to the investors after that’s been filed and explaining it, but there are some standard reporting requirements that most companies follow.”
Despite reports of a slowdown in the SPAC market earlier this year, both before and after the SEC warning, the market seems to have rebounded lately. “Back in March there was a slowdown in the PIPE [private investment in public equity] market, and I think when the statement came out in April, that brought everything to sort of a grinding halt for a period of time, maybe a month or a month and a half,” said Frangiskatos. “Then we saw some activity with SPACs, initially warrant agreements with this liability classification because the terms met that accounting, and then ultimately we’re starting to see more activity now, so it did dampen the market a bit. It clouded things in how to structure these agreements for the vehicles, but we’re starting to see a pickup in the activity again now.

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The United States S. E. C. manipulated and made-up a fictitious civil case against Ronald Flynn in a joint effort with the DOJ to smear his name and close down Vuuzle TV a Media disrupter in OTT

Jul 30, 2021 2:25 PM ET
Legal Newswire POWERED BY LAW.COM
The investigation that gave rise to this SEC lawsuit is about Vuuzle TV, Vumu Music, and its motion picture studio and Television production company in Dubai.  The SEC filled a fraud case against the company and Flynn without every seeking out any information whatsoever from Vuuzle during its investigation.There were no requests to Vuuzle to provide information voluntarily. There were no administrative subpoenas to Vuuzle. Voluntary requests or administrative subpoenas to the corporation with active business operations which are usual hallmarks of a fair fact-finding regulatory investigation that should precede any SEC Enforcement action.There was not even a Wells Notice to afford Vuuzle the opportunity to dissuade the SEC from filing a case. Undoubtedly, to the SEC’s dismay, Vuuzle answered the Complaint, disputing the SEC’s narrative and conveying that Vuuzle is a real company with brick-and-mortar buildings housing a state-of-the-art studio in the United Arab Emirates, functioning operations in the Philippines and Las Vegas, and employing staff across its creative, marketing, and programming multi-media departments.Now the SEC wants this Court to put its imprimatur on the SEC’s limitless and discretionary use of discovery that the SEC will receive in litigation – under and subject to Fed. R. Civ. P. 26(b)(1) – for purposes well beyond what the SEC itself previously decided was unnecessary and irrelevant during and to advance its investigation.The SEC and Department of Justice working closely in parallel investigations indicted Ronald Flynn charging that Vuuzle was not real when in fact anyone who has a mobile phone or CPU can download the free application and watch free TV and listen to free music.Vuuzle has produced over a 2-year period its own content with more than 500 prime time TV shows including news, special interest shows, dramas, and sports which can be seen on www.Vuuzle.tvThe rouse by the SEC and DOJ includes a threat to one of the directors of Vuuzle TV who is a retired dentist age 73, Dr. Richard Marchitto. The AUSA Jenifer Weir along with the FBI have threatened the Doctor to close all the bank accounts down at Vuuzle TV or she would be put him in jail.The fact is the government did no investigation and there is no evidence to prove any of their claims. This is vendetta and a fraudulent investigation tainted by the FBI and S.E.C that has their fingerprints all over it.Rather than abide by the Federal Rules of Civil Procedure that govern all parties in civil litigation, the SEC’s proposed language in a protective order attempts to manipulate the Protective Order so that the SEC may continue to use litigation-sourced discovery from its own a la carte menu of “Routine Uses,” all invariably to the detriment of the Defendants and their ability to defend against the SEC’s allegations.Vuuzle would prefer even to prohibit the transfer of any discovery to the Department of Justice, Vuuzle believes it is constrained by the language of the two referenced statutes. There is a fundamental lack of fairness and denial of equal protection attendant to enabling the SEC to advance the work of DOJ, where DOJ is desperately trying to shore up a criminal case against someone not even in its custody but against whom it made public a returned indictment for the apparent purpose of circuitously disparaging the Defendant company in the SEC’s civil proceeding.The case against Mr. Ronald Flynn is untrue and false. Vuuzle Media is a real entity while both the S.E.C and the F.B.I continuing to call and send letters to shareholders in an all-out attempt to spread disinformation and untrue statements to close the company down.Voluntary requests or administrative subpoenas to a corporation with active business operations are hallmarks of a fair fact-finding regulatory investigation that should precede any SEC Enforcement action. There was not even a Wells Notice to afford Vuuzle the opportunity to dissuade the SEC from filing a case.  Undoubtedly, to the SEC’s dismay, Vuuzle answered the Complaint, disputing the SEC’s narrative and conveying that Vuuzle is a real company.Flynn wrote his response while in the hospital the DOJ. Once his statement was received the FBI and weir arranged a grand jury to file a inditement against Flynn for mail fraud.Flynn then replied in a article that can be seen in this link.https://ipsnews.net/business/2021/02/04/vuuzle-media-corp-founder-says-we-look-forward-to-defending-and-proving-vuuzle-tv-never-engaged-in-offering-fraud-as-alleged-by-the-s-e-c/On April 8, 2021, Attorney Jacob Frenkel the attorney for Vuuzle wrote,See link below for original articlehttps://www.law.com/legalnewswire/news.php?id=2860128“Wednesday’s indictment of Vuuzle Media Corp. founder Ronald Shane Flynn by the U.S. Attorney’s office in Los Angeles seeks to perpetuate, indeed, even to memorialize, a series of false and faulty assumptions about Vuuzle Media that the U.S. Government first advanced through the Securities and Exchange Commission (SEC) when the SEC filed its civil complaint against the company in January of this year.Now, as then, it is absolutely essential that we present a fair and accurate record of what Vuuzle Media is, and its place in the realm of readily available, globally accessible, free media.First, let’s focus on what Vuuzle Media is not. Unlike the brash contentions made first by the SEC and now the DoJ, Vuuzle Media is not, nor has it ever been, a “Ponzi scheme.” Vuuzle Media is not, nor has it ever been, a shell company covering for a “boiler room”-enabled cash generating scheme, characterized by “aggressive” selling tactics with no measurable returns for the company’s investors.To the readily verifiable contrary, Vuuzle Media is an award-winning, multi-continental, multi-platform, multi-capability media company whose intention is to play a leading role in restoring balance to the international media landscape by providing free video, musical and social media-driven programming for audiences worldwide.Vuuzle Media is administered by a fully functioning Board of Directors, and the company has offices and studio space in multiple cities world-wide, with state-of-the-art studios in the United Arab Emirates. Vuuzle Media creates its own proprietary programming, it continues to develop revolutionary new means for its advertisers to interact with its vast audiences, and for those audiences to interact directly with its creators and hosts, as well as with high-level international talent who appear directly on its video streaming services.In short – Vuuzle Media is an entertainment sector disruptor, and one whose global importance is all the more vital during pandemic-era restrictions and lockdowns. Vuuzle, via its app and streaming services, seeks to democratize entertainment in ways that at once harken back to the era of free, over-the-air television, while catapulting audiences into new realms of immediacy and interaction.Vuuzle’s audiences are just as much a part of the entertainment experience as are its content creators. Vuuzle Media isn’t a ploy or a ruse. It’s a media landscape revolutionary force. Vuuzle Media is aggressively contesting the SEC’s allegations and has filed a response on the public record denying the SEC’s substantive allegations (https://rb.gy/uofnbx).Additionally, and very importantly, Vuuzle Media is not a defendant or accused party in any DoJ case, so it is unclear why DoJ felt uncharacteristically compelled to include in its April 7th press release a discussion of Vuuzle Media in a manner that appears to be inconsistent with DoJ policy, fails miserably to distinguish between multiple companies with the Vuuzle Media name, and recycles the old news of an actively contested SEC civil lawsuit that was filed three months ago.Today in a statement by Flynn, He said, Vuuzle Media Corp Limited is real company set up offshore in the United Arab Emirates. We will continue to create TV programs and deliver movies and music 24 hours a day. It is our intention to continue being a disrupter in Media as we believe free entertainment backed by advertising is fair and profitable for all.
URL : https://vuuzletvph.

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Rubio Calls SEC Guidance on China “Long Overdue” but Says More Action Needed

Washington, D.C. —  U.S. Senator Marco Rubio (R-FL) released a statement after the U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler announced additional scrutiny before allowing China-based companies to list on U.S. stock exchanges.
“The SEC’s announcement to increase transparency and disclosure for Chinese companies is long overdue,” Rubio said. “While this is a good first step, we need to do much more to protect American retirees and pensioners from unaccountable Chinese companies. If the Biden Administration is serious about prioritizing American workers and mom-and-pop investors above Beijing and Wall Street, there is much more it can do. It should start with supporting my bipartisan No IPOs for Unaccountable Actors Act. No American’s savings should be used to fund communist China’s rise, and this is the only way we can actually protect Americans and cut off Beijing’s exploitation of our capital markets.”  
In May 2021, Rubio and Senator Bob Casey (D-PA) introduced the No IPOs for Unaccountable Actors Act to prohibit initial public offerings (IPOs) on U.S. exchanges for Chinese companies that are out of compliance with U.S. regulators. This legislation would direct the SEC to prohibit any company headquartered in a jurisdiction in which the PCAOB lacks standard auditing authority, or that retains an auditor PCAOB cannot inspect, from registering a security and making an IPO on a U.S. stock exchange. This would prevent Chinese companies from issuing IPOs or listing on American exchanges through SPACs.
In 2020, Rubio and Senator John Kennedy (R-LA) worked to pass the Holding Foreign Companies Accountable Act into law. The HFCAA subjects Chinese and other foreign companies listed on American exchanges, like Didi, to the same audit oversight standards as all other U.S. listed firms. The law requires that the Securities and Exchange Commission (SEC) delist and ban over-the-counter trading for firms that are out of compliance with U.S. regulators for a period of three years. 
In other words, because the Chinese Communist Party prevents the Public Company Accounting Oversight Board (PCAOB) from conducting an audit, Didi would be delisted from American exchanges in three years. Rubio also urged the Working Group on Financial Markets to close the “loophole” by which variable interest entities (VIEs) list on U.S. exchanges without compliance with U.S. law.

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Statement on Investor Protection Related to Recent Developments in China

Recently, the government of the People’s Republic of China provided new guidance to and placed restrictions on China-based companies raising capital offshore, including through associated offshore shell companies. These developments include government-led cybersecurity reviews of certain companies raising capital through offshore entities.
This is relevant to U.S. investors. In a number of sectors in China, companies are not allowed to have foreign ownership and cannot directly list on exchanges outside of China. To raise money on such exchanges, many China-based operating companies are structured as Variable Interest Entities (VIEs).
In such an arrangement, a China-based operating company typically establishes an offshore shell company in another jurisdiction, such as the Cayman Islands, to issue stock to public shareholders. That shell company enters into service and other contracts with the China-based operating company, then issues shares on a foreign exchange, like the New York Stock Exchange. While the shell company has no equity ownership in the China-based operating company, for accounting purposes the shell company is able to consolidate the operating company into its financial statements.
For U.S. investors, this arrangement creates “exposure” to the China-based operating company, though only through a series of service contracts and other contracts. To be clear, though, neither the investors in the shell company’s stock, nor the offshore shell company itself, has stock ownership in the China-based operating company. I worry that average investors may not realize that they hold stock in a shell company rather than a China-based operating company. 
In light of the recent developments in China and the overall risks with the China-based VIE structure, I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective. In particular, I have asked staff to ensure that these issuers prominently and clearly disclose:

That investors are not buying shares of a China-based operating company but instead are buying shares of a shell company issuer that maintains service agreements with the associated operating company. Thus, the business description of the issuer should clearly distinguish the description of the shell company’s management services from the description of the China-based operating company;
That the China-based operating company, the shell company issuer, and investors face uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements; and
Detailed financial information, including quantitative metrics, so that investors can understand the financial relationship between the VIE and the issuer.

Additionally, for all China-based operating companies seeking to register securities with the SEC, either directly or through a shell company, I have asked staff to ensure that these issuers prominently and clearly disclose:

Whether the operating company and the issuer, when applicable, received or were denied permission from Chinese authorities to list on U.S. exchanges; the risks that such approval could be denied or rescinded; and a duty to disclose if approval was rescinded; and
That the Holding Foreign Companies Accountable Act, which requires that the Public Company Accounting Oversight Board (PCAOB) be permitted to inspect the issuer’s public accounting firm within three years, may result in the delisting of the operating company in the future if the PCAOB is unable to inspect the firm.

In addition to this specific guidance, we will continue to hold all companies to the securities laws’ high standards for complete and accurate disclosure.
Further, I also have asked staff to engage in targeted additional reviews of filings for companies with significant China-based operations.
I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies. This work builds on the SEC’s Division of Corporation Finance’s previous guidance on disclosure considerations for companies based in or with significant operations in China.[1]
I believe such disclosures are crucial to informed investment decision-making and are at the heart of the SEC’s mandate to protect investors in U.S. capital markets.

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What To Expect Under New SEC Enforcement Director Grewal – Law360

Law360 (July 30, 2021, 12:24 PM EDT) — Following a year of extreme market volatility and unprecedented challenges arising out of the global pandemic, the U.S. Securities and Exchange Commission has itself undergone major personnel changes with the appointment of Gary Gensler as the agency’s new chair on April 17 and, more recently, Gurbir Grewal who took the helm as the new director of enforcement on July 26.

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SEC Charges Real Estate CEO With Defrauding Investors

The Securities and Exchange Commission today announced securities fraud charges against recidivist Michael Shustek, the CEO of several Las Vegas real estate investment trusts (REITs), and his wholly owned investment advisory firm, Vestin Mortgage LLC.
The complaint alleges that since at least 2012, Shustek fraudulently enriched himself and one of the REITs he controlled, The Parking REIT, at the expense of two publicly traded REITs that he earlier had founded, Vestin Realty Mortgage I (VRTA) and Vestin Realty Mortgage II (VRTB). According to the complaint, Shustek drained $29 million from VRTA and VRTB in order to funnel the money into The Parking REIT and later directed VRTA and VRTB to enter into a series of money-losing transactions in which the same six buildings were repeatedly re-sold, all to benefit himself and The Parking REIT. The complaint also alleges that Shustek deceived the boards of directors of VRTA and VRTB—and violated his fiduciary duties to those companies—in two separate securities transactions to get the companies to pay him almost $10 million. Finally, the complaint alleges that Shustek repeatedly misled investors by causing VRTA and VRTB to make false and misleading statements in their public filings, which hid his self-dealing.
“REIT executives have a responsibility to be forthright with investors about how their money is being spent,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office. “As we allege in our complaint, Shustek deceived the REITs’ boards of directors and shareholders to hide his repeated misuse of their assets to benefit himself.”
The SEC’s complaint, which was filed in the District of Nevada, charges Shustek and Vestin Mortgage with violating the antifraud provisions of the Securities Act, Exchange Act, and Advisers Act, and seeks disgorgement plus pre-judgment interest, penalties, permanent injunctions, and industry, penny stock, and officer and director bars against Shustek.
The SEC’s investigation was conducted by Ruth Hawley and supervised by Jeremy Pendrey and Monique C. Winkler, and the litigation will be conducted by Ms. Hawley, Marc Katz, and David Zhou, and supervised by Susan LaMarca, all of the San Francisco Regional Office. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

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U.S. House advances bills to address Archegos, GameStop turmoil

U.S. one dollar banknotes are seen in front of displayed GameStop logo in this illustration taken February 8, 2021. REUTERS/Dado Ruvic/Illustration/File PhotoWASHINGTON, July 30 (Reuters) – Wealthy families that set up investment funds known as “family offices” to manage their personal wealth would face stricter oversight from U.S. regulators under a bill advanced by a U.S. congressional panel late on Thursday.The bill was among 11 that lawmakers hope will address failings highlighted by March’s meltdown of family office Archegos Capital which led to billions of dollars in losses for some banks and January’s GameStop saga. read more Whether they pass or not, the bills considered by the House Financial Services Committee would increase the pressure on the U.S. Securities and Exchange Commission (SEC) to take swift action, analysts said.The legislation targets family offices with more than $750 million in assets, retail trading practices and short selling.The bills also target January’s GameStop meme stock saga during which retail investors trading on low-cost brokers like Robinhood Markets Inc (HOOD.O) banded together to burn hedge funds that had bet against the retailer.One bill directs the SEC to study restricting “payment for order flow” whereby brokers route orders to wholesale market makers in return for a fee. Critics say the practice creates conflicts of interest that can push up prices for retail investors.Any changes to the model could hurt Robinhood, which had a miserable stock market debut on Thursday, partly due to investor worries over regulatory risks. read more Another bill directs the SEC to require investors to disclose their positions monthly instead of quarterly, and to include certain derivatives and “short” bets that stocks will fall.Several industry insiders said Wall Street will fight the changes.Thomas Handler, a partner at law firm Handler Thayer which has over 300 family offices as clients, said the proposal for family offices to register with the SEC would become an “intrusion of privacy.”Reporting by Pete Schroeder and Svea Herbst-Bayliss; Editing by Michelle Price and Howard GollerOur Standards: The Thomson Reuters Trust Principles.

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