Public Company Fined for Operating as Inadvertent Investment Company
The SEC fined and censured a public company for failing to register as an investment company because over 80% of its assets consisted in non-controlling interests in other OTC companies. The respondent changed business direction in 2014 and began purchasing OTC and private interests in marijuana related businesses, which came to represent more than 80% of its assets. In 2015, the company could not respond to SEC requests about investment company registration, which is required when investment securities exceed 40% of total assets. As a public company, the respondent could not rely on private offering exemptions (3(c)(1) or 3(c)(7)). As part of the settlement, the company agreed to register or pay a $5000 penalty for each month that the company failed to register.
OUR TAKE: Operating companies engaged in passive investing, which often occurs in emerging industries, must be aware of becoming an inadvertent investment company. Once total investment securities exceed about one-quarter of total assets, it’s time to consult a 1940 Act lawyer.