Soliciting Investments into an MCA or Business Lender on Behalf of Someone Else? Be Careful

A recent civil lawsuit brought by the SEC against the orchestrator of an MCA funder-turned-Ponzi scheme came packed with claims against two other individuals who “acted as unregistered brokers.”

“The two were alleged to have solicited investors, explained the investment terms to those investors, vouched for the merits of the investment opportunity, facilitated the collection of investor funds, and received transaction-based compensation without ever registering as a broker-dealer with the Commission or associating with a registered broker-dealer,” the complaint alleges.

Unlike some syndication models, where investors pick and choose the individual deals they want to invest in, the defendants here told investors that the owner of the funding company would select which deals to fund with their money on his own. Investors were not entitled to know the names of the merchants due to confidentiality. Overall, the funder solicited at least 87 investors, raising at least $47 million, and promised fixed returns of between 22% and 53% on one-year investments and between 9% and 10% on shorter, two- to three-month investments.

The owner, who just pleaded guilty to wire fraud, misappropriated at least $11 million for himself—to pay gambling debts, personal credit card bills, home renovation expenses, and mortgage and car payments. He also used investor funds to pay earlier investors. While he did fund some deals, there were not that many. The scheme was able to go on for five years before collapsing in mid-2023.

The brokers who marketed the investment opportunity received commissions ranging from 5% to 25% of the amounts they brought in. They personally face claims that they violated Section 15(a) of the Exchange Act and should be enjoined.

The SEC complaint describes each of their violations “as a natural person not associated with a broker or dealer which is a person other than a natural person, made use the mails or any means or instrumentality of interstate commerce to effect transactions in, or to induce or attempt to induce the purchase or sale of, any security without being registered with the Commission as a broker-dealer.”