The U.S. Supreme Court decided that the Securities and Exchange Commission can force an issuer to cough up misappropriated funds.
In the case SEC v. Liu, Mr. Liu and his wife raised $27 million from Chinese nationals under the Federal EB-5 program that provides a fast path to a Green Card for foreign investors.
The Lius provided the investors with a private placement offering memorandum that stated that most of the money would be used to build a cancer treatment center and only a small portion would be used for administrative expenses. In fact, the SEC investigation determined that about $20 Million was spent on “on ostensible marketing expenses and salaries, an amount far more than what the offering memorandum permitted and far in excess of the administrative fees collected.” The SEC sued the Liu’s the lower court ordered the Liu’s to disgorge the misappropriated funds. The Supreme Court noted that disgorgement is an appropriate equitable relief but sent the case back to the lower court to determine whether the amount of the remedy should have deducted their legitimate expenses.
Lesson: Your PPM must reflect what you will actually do with the money you raise from investors.