The history of Longfin Corp. took another sordid turn this month, as U.S. prosecutors charged the defunct cryptocurrency company’s ex-chief executive with orchestrating a scheme to inflate its revenue. The news further stokes concerns about the fast-track IPO process used by early-stage companies to list on stock exchanges.
Longfin’s wild ride began with its launch in early 2017. Less than a year later, in December 2017, it went public in a $5.7 million offering on the Nasdaq exchange, where its shares promptly rose 13-fold. The high did not last. Within four months, the Securities and Exchange Commission (SEC) had launched an investigation that sent investors sprinting for the exits. Longfin delisted in May and was belly-up by November, a spectacular fall for a company that at one point had a valuation of more than $3 billion.
In its first action against the company, the SEC accused it of selling and distributing more than $33 million of stock in unregistered transactions. The new charges filed this month once again find Longfin and its former CEO, 49-year-old Venkata S. Meenavalli of India, in the regulator’s crosshairs. The SEC (not to mention federal prosecutors, who have already indicted Meenavalli) say Longfin recorded “sham revenue” of more than $66 million, or roughly 90% of its 2017 revenue.
That’s some serious (alleged) fraud, but the wider implications of the case stem from the shenanigans that Longfin pulled with Regulation A+. That’s a Regulation A refresh borne of the Jumpstart Our Business Startups Act of 2012, which provides a streamlined path to public offerings for smaller companies. Specifically, it allows companies to raise upwards of $50 million per year while facing relaxed accounting and reporting standards relative to conventional IPOs. Crypto companies, in particular, have seen Reg A+ as a potential registration path, and Longfin became one of a small group of small companies to use it to go public.
A couple problems with that. The SEC claims that in order to qualify for an offering under Regulation A+, Longfin and Meenavalli misrepresented the company’s principal management and operations as being located in the U.S. The Commission also alleges that 400,000 Longfin shares were distributed to company insiders and affiliates to meet the criteria for a Nasdaq listing, without obtaining payment for the shares.
As it turns out, Longfin has company — if not in the fraud department, certainly in losing investor money after using Reg A+ to go public. According to a Wall Street Journal analysis, 10 of 11 companies to hold IPOs through Reg A+ since 2017 are now trading below their IPO price. Longfin’s colorful demise has put a spotlight on this fact, and led to concerns about fly-by-night operations using Reg A+ to take unsophisticated investors for a ride.
In response, Nasdaq and the New York Stock Exchange are pumping the brakes on Reg A+ listings for the time being. For its part, Nasdaq has proposed more stringent requirements for Reg A+ IPOs. Under the Nasdaq proposal, currently awaiting SEC approval, a company that wants to list its shares under Reg A+ would need to be in business for at least two years. Earlier this month, the SEC postponed its decision on the rule change.
For more information on this hot topic, be sure to check out Intelligize’s recent Reg A webinar.