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February 17, 2014: Strategic Global Investments, Inc. (STBV), a stock with a name well-suited to its oft-changing business plans, seems prepared to add a touch of novelty to the OTC scene by experimenting with a new way of helping toxic financiers and others purchase and dump very large amounts of stock.
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| STBV Chart |
Even a bid to enter the booming marijuana business--or rather, the booming business of selling penny stocks in the pot sector--failed to send STBV skyward. The new plan was announced on 10 February in a press release informing readers that the company had "entered into meaningful negotiations" to purchase a marijuana cultivation facility in Teller County, Colorado. While that is surely better than entering into meaningless negotiations, the sequence of events to come was unclear: "Strategic's plan is to have the Memorandum of Understanding signed by mid-February and the final agreement signed by the beginning of March, 2014; with construction to modernize the operation beginning in February and the first new crop started in the first week of March."
The press release was accompanied by a lackluster promotion by Information Solutions Group, LLC. ISG disclosed compensation of $10,000 from "A. Agovino" for its "marketing" of STBV. The pump is atypically low key, offering only an overview of the company and, in a larger font, the text of the press release about the new pot venture. There are no 40 point headlines, no unrealistic price targets, no guarantees of extravagant gains. Perhaps that is why it went largely unnoticed.
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| Information Solutions Group's Pump Piece On STBV <click to enlarge> |
STBV has been the subject of several Pump & Dump campaigns in the past, previously in a November 2013 campaign headed by Odd Marketing.
A brief history of Strategic Global
Like many pennies, STBV went through several incarnations before becoming what it is today. As American Consolidated Laboratories, it was an SEC reporter, but chose to terminate its registration in January 2008. This was a key event, as we shall see later. It had not filed financial reports, or anything else, with the SEC since 1997. It dropped out of sight in its home state of Florida in 1997 as well, becoming dormant. In 2007, it was reinstated by Brian T. Scher. Scher had not been associated with the original company. The reinstatement suggests a corporate hijacking. They are not unusual in Pennyland, and are an easy and efficient way to gain control of a public shell company. The company's domicile was then changed to Delaware in mid-2008.
In May 2010, the American Consolidated shell was purchased by Andrew Fellner, who intended to use it as a public vehicle for his own Punta Perfecta S.A. de C.V., a Mexican company that claimed to own land in the Los Cabos areas of Baja, Mexico supposedly valued at $5 million. Fellner's unoriginal plan was to build timeshares. Little more was heard of the resort business; within months Fellner had shifted his focus to "profit sharing" with Infinity National Asset Management, Inc., a company that purchases "pre-foreclosures" in California. In early 2011, STBV acquired Wazuu, Inc., which owned a social media website by the same name, along with a few others no better-known. The site's slogan was "DO U WaZuu?" Not many people did, apparently. In connection with the Wazuu acquisition, the company ventured into the streaming video business.
By early 2012, Wazuu had morphed into Wazillo Media, which Fellner described as a "revolutionary platform that brings real-time, live-streaming video to a global audience through a structure of powerful content management and distribution technologies." Say what?
STBV then dropped out of view, only to return a year later with a corporate update assuring shareholders that the company "has continued operations" and was pushing forward with its media business through Wazillo. In that connection, in April 2013 the company announced plans to "enter the marijuana industry" by building "Grow Life Studios: San Diego" at its own headquarters. GrowLife, Inc. is well known to penny players as PHOT, one of many pot stocks that have sprung up like, well, weeds in the last year or so. It had issued its own version of the news a week earlier.
All that sounds impressive, as was intended, but it didn't put money in the bank. By the end of September 2013, STBV had $13,159 in cash, and total assets of $754,608. Revenues for the quarter had been a paltry $476 and in the meantime, the number of shares outstanding was growing in leaps and bounds; tripling between December 2011 and September 2013. Things weren't going well Fellner's shareholders. And they were about to get worse.
Andrew Fellner
Fellner, who evidently likes to be called "Andy", has a checkered past. In his biography at Bloomberg Businessweek, which is drawn from company filings, he notes that he's an attorney who eventually gave up his practice to work in real estate, becoming a developer in Mexico.
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| Andrew Fellner |
Raising money
Fellner's efforts at making a go of Strategic Global have so far not been met with success, nor will they if he's unable to raise money to continue operations. Driven by necessity, he's chosen a novel way to do so, and that choice is what's important about the STBV story.
At the top of all of the company's OTCMarkets financial reports is a clear message: "We previously were a shell company until June 5, 2010, therefore the exemption offered pursuant to Rule 144 was not available. Anyone who purchased securities directly or indirectly from us or any of our affiliates in a transaction or chain of transactions not involving a public offering cannot sell such securities in an open market transaction."
Okay, it's a "fairly clear" message. The problem isn't that Rule 144 "was not" available specifically to STBV; it's that it is not available in these situations at all. Rule 144 securities are unregistered, and are often issued in connection with Regulation D private placements. Due to a 2008 SEC rule change, any OTC company that has ever been a shell, as STBV admittedly was, will be unable to rely on Rule 144 unless it files a registration statement with the agency and keeps its filings current for one year. In 2010, just after the change in control, Fellner did one Regulation D, Rule 506 private placement. Since a Rule 144 exemption would not have been available, it would be interesting to know whether buyers of the shares offered--an amendment shows that there were some--were ever able to free them up for trading, unless they found a sleazy lawyer willing to write fraudulent opinion letters for them.
Regulation A
When faced with Strategic Global's dilemma, most penny companies that are serious about raising money properly come to the conclusion that they need to bite the bullet and begin reporting to the SEC. It will take them time and trouble, and will cost them money before it helps them make money, but it is the avenue recommended by most securities attorneys and the one apparently favored by the SEC itself. The company has two choices when it comes to initial registration statements. It can file a Form 10, or it can file a Form S-1. The Form 10 has the advantage of automatically becoming effective 60 days after filing, but it cannot be used to raise capital; it registers a class of stock, not an offering. A shell company would be stuck for a year and two months after filing its Form 10 before it could finally launch a Reg D private placement.
An S-1, on the other hand, registers an offering, not a class of stock. The registration statement does not become effective automatically, but will be read and commented upon by examiners from the SEC's Division of Corporation Finance. When the examiners are satisfied, the S-1 will be deemed effective, and the stock offered will be registered and can then be traded freely. If the company stays current with its filings, after a year Rule 144 will become available to it and previously issued restricted stock can be sold. It can also venture new Reg D placements.
Most companies in STBV's situation would simply file an S-1. STBV chose not to do that, for reasons left unexplained. Instead, it elected to file a series of Regulation A offerings.
Reg A is not often used. From 2009 to 2012, only 16 issuers filed Forms 1-A, compared to nearly 45,000 that decided to go with Reg D placements. That is evidently because the 1-A requires a good deal of disclosure, and because in most cases it will be reviewed by the SEC, eliciting comments requiring successive amendments. (Technically, the company has the option of declining to cooperate with an SEC review, but to exercise that right would be to invite the invocation of a stop order, which would put paid to the offering.)
But Reg A offerings have a potential advantage: once the 1-A is deemed effective, the stock sold in the offering is immediately free trading. There's only one obstacle to overcome before it can enter the market. It must comply with state blue sky laws, which in nearly all cases involves registration of the securities. Additional documentation must be provided, and state examiners, unlike the SEC's Corporate Finance attorneys, will evaluate the merits of the offering.
Since the JOBS Act became law in early 2012, there's been interest on the part of Congress to modify Reg A to make it more appealing to small companies wishing to raise capital. That resulted in proposed changes to Regulation A that were introduced on 18 December 2013. The amended rule is informally known as "Reg A-Plus." A-Plus has two important provisions: it would raise the current ceiling on offerings from $5 million to $50 million, and it would do away with the necessity for compliance with state blue sky laws. As the Commission puts it: "In light of the total package of investor protections to be included.., [Reg A-Plus] would provide for the preemption of state securities law registration and qualification requirements…"
That last provision has drawn cries of outrage from state securities regulators across the nation, and from the North American Securities Administrators Association (NASAA), an organization that defends investor rights.
As we shall see, there's a reason to object to the preemption of state securities laws that may not have occurred even to those critics.
STBV's gigantic offering
Until a few days ago, Strategic Global's shareholders weren't especially concerned about stock sales. They believed issuance was well under control, with OTCMarkets reporting shares outstanding of 227 million and a float of 149 million. One billion shares were authorized, but that was no biggie.
To their shock and horror, all that changed on February 11, when those comforting numbers changed dramatically.
In the past, there've been a few penny stocks with shares authorized--and, in the case of the immortal CMKM Diamonds, shares outstanding--in the hundreds of billions, but nowadays it's rare. It's also unexpected for a modest outstanding of 227 million to balloon to more than 12 billion seemingly overnight. What was going on?
Some insisted it must all be a bizarre mistake, but it was not. It had to do with those Reg A offerings.
The Form 1-A for the most recent placement was filed on 5 November 2013. It was amended three times. None of the SEC comment letters that necessitated the amendments may be read because they aren't posted on Edgar until the issues that prompted them have been resolved, and usually appear some time after the 1-A is deemed effective.
In the 5 November filing, on page 73, an important change to the company's corporate charter in Delaware is noted:
RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the first paragraph of the Article thereof numbered "VI" so that, as amended, said Article shall be and read as follows: "The total number of shares of stock which the Corporation shall have authority to issue is 100,010,000,000; 100,000,000,000 shares shall be designated common stock, par value $0.00001 per share and 10,000,000 shares shall be designated as preferred stock, par value $0.0001 per share."The amendment is dated 24 October. The authorized was raised months ago, in anticipation of the filing of the 1-A. OTCMarkets was notified rather late in the day, but the information was there to be found by anyone who read the SEC filings.
In the Form 1-A--it seems best to use the most recent amendment, from 13 January 2014, here--Strategic Global states that it intends to sell a staggering 30 billion shares at $0.0001 per share, in multiples of 100 shares. It hopes to raise a total of $3 million.
This was not STBV's first Reg A rodeo. On 11 December 2012, the company filed its initial 1-A, with the intention of raising $5 million by selling 125 million shares at $0.04 a share. That filing was deemed effective, and Strategic presumably began selling stock. But on 29 July 2013, a new 1-A appeared. In it, it was noted that "the Issuer is currently making an offering of its shares at $0.04 per share pursuant to an effective Offering Statement on Form 1-A. If and when the current Offering Statement is approved, the Issuer will discontinue that offering."
With this new "replacement"offering, the company had begun to slide down the slippery slope of dilution: 500 million shares would be sold at $0.01 per share, still for a total of $5 million. With the latest "replacement," in which 30 billion shares will be offered at $0.0001 per share, the slippery slope has turned into an Olympic bobsled run.
What's Strategic Global's future?
Frankly, it doesn't look as if it has one. The history of the Reg A offerings isn't difficult to interpret. Fellner is desperate for money. The company's current financial situation is unknown, because Reg A does not require audited financials; even the unaudited numbers offered are nearly six months old. Clearly the first two offerings met with little success: not enough stock sold at $0.04, and then not enough sold at $0.01. Now a fire sale is in progress at $0.0001, with a total planned issuance of 30 billion shares.
It is obvious that Fellner does want to sell every one of them. If he doesn't succeed, he may go even lower.
This most recent 1-A has evidently been deemed effective. When Forms S-1 pass muster with the Corp Fin examiners, a Notice of Effectiveness is published on Edgar. That is not the drill with Forms 1-A, perhaps because they're paper documents. We know that STBV's first two did become effective, because reference is made to that in subsequent filings. While the examiners' comment letters, and the issuer's responses, to the 1-A for the 30 billion offering have not yet appeared, it can take from 20 to 40 days for them to do so.
Recent effectiveness of the 1-A would account for Fellner's unexpected update to the OTCMarkets' Company Info page, at least to some extent. It is certainly possible that he's managed to sell at least 4.4 billion shares at these rock bottom prices. Buyers would easily be able to unload at a profit, if they were quick about it.
Unfortunately that doesn't explain everything. Since stock issued in connection with a Reg A offering is unrestricted, any of that stock sold recently should have hit the outstanding and the float equally. One more pesky detail: nowhere near 4.6 billion shares (less 149 million) have traded in the past month; why wouldn't new buyers dump immediately?
Fellner speaks out
Late Friday, several concerned shareholders wrote to Andy Fellner. They all received the same reply. A corroborating screen shot was provided by one of those shareholders. The image and the letter's content suggests that it was indeed written by STBV's CEO.
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| Email from Fellner <click to enlarge> |
It is of course not true that the SEC "approved" it, as the examiners' job is not to judge the merits of the company or of the offering.
Encouraged by Fellner's responsiveness to shareholders, we reached out to him with concerns of our own. He did not reply.
One of our questions was whether he'd registered the stock in Florida and California, the states in which the stock will be sold, according to the prospectus contained in the Form 1-A. Florida does conduct merit reviews. A manual for the form of the submission may be seen here, and it is fairly complicated. Did STBV complete its submission between 17 January and last week? We don't know, nor do we have information about any California registration.
Another question asked was whether, when Fellner filed the Form 1-A to offer 30 billion shares of common at $0.0001, he had any particular buyers in mind.
Reg A and toxic financiers
STBV's various Forms 1-A list issuances of unregistered stock going back several years. Some of the shares in question were issued for acquisitions, some for services. Some were issued for purported debt. One fairly recent transaction, from August 2013, involves the supposed sale of 2.5 million shares to KnotFloat/Redwood Management LLC for $0.01 per share, or $25,000. Redwood is well known as a toxic financier. Did the firm buy that stock as part of the second Reg A offering? Another buyer, from March 2013, is Whitehead Financial Group. Whitehead paid $0.04 per share, in $20,000 cash and a $60,000 note receivable; it later bought more at the same price. Whitehead is run by James Toner, one of STBV's two greater than five percent owners. (The other is Fellner.)
According to several confidential sources, penny stock financiers are taking a new look at Reg A, and trying to persuade clients to make use of it. In the past, these toxic lenders often funded companies on the understanding that they'd be allowed to convert and sell their debt before the ink was dry on the check they'd just handed to the CEO. They usually did that by obtaining attorney opinion letters stating fraudulently that the stock in question was free trading because it qualified for a state exemption from registration.
In the past two years, the SEC has been cracking down on fraudulent opinions, making life difficult for the financiers. In 2012, it brought suit against Edward Bronson and his firm E-Lionheart, which also did business as Fairhills Capital, alleging that Bronson had bought shares from approximately 100 penny companies at very deep discounts, and had then resold them immediately, without registration or any valid exemption from registration. The case is still in its fairly early stages, but Bronson hasn't given up. He's replaced E-Lionheart with Exelerate Group and another entity called Deer Valley Management.
With quick resale of Reg D stock becoming problematic for the toxic financiers, they're turning to Reg A. One of those confidential sources provided us a letter from a toxic financier to his clients that he will no longer be dealing in 504 placements, and urges them to use Reg A. The letter claims that Reg A-Plus is already effective, which it is not, and states further that the qualification process is automatic: that the 1-A filed will become effective automatically after 20 days.
That is not true; it is in fact the opposite of the truth. The language used by the SEC specifies that the proposed amendment will "allow an offering statement to be qualified only by order of the Commission rather than, in the absence of a delaying notation in the offering statement, without Commission action on the 20th calendar day after filing." In other words, under Reg A-Plus, all Forms 1-A must be reviewed by the SEC, and will not become effective until the review process is completed to the examiners' satisfaction.
The matter of registration in compliance with state blue sky laws is not addressed in the letter. Issuers are encouraged get a Reg A offering in the works immediately; the financier's attorney will prepare the Form 1-A and file it. But Reg A-Plus has not yet become effective, and that is not likely to happen for months, so state securities law registration and qualification requirements have not yet been preempted by it. Any company hoping to sell stock in a Reg A offering must, by law, blue sky it in the states where it is to be sold. It is not a kindness, nor is it ethical, to invite small companies that need to raise money to break the law.
All this strongly suggests that the SEC should be on the lookout for probable abuses of Reg A offerings. They are likely to come sooner rather than later.
Certainly, whatever STBV is doing, it isn't doing shareholders any favors. They probably would have been better off if Fellner had just let the company fail. It plans to issue a truly insane amount of stock in order to raise a lousy $3 million. Does Fellner believe that if only he can lay hands on that amount, he can get his pot project rolling--IF there really is a pot project; no mention of it was made in the 1-A--and somehow bring the company back from the brink? He's evidently been selling some Reg-A stock in Florida and California for months; stock issued when the first two Forms 1-A were deemed effective. Was that stock properly registered in those states? It would also be good to know if he's made arrangements to sell much of the current 30 billion share offering to one or more toxic funders.
It seems that Fellner is counting on the magic of marijuana to primp STBV's stock price as an avalanche of paper hits the market. These days many penny sheep will buy anything with a whiff of weed, but with shares outstanding on their way to the tens of billions, STBV seems likely to go up in smoke. But not until Information Systems Group and likely a slew of other stock pimps promote the crap out of it.