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Alaska Financial Company III Promoters Allegedly Misappropriated Funds and Violated SEC “Regulation D”

Stealing MoneyThe Securities and Exchange Commission (SEC) reportedly has settled charges against the operators of a real estate investment business that caused millions in loses to investors.  Up to 300 investors may have lost money on interests in a fund known as Alaska Financial Company III, LLC (“AFC III”), which two individuals named Tobias Preston and Charles Preston sold to investors via their company McKinley Mortgage Co. LLC (“McKinley”).

The SEC accused defendants of falsely portraying AFC III as a safe investment and reporting that it had profitable operations.  However, according to the SEC, in reality AFC III was insolvent and unable to make interest payments as they came due.  According to the SEC, although a portion of the raised funds were invested as promised to investors, Messrs. Preston and McKinley diverted millions of dollars in proceeds of outside investments to fund business and personal expenses as well as McKinley’s operations.

AFC III has made so-called Form D filings with the SEC since 2013 stating that AFC III qualifies for an exemption from registration of its securities offering under Rule 506(c), which allows for general solicitation of investors, such as through AFC III’s website and social media platforms, but limits sales to accredited investors.  As a general rule, offers of securities to the public (which includes offers made over the internet) must be registered with the SEC under the Securities Act of 1933.  However, under federal securities law, the SEC recognizes certain instances where companies seeking to raise capital are exempt from registering securities. Securities offerings exempt from registration are sometimes referred to as “private placements.”  AFC III sought to be treated as exempt from registration by the SEC and was marketed as a private placement.

Securities exempt from registration may be offered pursuant to Regulation D (“Reg D”) as promulgated by the SEC in 1982.  Essentially, Reg D sets forth a series of rules establishing certain transactional exemptions from the securities registration requirements of the ’33 Act.

One of the more commonly utilized Reg D Rules, Rule 506, is the rule that AFC III sought to use to establish its purported exemption from registration.  Under Rule 506(c), a company can broadly solicit and generally advertise the securities offering, but must qualify for exemption by satisfying the following standards: (a) the investors in the offering are all accredited investors; and (b) the issuing company has taken reasonable steps to verify that its investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.

The SEC alleged that the Prestons facilitated investments in AFC III from unaccredited investors since at least 2013, and accepted approximately $3 million of investments in AFC III from unaccredited investors, who reportedly received AFC III offering materials and returns consistent with AFC III’s offering materials.

The SEC’s complaint charges violations of the anti-fraud and registration provisions of the federal securities laws.  Without admitting or denying the SEC’s allegations, as part of the settlement the Prestons and McKinley agreed to repay almost $30 million to the fund and to the appointment of new management at McKinley, AFC III, and their affiliates.

Public reports do not reveal whether AFC III was sold through FINRA-registered brokers or financial advisors.  However, as members and associated persons of FINRA, brokerage firms and their financial advisors must ensure that adequate due diligence is performed on any investment that is recommended to investors- including private placements under Regulation D.  Further, firms and their brokers must ensure that investors are informed of the risks associated with an investment, and must conduct a suitability analysis to determine if an investment meets an investor’s stated investment objectives and risk profile. Either an unsuitable recommendation to purchase an investment or a misrepresentation concerning the nature and characteristics of the investment may give rise to a claim against a stockbroker or financial advisor.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors who have incurred losses in connection with private placement offerings, including investments in oil and gas drilling funds and hedge funds. Investors may contact our office at (866) 966-9598 or for a no-cost, confidential consultation.

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