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  • Claudia Ecobici

SEC’s Crackdown on OTC Markets’ Toxic Lenders Should NOT Spell The End for Microcap Companies

The proverbial shit has hit the fan on the over-the-counter (OTC) markets, leaving many microcap companies in a very precarious situation.


For quite some time now, the SEC has been targeting so-called penny stock financiers (aka “Toxic Lenders”), most of whom are ultimately responsible for the type of toxic financing that could be tried as an accessory to the murder of a microcap company’s potential.




Dropping like flies


In late 2017, the SEC brought an enforcement action against Ibrahim Almagarby and his company Microcap Equity Group LLC (“Microcap Equity”) for engaging in the sale of billions of shares of numerous penny stock issuers, while allegedly acting as an unregistered dealer.


Brokers and dealers are required to register under the Securities Exchange Act of 1934 (the “Exchange Act”) to protect public companies of all sizes, including microcap businesses. Operating unregistered has allowed many of these financiers to skip regulatory obligations, such as regulatory inspections and oversight, financial responsibility requirements, and maintaining proper books and records.


The SEC’s complaint noted that since 2013, Almagarby and his firm engaged in purchasing aged penny stock debts, converting the debts into equity, and selling those shares into the public market for his own accounts - at a significant profit. Almagarby and MEG reportedly generated over $1.4 million in ill-gotten gains through such activities.

The case took a few years to progress, however, on August 17th of this year, a Florida Court granted summary judgment in favor of the SEC, bringing the matter to an abrupt end - for now.


The Almagarby case was just the beginning. Earlier this year, the SEC also brought enforcement actions against multiple toxic lenders, including John D. Fierro (and his company, JDF Capital, Inc.), Justin W. Keener (d/b/a JMJ Financial), and John M. Fife (along with companies he controls). The SEC alleges that the defendants in these three enforcement actions generated nearly $85 million in potentially ill-gotten profits.


The Endgame


The recent crackdown was an unprecedented, but necessary move. The microcap market has been held hostage by these toxic practices for far too long.


Think about it…Why would a public company’s stock price get pushed down to ‘sub-penny’ levels, trade with great volatility (but mostly sideways), and see its Issued and Outstanding increase by many multiples, with nearly 100% of the newly issued stock landing in the float?


These toxic lenders had it coming and it might just be a matter of time before the rest of them get their days in court too. The SEC is currently sifting through thousands of tips it received via its Whistleblower Program, so we can expect more, similar enforcement actions to come.


One door closes...


While we applaud the SEC and celebrate the justice being served to these predatory lenders, we also have to face the unfortunate fact that many microcap companies have survived this type of toxic funding. It was a necessary evil that allowed some companies to just stay afloat long enough to survive.


Will these toxic lenders now register as dealers in order to keep operating as they do? We wouldn’t hold our breath!


So, how will these microcap companies find capital moving forward? The odds are heavily stacked against many of them, especially now, amid the current pandemic crisis.


We ask this question because if they fail to do so, many of their shareholders may also perish. The biggest losers will be the smaller mom and pop investors who have poured money into purchasing the stock of these companies.


Two doors of opportunity have opened


As the funding door begins closing on the OTC markets, two doors of opportunity have flung wide open for the microcap businesses who are trying to survive and thrive, as well as the small investors who put their faith in them.


Awaiting these individuals with a wide-open entrance are the JOBS Act and equity crowdfunding’s Regulation Crowdfunding (“Reg. CF”) and Regulation A+ (“Reg. A+”)!


Back in 2012, then-President Barack Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law, officially opening up opportunities for businesses of all sizes, both public and private.


Reg. A+ and Reg. CF, which fall under Titles IV and III of the JOBS Act, respectively, allow private and public companies to advertise their offering and to raise money from both accredited and non-accredited investors. Anyone can now invest in a startup or development stage company.


For the public companies trading on the OTC Markets, this means a safe and secure way to secure investments without the fear of their stock value being eroded by Toxic Lenders. For prospective shareholders interested in microcap companies, this means the higher probability of your investment having greater upside potential for the same exact reason! Not to mention, when you invest in Reg. CF or Reg A+, your investment is going directly to the company to build operations, not to line the pockets of Toxic Lenders.


Fortunately, Reg. A+ and Reg. CF both exist to assist public companies in raising money and assisting investors in finding fair, unique, and equitable opportunities. So far, these funding options have helped to raise millions of dollars for thousands of companies and secured hundreds of thousands of jobs in the United States.


A recent report published by the SBE council noted that $500,000,000 has been committed by over 700,000 retail investors in diverse Reg CF offerings across the country. Meanwhile, Reg A+ offerings have helped 183 companies raise $2.446 billion in ongoing and closed offerings, according to the SEC.


So, while the SEC continues forward with their righteous pursuit to rout out the evil of Toxic Lenders and level the playing field for all shareholders, Reg A+ and Reg. CF can be viable options for many microcap businesses and their smaller investors.


Whether you are a public company looking to raise money, or a microcap investor interested in investing in a viable project, there is likely no better time than now to get involved.


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