Commission Charges Private Start-up with Financial Fraud

When most people talk about the SEC they are focused on public companies whose shares are listed and trade on the New York Stock Exchange or another national exchange. Few people think about the Commission when discussing a company whose shares do not trade and which may not be public. There is no doubt, however, that the agency can, and periodically does, assert jurisdiction over firms whose shares are not listed on any exchange and which are not public. The most recent case involving a private company is one centered on a financial fraud – the kind of cases the Commission has traditionally brought but which have proven elusive in recent years. SEC v. S-Ray Inc., Civil Action No. 3:22-cv-5150 (W.D. Wash. Filed March 15, 2022).

Named as defendants in the action are the company and Stephen Alexander Baird. The company was founded in 2015 with the idea of developing ultrasound devices for use in dentistry. Defendant Stephen Baird founded the firm, raising about $6 million from approximately 180 individual investors, many of whom were dentists and/or employed in the industry.

The start-up continued to raise money from investors. For example, by about 2018 the firm raised at least $2 million. Investors were given a prospectus and periodic updates on the firm in emails and discussions. While the company was able to continue raising funds, unfortunately it did not prosper. By April 2019 the company lost its last employee other than Mr. Baird.

Nevertheless, fund raising continued. Potential investors were not told that the firm was actually failing; they were not told that there were no orders. To the contrary, investors were informed that in fact there were orders. More importantly, the investors were also not told that their funds were not being used to develop the company. Rather, the investor funds were going directly into Mr. Baird’s pocket for his personal use.

The offerings continued through at least 2020. During that time S-Ray and Mr. Baird continued to tell potential investors that the firm would use the money for development. Investors were not told that their funds were going straight to Mr. Baird. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 25344 (March 15, 2022).