Lender to Penny Stock Issuers Charged as Unregistered Dealer

Aryeh Goldstein thought he had found the holy grail. After forming Adar Bays, LLC in 2014 and later Adar Alef, LLC in 2018, business was lending money to penny stock companies. Those issuers were small with a stock price below $5 and often much less. Frequently, these firms needed cash.

Beginning in 2014 Mr. Goldstein loaned the small issuers money through Adar Bays and later Adar Alef. The loans were extended to the companies using convertible debt agreements. If the issuer could not keep up with the payments, the loan provisions stipulated that the lender – here Mr. Goldstein and one of his entities – could convert the notes into shares of the borrower. The prices were favorable – about 30% to 50% below market. The shares could then be sold into the market, realizing significant profits.

The process seemed to be good for the small issuers involved – loans could be had that helped fund operations. The loans seemed to be good for Mr. Goldstein and his firms – they made money on the loans if they were repaid. They made even more money if the issuer failed to make the payments – the loans were called and converted into shares of the borrower at heavily discounted prices. That translated into significant profits for Mr. Goldstein when the shares were sold.

The lending business was solely Mr. Goldstein’s operation. He created the business. He funded the lending business. But in selling the shares while he was acting for his own account he was doing exactly what securities dealers do. The Exchange Act requires that such dealers register with the Commission even if the business is all one person using only his or her cash to invest.

Absent registration Mr. Goldstein violated Exchange Act Section 15(a). Mr. Goldstein and his businesses were named as defendants in an SEC enforcement action. SEC v. Goldstein, Civil Action No. 1:24-cv-20261 (S.D.Fla. Filed January 23, 2024. The complaint named as defendants Mr. Goldstein and each of his entities.

The action was settled. Each Defendant consented to the entry of a permanent injunction that prohibits future violations of Exchange Act Section 15(a). In addition, the order requires the payment of disgorgement in the amount of $1,044,252 plus prejudgment interest of $100,748 and the payment of a penalty of $105,000. In addition, a 5 year penny stock bar was imposed. See, Lit. Rel. No. 25930 (January 23, 2024).