On June 25, 2024, the Securities and Exchange Commission (the “SEC”) charged an advanced materials company and its former executive officers with market manipulation, fraud and other securities law violations.  The charges related to the alleged artificial inflation of the price of the company’s shares and the issuance and sale of shares through the company’s at-the-market (“ATM”) program.  The company was formed through a reverse merger.  The SEC alleges, among other things, that a predecessor entity issued and sold shares with an inflated value through its ATM program prior to completion of the merger.

In advance of the ATM issuances, the predecessor entity offered new shares of its preferred stock to common stockholders and publicly announced a preferred dividend of the profits from selling oil and gas assets to such preferred stockholders.  As a result of touting the preferred dividend, the common stock price rose from less than $1.00 per share to as high as $10.88 per share over a ten-day period in 2021.  The complaint alleges that the preferred dividend was planned with the intent of causing a short squeeze.  The complaint further alleges that as a result of this scheme to inflate the stock price, the company was able to sell approximately 16 million shares through the ATM offering for tens of millions of dollars more than it could have absent the scheme.

The SEC alleges that the predecessor company included misleading or vague statements regarding the preferred dividend in its proxy statement, including statements to the effect that holders would receive the net proceeds of the sale of the oil and gas assets.  In reality, the company concealed a planned spin-off of the assets into a new entity and made false claims regarding the value of the assets.  The SEC charged the company and its executive officers with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Section 14(a) of the Exchange Act. The chief executive officer was also independently charged with violating Section 13(a) of the Exchange Act, Section 13(b)(2)(A) of the Exchange Act, and Section 13(b)(2)(B) of the Exchange Act.  While the fact pattern here is quite extraordinary, it serves as a good reminder regarding the need for controls relating to the use of ATM programs.  Public companies using ATM programs must ensure that accurate and complete disclosures are made in proxy statements and other filings incorporated by reference into the ATM prospectus.  The continuous nature of an ATM program and its ready accessibility should not result in a more lax approach to vetting disclosures, including those incorporated by reference.  See the complaint linked here and the order linked here.

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