SEC Charges Adam R. Long, L2 Capital, LLC and Oasis Capital LLC, as Unregistered Dealers

On September 28, 2023, the Securities and Exchange Commission (the “SEC“) filed charges against Adam R. Long of Dorado, Puerto Rico, and two companies Long owns and controls for acquiring and selling nearly 6 billion shares of microcap stock without registering as a securities dealer with the SEC.  

The SEC’s complaint alleges that from at least November 2018 to August 2021, Long and his companies, L2 Capital LLC, and Oasis Capital LLC, purchased at least 20 convertible notes from at least 15 penny stock or microcap issuers, converting those notes into shares of stock at a large discount from the market price, and selling the newly issued shares into the market at a significant profit. 

The SEC alleges that Long and his companies obtained at least $20 million in profits after they sold nearly six billion newly issued shares into the market.  The complaint also alleges that at the time of the conduct, the defendants were not registered with the SEC as dealers, in violation of the mandatory registration provisions of the federal securities laws.  The SEC further alleges that by failing to register, the defendants avoided certain regulatory obligations for dealers that govern their conduct in the marketplace, including regulatory oversight, financial reporting requirements, and maintaining required books and records.

Using public filings, were able to identify 37 issuers that did various financings with L2 and/or Oasis, involving dozens of convertible notes: Ocean Thermal Energy (CPWR), MGT Capital Investments Inc (MGTI), Propanc Biopharma Inc (PPCB), Predictive Oncology Inc (POAI), FBEC Worldwide Inc (FBEC), Allstar Health Brands Inc (ALST), Lord Global Corporation (LRDG), Maptelligent Inc (MAPT), IOTA Communications Inc (fka IOTC), Mansfield-Martin Exploration Mining Inc (fka MCPI), Quantum Materials Corp (fka QTMM), Integral Technologies Inc (fka ITKG), Sintx Technologies Inc (SINT), ABCO Energy Inc (ABCE), Jaguar Health Inc (JAGX), Agritek Holdings Inc (AGTK), Magnum Opus Acquisition Ltd (OPA), Origin Agritech Ltd (SEED), Prenetics Global Limited (PRE), Arena Group Holdings Inc (AREN), Grow Solutions Holdings Inc (GRSO), Medizone International Inc (fka MZEIQ), Digital Brands Group Inc (DBGI), Sphere 3D Corp (ANY), Riot Blockchain (RIOT), High Wire Networks Inc (HWNI), Astro Aerospace Ltd (fka ASDN), 12 Retech Corp (RETC), Quantum Computing Inc (QUBT), Arch Therapeutics Inc (ARTH), Directview Holdings Inc (fka DIRV), Bridgeway National Corp (fka BDGY), NuGenerex Immuno-Oncology Inc (fka NUGX), Bowmo Inc (BOMO), Generex Biotechnology Corporation (fka GNBT), Sharing Economy International Inc (SEII), Fact Inc (FCTI), Terawulf Inc (WULF), Connexa Sports Technologies Inc (CNXA), and Longeveron Inc (LGVN).

According to the Complaint, beginning in November of 2018, the defendants regularly acquired convertible notes, which are a type of short-term debt security, from small companies that needed cash and issued penny stocks (penny stock companies) or other low-value securities (microcap companies). Because these issuers often had minimal assets, negative cash flows, and limited operating histories, the defendants were able to negotiate highly favorable terms for the convertible notes.

The defendants typically purchased convertible promissory notes with market-adjustable pricing, which allowed them to convert those notes into shares of stock of the issuing penny stock or microcap company at a discounted price that was a fraction of the lowest volume-weighted average share price within a given period (“Variable Convertible Note Transactions”). Those discounts generally ranged from 10 to 50 percent less than the lowest trading price of the stock in the 15 to 30 days preceding each conversion.  The defendants also obtained an original issuer’s discount (“OID”) when L2 and/or Oasis purchased a note. The amount of the OID varied but typically was approximately 10 percent of the total note amount.

In most cases, the penny stock and microcap companies with whom L2 and Oasis entered into Variable Convertible Note Transactions did not make the required payments under the notes. So L2 and/or Oasis exercised the right to convert the amount due under the notes into newly issued shares and then sold the shares into the public market.

The defendants’ repeated conversions of notes into stock, and their subsequent sales of newly-issued and freely-trading shares, significantly increased the amount of publicly-issued stock for each company that had issued the notes to the defendants. As a result, the defendants’ sales diluted the value of the shares held by existing shareholders and frequently depressed the issuing companies’ stock prices.

The SEC alleges that the defendants held themselves out to the public as dealers who were willing to buy convertible notes as part of their regular business operations, including through their websites, email and phone solicitations, and industry conference appearances. Long also relied upon a network of investment bankers, brokers and attorneys to find deals for L2 and Oasis.

The SEC further alleges that Long retained at least five independent contractors to help him identify potential Variable Convertible Note Transactions for L2 and Oasis, as well as two contractors, who lived and worked in the Northwest suburbs of Chicago, Illinois, who were responsible for communicating with transfer agents, broker-dealers and issuers (all of whom were subject to SEC registration requirements) and ensuring that L2 and Oasis acquired the shares converted from the Variable Convertible Note Transactions and were able to sell the shares into the public securities market. They tracked L2’s and Oasis’ ability to convert debt to shares, issued conversion notices, ensured that restrictions on the sale of shares were removed, and provided the information needed to ensure that free-trading shares were deposited into L2’s and Oasis’ accounts held at SECregistered broker-dealers.

According to the SEC, in the middle of 2019, Long began to wind down L2’s business operations as part of a plan to use Oasis for any future Variable Convertible Note Transactions after the SEC filed a lawsuit against his former partner at L2, Edward M Liceaga (SEC v. River North Equity, LLC, et. al., Case No. 19-cv-1711, filed in April 2019 in the U.S. District Court for the Northern District of Illinois).  In that complaint, the SEC also charged Liceaga as an unregistered dealer.

L2 continued to convert debt due under the convertible notes it owned into publicly-tradeable shares and then sold the shares into the market to investors living throughout the United States. L2 also assigned some convertible notes and shares converted through Variable Convertible Note Transactions to Oasis.

In late 2020 and early 2021, the defendants transitioned from trading primarily penny stocks and began targeting microcap issuers with stock trading on the Nasdaq stock market (“Nasdaq”)

The SEC’s complaint, filed in federal court in the U.S. District Court for the Northern District of Illinois, charges the defendants with violating the dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act of 1934. The complaint alternatively charges Long with control person liability under Section 20(a) of the Exchange Act for L2 Capital’s and Oasis Capital’s violations. The SEC seeks permanent injunctions, disgorgement including prejudgment interest on a joint and several basis, civil penalties, and penny stock bars.

The litigation marks the 13th such case since 2017.  Five of the cases have already ended with a Final Judgment in favor of the SEC, each resulting in the surrender for cancellation of all shares owned by the defendants, and the cancellation of remaining convertible notes and/or warrants owned by the defendants, along with disgorgement, civil penalties and penny stock bars ordered against the defendants.   

With so many active toxic convertible lenders still out there, there is likely to be lots more similar litigation brought by the SEC against other unregistered dealers in the future. 

The following is a snapshot of the 13 unregistered dealer cases brought by the SEC since 2017.

To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

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Brenda Hamilton, Securities Attorney
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