The action addresses their failure to register as securities dealers in connection with their convertible note financing business, which involved acquiring and selling securities from over 100 microcap companies.

The parties have agreed to settle the charges, with Goldstein and his entities agreeing to pay $1.25 million in monetary relief and to surrender or cancel all remaining shares of public companies allegedly acquired through their unregistered dealer activities.

Case Summary

The Securities and Exchange Commission (SEC) filed an enforcement action against Aryeh Goldstein, a resident of Florida and New York, along with two entities he controls: Adar Bays, LLC, based in Florida, and Adar Alef, LLC, operating in Florida and New York.

The action pertains to their failure to register as securities dealers in connection with their convertible note financing business, which involved acquiring and selling securities from over 100 microcap companies.

The parties have agreed to settle the charges. As part of the settlement, Goldstein and his entities will pay $1.25 million in monetary relief and will surrender or cancel all remaining shares of public companies allegedly acquired through their unregistered dealer activities.

The Defendants

1. ARYEH GOLDSTEIN

Aryeh Goldstein, 51 years old, resides in Miami Beach, Florida. He is the sole owner and Managing Member of Adar Bays, LLC, and Adar Alef, LLC, and exercised control over both during the relevant period. Goldstein has never been registered with the Commission as a dealer or in any other capacity.

2. ADAR BAYS, LLC

Adar Bays, LLC, is a limited liability company formed in Florida in 2014 and based in Miami Beach, Florida. Solely owned and controlled by Goldstein as its Managing Member, Adar Bays was used to facilitate convertible debt financing transactions and related stock sales. The company has never been registered with the Commission as a dealer or in any other capacity.

3. ADAR ALEF, LLC

Adar Alef, LLC, a Nevada limited liability company, was originally formed in New York by Goldstein in 2018. In 2020, it became a Nevada LLC and was subsequently registered to do business in Florida. Owned and controlled by Goldstein, its sole Managing Member, Adar Alef was used to facilitate convertible debt financing transactions and related stock sales. It has never been registered with the Commission as a dealer or in any other capacity.

Facts Of The Case

I. THE DEFENDANTS’ CONVERTIBLE DEBT FINANCING BUSINESS

Adar Bays entered the convertible debt business in 2014. Convertible debt agreements between a public company borrower and a lender like the Defendants include provisions allowing the lender to convert unpaid debt into newly-issued discounted stock of the public company borrower if the borrower fails to meet its repayment obligations. Convertible debt lenders can then sell these discounted shares to investors on the open market, typically at a substantial profit. Lending money to penny stock companies through convertible debt agreements made up the majority of the Defendants’ business during the relevant times.

Adar Bays was established in 2014 specifically to lend money to distressed penny stock companies via convertible debt agreements. In 2018, Adar Alef was created to enter new convertible debt agreements, while Adar Bays continued handling existing deals.

The Defendants grew their business primarily through word-of-mouth. As they entered more convertible debt agreements with penny stock companies, additional companies sought them out directly and through third parties for convertible debt financing. Public disclosures of the borrower companies' convertible debt agreements with the Defendants further increased awareness of their business.

Over time, the Defendants entered into convertible debt agreements with at least 134 different issuers. During this period, they converted large amounts of unpaid issuer debt into discounted stock, generating trading profits from these investment returns. While they traded in their own account to generate these profits, they also facilitated the entry of newly-issued stock into the securities markets.

II. THE ANATOMY OF THE DEBT FINANCING AGREEMENTS

The Defendants extended cash loans to penny stock companies through Stock Purchase Agreements (SPAs) that typically gave the issuer a six-month window to repay the loan in cash. Although issuers could theoretically repay within the first six months, the SPAs imposed a substantial premium for cash repayment—usually 140% of the amount due, plus additional charges and interest. After this initial six-month period, issuers typically lost the right to repay in cash without the Defendants' consent.

Following the six-month cash repayment period, the Defendants generally had the right to convert the amount due under the SPA into newly-issued shares of the issuer’s stock. The stock the Defendants received was significantly discounted, usually 30% to 50% off the lowest trading price in the days preceding the conversion. For example, if an issuer’s shares were trading at a low of $0.04 per share before the conversion, a 50% discount would make it $0.02 per share. The number of shares the Defendants received at conversion was calculated by dividing the total amount due under the SPA by the discounted share price. For instance, if an issuer owed $1,000 and the discounted share price was $0.02 per share, the Defendants would receive 50,000 shares ($1,000 divided by $0.02). When the Defendants sold the discounted stock at, for example, a market price of $0.04 per share, the sale proceeds would be $2,000, yielding a $1,000 profit.

III. DEFENDANTS WERE NOT REGISTERED WITH THE SEC AS DEALERS

Since at least 2014, the Defendants regularly engaged in numerous Stock Purchase Agreements (SPAs) with various penny stock companies. They exercised their conversion rights to obtain large amounts of deeply discounted stock and then sold this stock in the market, often for a profit. The Defendants used interstate commerce means or instruments to buy and sell securities, including placing trades on national securities exchanges through a broker and communicating with borrower companies and brokers via national telephone and electronic communications networks.

Through this conduct, the Defendants acted as dealers without registering with the SEC or associating with a registered dealer. To register as a dealer, one must file an application using Form BD and meet statutory requirements that involve maintaining high professional standards.

SEC registration requires the dealer to provide crucial information about its business, including the names of direct and indirect owners and executive officers, arrangements with other persons or entities, the identities of those who control the business, the states in which the dealer operates, and any past criminal or regulatory actions against the dealer or its affiliated persons. Additionally, financial information, such as bankruptcy history, must be disclosed. Registered dealers must join a self-regulatory organization or a national securities exchange, which assists the SEC in regulating their activities. Furthermore, registered dealers are subject to inspections by SEC staff and the Financial Industry Regulatory Authority (FINRA) to ensure compliance with securities laws.

IV. DEFENDANTS BOUGHT AND SOLD PENNY STOCKS

Almost all the stock bought and sold by the Defendants were penny stocks, which did not qualify for any exceptions from the definition of a “penny stock,” as outlined in Exchange Act Section 3(a)(51) and Exchange Act Rule 3a51-1 (15 U.S.C. Section 78c(a)(51); 17 C.F.R. Section 240.3a51-1). As such, the Defendants participated in offering penny stocks to investors by acting as securities dealers engaged in the buying and selling of these stocks.

Claims For Relief

VIOLATIONS OF SECTION 15(A)(1) OF THE EXCHANGE ACT (AGAINST ALL DEFENDANTS)

The Commission re-alleges and incorporates by reference the allegations set forth in paragraphs 1 through 23 above.

Through the conduct described above, the Defendants used the mail or other means of interstate commerce to effect transactions, induce, and attempt to induce the purchase and sale of securities as part of their regular business. They did this without being registered with the Commission as broker-dealers and without being associated with a registered broker-dealer entity.

As a result, the Defendants violated, and unless enjoined, will likely continue to violate Section 15(a)(1) of the Exchange Act.

Prayer For Relief

The Commission respectfully requests that this Court:

I. PERMANENT INJUNCTION

Enter a permanent injunction restraining each of the Defendants, their officers, agents, servants, employees, attorneys, and those persons in active concert or participation with Defendants who receive actual notice of the Order, by personal service or otherwise, from directly or indirectly engaging in the transactions, acts, practices, or courses of business described above, or in conduct of similar nature and objective, in violation of Section 15(a)(1) of the Exchange Act [15 U.S.C. § 78o(a)(1)].

II. DISGORGEMENT

Order Defendants to disgorge ill-gotten gains and/or unjust enrichment received directly or indirectly, with pre-judgment interest thereon, as a result of the violations alleged herein, pursuant to Exchange Act Sections 21(d)(5) and 21(d)(7) [15 U.S.C. §§ 78u(d)(5) and 78u(d)(7)].

III. CIVIL PENALTIES

Impose appropriate civil penalties upon Defendants pursuant to Section 21(d)(3) of the Exchange Act.

IV. PENNY STOCK BAR

Issue an Order restraining and enjoining Defendants from participating in the offering of any penny stock, including engaging in activities with a broker, dealer, or issuer for the purposes of issuing, trading, or inducing or attempting to induce the purchase or sale of any penny stock, under Exchange Act Section 21(d)(6).

V. CANCELLATION OF STOCK AND CONVERSION RIGHTS

Order the Defendants to surrender for cancellation any remaining stock and conversion rights under any debt financing agreements entered into since 2014.

VI. RETAIN JURISDICTION

Retain jurisdiction over this action in accordance with the principles of equity and the Federal Rules of Civil Procedure to implement and carry out the terms of all orders and decrees that may be entered.

VII. FURTHER RELIEF

Grant such other orders for further relief as the Court deems just and proper.

Key Takeaways For Investors

The Commission respectfully requests that this Court:

1. IMPORTANCE OF SEC REGISTRATION

The case underscores the necessity for entities involved in securities transactions to be registered with the SEC as broker-dealers. Engaging in securities transactions without proper registration can lead to severe legal consequences.

2. RISKS OF CONVERTIBLE DEBT AGREEMENTS

Convertible debt agreements can be lucrative but also carry significant risks. Investors should be aware that such agreements often involve distressed companies and can result in substantial profits if the stock price appreciates, but they also come with the risk of substantial losses.

3. DISCLOSURE AND TRANSPARENCY

The case highlights the importance of transparency and disclosure in securities transactions. Investors should ensure that the entities they are dealing with are compliant with all regulatory requirements and provide full disclosure of their business practices.

4. DUE DILIGENCE ON PENNY STOCKS

Penny stocks are often associated with higher risk due to their low market capitalization and liquidity. Investors should perform thorough due diligence before engaging in transactions involving penny stocks to avoid potential fraud and manipulation.

5. IMPACT OF LEGAL ACTIONS

Legal actions and enforcement by regulatory bodies like the SEC can significantly impact the operations and financial standing of companies involved. Investors should be cautious of companies under investigation or litigation, as these issues can lead to penalties, disgorgement of profits, and operational disruptions.

6. ROLE OF INTERSTATE COMMERCE

The case illustrates how the use of interstate commerce, such as electronic communications and trading on national exchanges, is integral to securities transactions. Investors should be aware that these activities are heavily regulated to ensure market integrity and investor protection.

7. CONSEQUENCES OF NON-COMPLIANCE

Non-compliance with securities laws can result in severe penalties, including disgorgement of profits, monetary penalties, and permanent injunctions. Investors should prioritize compliance to mitigate legal and financial risks.

8. MONITORING BY REGULATORY AUTHORITIES

The involvement of regulatory authorities like the SEC and FINRA in monitoring and inspecting registered dealers ensures that investors are protected from fraudulent activities. Investors should favor dealing with entities that are subject to such regulatory oversight.

By understanding these key takeaways, investors can better navigate the complexities of securities transactions, particularly in the realm of convertible debt and penny stocks, and make more informed decisions.

Key Takeaways For Financial Market Practitioners and Management

The Commission respectfully requests that this Court:

1. STRICT ADHERENCE TO SEC REGISTRATION REQUIREMENTS

Financial market practitioners must ensure that their firms are properly registered with the SEC if they are acting as broker-dealers. Failure to register can result in significant legal actions and penalties.

2. REGULATORY COMPLIANCE

Continuous compliance with securities regulations is critical. Management should implement robust compliance programs and regularly audit their operations to ensure adherence to all applicable laws and regulations.

3. TRANSPARENCY IN BUSINESS PRACTICES

Transparency in dealings, especially when it involves convertible debt agreements and penny stocks, is essential. Clear disclosure of business practices to investors and regulatory bodies can prevent legal issues and build trust.

4. RISK MANAGEMENT IN CONVERTIBLE DEBT FINANCING

Convertible debt financing involves inherent risks, particularly with distressed companies. Practitioners should have strong risk management frameworks to evaluate and mitigate these risks effectively.

5. DUE DILIGENCE

Rigorous due diligence processes should be in place when entering into agreements with penny stock companies or any high-risk entities. This includes thorough background checks and financial assessments to avoid potential fraud and reputational damage.

6. IMPACT OF LEGAL AND REGULATORY ACTIONS

Management should be aware that legal and regulatory actions can have severe operational and financial repercussions. Proactively addressing any compliance issues can mitigate the impact of such actions.

7. EFFECTIVE USE OF INTERSTATE COMMERCE

The case highlights the role of interstate commerce in securities transactions. Firms should ensure that their use of electronic communications and trading platforms complies with all relevant regulations.

8. PROACTIVE ENGAGEMENT WITH REGULATORY AUTHORITIES

Maintaining open and proactive communication with regulatory bodies like the SEC and FINRA can help address compliance issues before they escalate into enforcement actions.

9. TRAINING AND AWARENESS

Regular training programs for employees on compliance, ethics, and regulatory requirements can prevent inadvertent violations and foster a culture of integrity within the organization.

10. DOCUMENTATION AND RECORD-KEEPING

Proper documentation and record-keeping are essential for demonstrating compliance and facilitating audits by regulatory authorities. Firms should ensure that all transactions and communications are well-documented.

11. REPUTATION MANAGEMENT

Non-compliance and legal issues can significantly damage a firm's reputation. Practitioners should prioritize ethical practices and compliance to maintain their reputation and trust with investors and stakeholders.

12. MONITORING AND INTERNAL CONTROLS

Implementing robust internal controls and monitoring systems can detect and prevent regulatory breaches. Regular reviews and updates to these systems are necessary to adapt to evolving regulations and market conditions.

By understanding these key takeaways, financial market practitioners and management can enhance their compliance strategies, mitigate risks, and ensure sustainable and lawful operations in the financial markets.