SEC Charges Former Alfi CEO Paul A. Pereira With Fraud For Making False Statements On Social Media

On February 27, 2024, the Securities and Exchange Commission (the “SEC) charged the former co-founder and CEO, Paul A. Pereira ( “Defedant” or “Pereira”), of Alfi, Inc. (“Alfi") with fraud for making fasle and misleading statements on social media concerning its financial performance to increase the now defunct Alfi’s stock price.

Facts Of The Case

The case is about Defendant Paul A. Pereira, the former Chief Executive Officer (CEO) and co-founder of Alfi, Inc., an advertising technology company. Pereira engaged in a fraudulent scheme to deceive investors about Alfi’s performance, aiming to attract interest and inflate the company's stock price.

Between June 2021 and August 2021, Pereira disseminated materially false and misleading information concerning Alfi's revenues, an alleged partnership to deploy Alfi technology in retail settings, and the company’s present and anticipated advertising inventory. "Advertising inventory" denotes the potential advertising revenue from media assets like billboards or devices, crucial for Alfi’s performance. Pereira spread these falsehoods through anonymous social media posts, a YouTube interview, and a press release issued by the company.

Defendant And Relevant Entity

Defedant

Pereira, aged 62, resides in Miami Beach, Florida. He co-founded Lectrefy in April 2018, later renamed Alfi, and served as its CEO and on its Board of Directors from April 4, 2018, until his resignation on February 2, 2022.

Relevant Entity

Alfi, established as a Delaware corporation in 2018 and headquartered in Miami Beach, Florida, operated as an advertising technology company. It claimed to have developed technology for measuring and generating reports on audience presence, demographics, and responses to digital advertisements.

Alfi’s common stock and warrants were registered with the Commission under Section 12(b) of the Exchange Act and were traded on the NASDAQ Stock Market from May 3, 2021, until October 27, 2022, when they were delisted. On October 14, 2022, Alfi filed for Chapter 7 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware.

Charges Against The Defendant

Alfi’s Business and Initial Public Offering

In April 2018, Pereira, along with his son and a business associate, co-founded Lectrefy, which later became Alfi. Alfi specialized in developing technology purportedly utilizing artificial intelligence and big data analytics to gauge and forecast human responses to advertisements.

Alfi’s business model involved creating advertising technology for tablets and kiosks and seeking contracts with brands and advertising agencies to display ads on these devices.

According to the company’s amended Form S-1 submitted to the Commission on April 26, 2021, their technology could discern various characteristics of viewers, such as age, gender, ethnicity, location, and emotions, and deliver tailored advertisements in real time. Pereira, in media interviews, illustrated the technology's capability by describing scenarios like displaying Louis Vuitton products to a young woman wearing yellow sunglasses. The success of Alfi hinged significantly on its advertising inventory, which denotes the potential advertising revenue from its media assets like screens and devices.

A pivotal aspect of Alfi’s strategy was partnering with Uber, Lyft, and taxi drivers to distribute Alfi-enabled devices in their vehicles for advertising purposes. However, by November 2020, Alfi had not generated any revenue and faced financial constraints. To address this, Pereira and the Alfi management, along with the Board of Directors, opted to conduct an initial public offering (IPO) of Alfi stock.

Alfi filed a draft Form S-1 registration statement with the Commission on November 30, 2020. The registration statement became effective on May 3, 2021, and trading of Alfi common stock and warrants commenced on the NASDAQ Stock Market on the following day. The company reportedly raised approximately $17.8 million through the IPO. Investors exercised Alfi warrants from around June 18, 2021, to September 20, 2021, resulting in approximately $16 million in proceeds from warrant sales.

Pereira Created a Pseudonymous Account on Stocktwits and Posted Material Misrepresentations Concerning Alfi’s Revenues

Following Alfi’s IPO on May 4, 2021, it garnered attention from the media and retail investors on social media platforms, being dubbed a "meme stock." This term refers to stocks experiencing extreme price volatility due, in part, to high trading volumes by retail investors during certain periods.

Alfi’s stock price underwent significant fluctuations, starting at $3.60 per share on its IPO day and reaching $9.22 per share by June 16, 2021, before declining gradually through July 2021.

Increasing Alfi’s presence on social media platforms, particularly those frequented by retail investors, became a priority for Pereira. He expressed concern to Alfi employees about the lack of attention on social media and instructed them to post favorable information about Alfi on platforms like Stocktwits.

Around May 18, 2021, Pereira created a Stocktwits account under the pseudonym "Uptix12." Over the ensuing five months, Pereira contravened Alfi’s social media policy by posting multiple times per week, and often per day, about Alfi on Stocktwits. Due to the pseudonymous nature of the account, users were unaware of Pereira's identity as the CEO of Alfi.

On June 3, 2021, Pereira posted a materially false statement on Stocktwits, claiming that Alfi likely had $10 million to $20 million in revenues, despite knowing or recklessly disregarding the fact that Alfi's reported revenues were significantly lower. Just the day before this post, Alfi had reported revenues of only $17,450 for the quarter ending March 31, 2021.

Pereira Falsely Claimed that Alfi Entered into an Agreement with a Third Party for the Deployment of Alfi Technology

On June 16, 2021, six days after Alfi reported meager revenues, Pereira gave an interview on a financial media company's YouTube channel. During the interview, Pereira falsely claimed that Alfi was entering into a contract with a large restaurant chain to deploy its technology in their establishments. However, Pereira knew or should have known that no such contract existed.

Pereira Made Material Misstatements and Omissions Concerning Alfi’s Current and Projected Advertising Inventory

By July 2021, Alfi had engaged an advisor to identify potential acquisition targets. Pereira sought to boost Alfi’s stock price and daily trading volume to improve its negotiating position for potential acquisitions.

On July 15, 2021, Pereira communicated to Alfi’s external investor relations consultant the need for specific stock prices and daily trading volumes to facilitate an acquisition. However, the stock price was declining, prompting concerns from Pereira and others.

On August 17, 2021, Pereira issued a press release stating that Alfi planned to distribute its devices to rideshare vehicles in 14 U.S. cities, claiming an advertising inventory of over $100 million by year-end 2021. Subsequently, he posted similar claims on Stocktwits. However, Alfi’s actual advertising inventory was significantly lower, with only around 20,000 tablets in physical inventory and distributed devices not exceeding 1,500 by August 2021.

Pereira’s Resignation and Alfi’s Bankruptcy

On October 22, 2021, Pereira was placed on administrative leave, and an internal investigation was launched by a special committee of the Board regarding corporate transactions unrelated to the present allegations. The investigation revealed Pereira's corporate governance abuses and inaccurate social media posts made from a pseudonymous account. Pereira resigned from his positions as director and CEO on February 2, 2022. On October 14, 2022, Alfi filed for Chapter 7 bankruptcy protection.

Relief Sought By The SEC

Permanent Injunction Against Defendant

The SEC requests the court to issue a Permanent Injunction restraining Pereira from infringing Sections 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

Civil Penalty

The SEC also requested the court to issue an Order directing Pereira to pay monetary penalties as stipulated by Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act.

Officer and Director Bar

The Commission further requested the court to Issue an Order prohibiting Pereira, in accordance with Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act from assuming roles as an officer or director of any company with securities registered under Section 12 of the Exchange Act or obligated to file reports under Section 15(d) of the Exchange Act.

Additional Relief

The commission also requested the court to grant any other necessary and suitable relief as deemed appropriate.

Retention of Jurisdiction

Furthermore, the Commission respectfully urges the Court to maintain jurisdiction over this matter to enforce and execute the terms of all orders and decrees it issues, and to entertain any pertinent application or motion by the Commission for supplementary relief within the Court's jurisdiction.

Demand for Jury Trial

The Commission requests a trial by jury on all matters deemed triable.

Key Takeaways For Investors

The key takeaways for investors from the case are as follows:

Due Diligence

Investors should conduct thorough due diligence before investing in any company, especially those undergoing an initial public offering (IPO). This includes scrutinizing financial statements, management backgrounds, and business models to ensure transparency and legitimacy.

Beware of Misleading Information

Investors must be cautious of misleading or false information disseminated by company executives or on social media platforms. In this case, the CEO's actions in spreading false statements about the company's revenues and agreements led to inflated stock prices, ultimately harming investors.

Importance of Regulatory Compliance

It's crucial for companies and their executives to adhere to securities laws and regulations. Violations can result in severe penalties, including permanent injunctions, civil penalties, and officer and director bars, as demonstrated in this case.

Legal Ramifications

Investors should be aware of the legal consequences of securities fraud. In this instance, the Securities and Exchange Commission (SEC) pursued legal action against the defendant, seeking various forms of relief including monetary penalties and restrictions on future involvement in similar roles within publicly traded companies.

Gayatri GuptaApril 26, 2024

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

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