Discover Growth Fund, LLC, a U.S. Virgin Islands limited liability company v. BEYOND COMMERCE, INC., A Nevada Corporation

[7] 8 UNITED STATES DISTRICT COURT 9 FOR THE DISTRICT OF NEVADA [10] 11 DISCOVER GROWTH FUND, LLC, a U.S. Virgin Islands limited liability 12 company, Case No.: 3:21-cv-00328-MMD-CLB 13 Plaintiff, 14 vs. MEMORANDUM AND ORDER 15 BEYOND COMMERCE, INC., a Nevada corporation, [16] Defendant. [17] 18 The Motion for Approval of Stipulation for Settlement of Claims (Doc. 7) (“Motion”) filed 19 by Plaintiff DISCOVER GROWTH FUND, LLC (“Plaintiff” or “Discover”) came on for hearing 20 on November 17, 2021 before the Honorable Miranda Du, U.S. District Judge. The Court, 21 having been presented with a Settlement Agreement between Plaintiff and Defendant 22 BEYOND COMMERCE, INC. (“Defendant” or “Beyond Commerce”) (Doc. 7-4), considered 23 the Motion and supporting and responding papers, Declaration of John Burke (Doc. 7-1), 24 Defendant’s Non-Opposition (Doc. 8), Declaration of Peter M. Stazzone (Doc. 9), and 25 arguments of counsel, conducted a fairness hearing on the Motion as set forth in the 26 Settlement Agreement, and good cause appearing therefor, the Court grants the Motion for the 27 reasons explained below. 1 FINDINGS OF FACT AND CONCLUSIONS OF LAW 2 The Court makes the following Findings of Fact, Conclusions of Law, and Order. 3 FINDINGS OF FACT 4 Plaintiff Discover is an institutional investor. (Doc. 7-1 at ¶ 4.) Defendant is a Nevada 5 corporation. (Doc. 9 at ¶ 1.) Defendant is a company operating in two markets: (1) the business6 to-business internet marketing technology and services market; and (2) the information 7 management market, in developing proprietary software for digital transformation of clients’ 8 existing content. (Id. at ¶ 3.) Its stock is publicly traded on the OTC Markets under the trading 9 symbol “BYOC.” 10 Beyond Commerce issued to Discover a Senior Secured Redeemable Convertible 11 Debenture with an initial face value of $2,717,391.30 on August 7, 2018 (the “Debenture”), in 12 exchange for an aggregate of $2.5 million in cash. (Doc. 7-4 at ¶ 1.) The Debenture was 13 convertible into shares of Defendant’s common stock, at a discount to the market price based upon 14 a variable pricing formula. (Id.) Beyond Commerce then filed a resale Registration Statement 15 with the U.S. Securities & Exchange Commission, for the shares of common stock issuable to 16 Discover upon conversion of the Debenture, which became effective on February 7, 2019. (Id.) 17 The parties entered into an Exchange Agreement on March 19, 2021, pursuant to which 18 they exchanged the Debenture, which then had a face value of $1,556,905.00, for 1,556,905 shares 19 of Beyond Commerce Series C Convertible Preferred Stock. (Doc. 7-4 at ¶ 1.) 20 Discover entered into a Stock Purchase Agreement with Beyond Commerce on March 31, 21 2021, pursuant to which it purchased an additional 10,000 shares of preferred stock for $1 million 22 in cash. (Doc. 7-4 at ¶ 2.) (The Exchange Agreement and Stock Purchase Agreement are referred 23 to collectively as the “Agreements.”) Under the Agreements, Beyond Commerce is required to 24 maintain a reserve of 15.56 billion shares of common stock for issuance to Discover upon 25 conversion of the preferred stock. (Id.) 26 Plaintiff asserts claims against Defendant relating to the Agreements. (Doc. 7-4 at ¶ 5. See 27 also Doc. 1.) Within these Agreements, Defendant represented there were no claims, litigation, or 1 (Doc. 7-4 at ¶ 2.) Plaintiff discovered, after entering into the Agreements, that a third party had in 2 fact put Defendant on notice of the third party’s claim against Defendant. The third party later 3 filed a lawsuit against Defendant based on such claim. (Doc. 7-4 at ¶ 3.) 4 Defendant has acknowledged that the claims held by Plaintiff are bona fide outstanding, 5 resulted from arms-length agreements negotiated in good faith, and that the amounts being settled 6 are currently due debts arising in the ordinary course of business. (Doc. 9 at ¶ 5.) Defendant 7 further acknowledges that it is obligated to pay the full amount of the claims without counterclaim 8 or right of offset. (Id.) 9 Plaintiff and its U.S. attorneys, advisors, and representatives have worked cooperatively 10 with Defendant and its attorneys and advisors to reach a mutually-beneficial agreement. (Doc. 9 11 at ¶ 6.) The parties have entered into a settlement agreement to settle the outstanding claims in 12 exchange for stock, subject to Court approval following a fairness hearing. (Doc. 7-4.) (The terms 13 and conditions of the settlement are set forth in the Settlement Agreement (Doc. 7-4) filed in this 14 action.) Defendant’s CEO and board of directors have determined that the settlement is fair to 15 Defendant and in the best interests of its stockholders. (Doc. 9 at ¶ 6.) 16 Trading in Defendant’s shares is volatile and unpredictable. (Id. at ¶ 8.) Over the last year, 17 the trading price and volume for the shares have fluctuated substantially. (Id.; Doc. 9-1.) 18 Plaintiff is a highly sophisticated institutional investor who regularly enters into 19 transactions of this type, and is fully aware of the significant risks in exchanging debt for common 20 equity of a small public company that has substantial doubt as to its ability to continue as a going 21 concern. (See Doc. 7-1 at ¶ 15-16.) Plaintiff can afford a complete loss of its investment and is 22 willing to accept that risk, provided Defendant abides by the terms of the Settlement Agreement. 23 (Id. at ¶ 15.) If Defendant succeeds and performs, there is the potential for Plaintiff to fully recoup 24 its investment and possibly generate a sizable return. (Id. at ¶ 10.) Plaintiff is receiving shares 25 that it should be able to sell for more than the amount of the claims. (Id. at ¶ 15.) Plaintiff has 26 analyzed the provisions of the Settlement Agreement, company fundamentals and market 27 dynamics, and determined that the negotiated agreement is fair and reasonable, and adequate to 1 CONCLUSIONS OF LAW 2 I. Proposed Settlement 3 The parties have agreed to settle this case pursuant to a Settlement Agreement which 4 requires Defendant to issue 72,638 shares of its preferred stock to Discover. (Doc. 7-4 at ¶ 1.) 5 Because payment for the settlement of Plaintiff’s claims against Defendant will be in the form of 6 unregistered shares of preferred and common stock, court approval is required under Section 7 3(a)(10) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(10), and the comparable provision of 8 Nevada state “blue sky” law, NRS 90.280(6)(c). See Oceana Capital Grp. Ltd. v. Red Giant Ent., 9 Inc., 150 F. Supp. 3d 1219, 1222 (D. Nev. 2015). 10 II. Jurisdiction and Venue 11 This court has subject matter jurisdiction under 28 U.S.C. § 1332 (a)(2), because the amount 12 in controversy exceeds $75,000.00 and the action is between citizens of different states. See 28 13 U.S.C. § 1332 (c)(1), Hertz Corp. v. Friend, 559 U.S. 77, 93 (2010). Defendant is a Nevada 14 corporation. Plaintiff is a limited liability company based in the United States territory of the 15 Virgin Islands. See 28 U.S.C. § 1332 (e) (“The word ‘States,’ as used in this section, includes the 16 Territories”). Venue lies in this district under 28 U.S.C. § 1391 (b)(1), (c)(2) and (d). See Pacer 17 Global Logistics, Inc. v. Nat'l Passenger R.R. Corp., 272 F. Supp. 2d 784, 788 (E.D. Wis. 2003). 18 III. Application of the Exemption 19 Generally, public companies are not permitted to issue their stock without first filing a 20 registration statement nor are persons receiving it permitted to immediately resell the shares into 21 the public markets. See 15 U.S.C. § 77e(c), 15 U.S. Code § 77d(a)(1). Section 3(a)(10) of the 22 Securities Act provides an exemption for 23 any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such 24 exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the 25 fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right 26 to appear, by any court . . . . 27 15 U.S.C. § 77c(a)(10). 1 The Section 3(a)(10) exemption is often used to effectuate settlements of claims against 2 public company defendants. See, e.g., Oceana Capital, 150 F. Supp. 3d at 1219 ; Chapel Invs., 3 Inc. v. Cherubim Ints., Inc., 177 F. Supp. 3d 981, 987 (N.D. Tex. 2016); YA II PN, Ltd. v. Taronis 4 Techs., Inc., 435 F. Supp. 3d 622 (S.D.N.Y. 2020), citing In re Tripath Tech., Inc., Sec. Litig., No. 5 C 04 4681 SBA, 2006 WL 1009228 , at *2 (N.D. Cal. Apr. 18, 2006) (“The Settlement Shares are 6 to be issued in exchange for bona fide outstanding claims; all parties to whom it is proposed to 7 issue such securities have had the right to appear at the hearing on the fairness of the Settlement; 8 and the Settlement Shares are therefore unrestricted and freely tradeable exempted securities 9 pursuant to Section 3(a)(10) of the Securities Act of 1933, 15 U.S.C. § 77c(a)(10).”). 10 For the exemption to apply, the court must: (1) find that the person to receive shares holds 11 securities, claims or property interests that were outstanding prior to the hearing, (2) conduct a 12 fairness hearing at which all persons to whom the securities will be issued has the right to appear 13 and be heard, and (3) find that the terms and conditions of the proposed exchange are fair. See 14 Chapel Invs., 177 F. Supp. 3d at 987 . “Fundamentally, the court must find the proposed issuance 15 and exchange of securities is fair after considering the totality of the evidence.” Oceana Capital, [16] 150 F. Supp. 3d at 1224 . 17 IV. Fairness of the Proposed Exchange 18 Here, the parties have entered into the Settlement Agreement to settle the outstanding 19 claims in exchange for stock, subject to Court approval. The terms and conditions of the settlement 20 are fully set forth in the Settlement Agreement. (See Doc. 7-4.) Defendant will issue an additional 21 72,638 shares of preferred stock to Plaintiff in settlement of the outstanding claims. (Id. at ¶ 1.) 22 Given Beyond Commerce’s small market capitalization, the settlement will result in 23 significant dilution. See Crown Bridge Partners, LLC v. Sunstock, Inc., No. 18 CIV. 7632 (CM), [24] 2019 WL 2498370 , at *1 (S.D.N.Y. June 3, 2019) (when convertible securities are issued, “the 25 stock price will almost certainly drop, because the supply of shares available for purchase in the 26 market increases”). However, Discover has been selling shares of Defendant’s stock for 27 approximately three years in a manner designed to maximize its total economic return on 1 trades to alternative trading systems which allow institutional investors to trade without exposure 2 until after the trade has been executed, and reported to avoid disclosing their selling strategies to 3 the market and pushing the price down, and adjusting the number and percentage of shares sold 4 based on daily supply and demand. (Doc. 7-1 at ¶ 9.) See also ATSI Commc'ns, Inc. v. Shaar 5 Fund, Ltd., 493 F.3d 87, 106 (2d Cir. 2007) (convertible security is not manipulative, even when 6 coupled with selling). In addition, the alternative to settlement for Defendant is to incur a monetary 7 judgment it cannot afford to pay or file bankruptcy. 8 Discover is an investment fund fully aware of the significant risks involved. (Doc. 7-1 at 9 ¶ 15.) Discover has invested in convertible securities of many small public companies, which it 10 has converted into billions of shares of common stock that it resold into the public markets. (Id.) 11 Plaintiff can afford a complete loss of its investment, and is willing to accept that risk, provided 12 Defendant abides by the terms of the Settlement Agreement. (Id.) If Beyond Commerce succeeds 13 and performs, there is the potential for Plaintiff Discover to achieve a sizable return. (Doc. 7 at 14 7.) Discover is receiving preferred stock that converts at a substantial discount to the market price, 15 and it should be able to sell the common shares for more than the amount of its claims. (Doc. 7-1 16 at ¶ 10.) 17 Plaintiff is “a sophisticated investor, not in need of the protections afforded by 18 registration.” See Ackerberg v. Johnson, 892 F.2d 1328, 1337 (8th Cir. 1989); Berckeley Inv. Grp., 19 Ltd. v. Colkitt, 455 F.3d 195 , 215 (3d Cir. 2006). Plaintiff has conducted an independent market 20 analysis for Defendant’s securities, and understands both the upside potential and the downside 21 risks inherent in the settlement. (Doc. 7-1 at ¶¶ 11, 15.) Similarly, Defendant is a public company 22 whose Chief Financial Officer and board of directors have reviewed the Settlement Agreement 23 with counsel. (Doc. 9 at ¶ 10.) These factors are sufficient for the Court to find the negotiated 24 agreement between commercial parties is fair. See Chapel Invs., 177 F. Supp. 3d at 987 . 25 V. Consideration of Registration Requirements 26 If the Court approves the exchange as fair, Defendant will not be required to register its 27 shares under Section 5 of the Securities Act, 15 U.S.C. § 77e, because the shares to be issued will 1 be entirely exempt from the Securities Act. See 15 U.S.C. § 77c(a)(10), Oceana Capital, 150 F. 2 Supp. 3d at 1225. 3 In addition, Plaintiff is not required to register as a dealer under Section 15(a) of the 4 Exchange Act, 15 U.S.C. § 77o(a), because Discover is a private investor or trader, rather than a 5 dealer. Oceana Capital, 150 F. Supp. 3d at 1226 . 6 The plain language of the statute provides that the term “dealer” does not include a party 7 who buys or sells securities for its own account “but not as a part of a regular business.” See 15 8 U.S.C. § 78c(a)(5)(B). The primary meaning of the term “regular” is “usual; normal; customary.” 9 See Dictionary.com (2021). The term “regular business” as used in subsection (B) means “the 10 regular business of providing dealer services to others . . . , such as soliciting investor clients, 11 handling investor clients' money and securities, [and] rendering investment advice to investors.” 12 See Chapel Invs., 177 F. Supp. 3d at 990 . These services “distinguish the activities of a dealer 13 from those of a private investor or trader.” In the Matter of Sodorff, 50 S.E.C. 1249, 1992 WL 14 224082 at *5 n.27 (Sept. 2, 1992); Louis Dreyfus Corp. (SEC No-Action Letter), Fed. Sec. l. Rep. 15 P 78 ,526, 1987 WL 108160 *2 (July 23, 1987). 16 The plain language “part of a regular business” means that “a dealer must be engaged in 17 the securities business, and be buying and selling for his own account.” See Sodorff, 1992 WL 18 224082, at *5 (emphasis added). In Sodorff, Sodorff was deemed a dealer because he “solicited 19 investors and handled their money and securities, rendered investment advice, and sent 20 subscription agreements to investors for their review and signature, all of which are characteristics 21 of dealer activity.” Id. Discover does not engage in any of these dealer activities. (See Doc. 7-1.) 22 If it were possible for an entity whose only activities are buying and selling securities to be a dealer, 23 the statute would have said “all or part of” rather than “part of.” Cf., e.g., 18 U.S.C. § 1955 (a) 24 (“all or part of” a business), 11 U.S. Code § 1322 (b)(8) (“all or part of” a claim). “A person who 25 buys and sells securities for his own account in the capacity of a trader or individual investor is 26 generally not considered to be engaged in the business of buying and selling securities and 27 consequently, would not be deemed a dealer.” Chapel Invs., 177 F. Supp. 3d at 990 . See also 1 1986) (describing the list of factors that make someone a “trader” rather than someone “engaged 2 in the business” of buying and selling securities as a dealer). 3 Brokers and “dealers effect securities transactions for customers, for which they typically 4 charge a commission or other transaction-based fee.” XY Plan. Network, LLC v. United States Sec. 5 & Exch. Comm'n, 963 F.3d 244 , 248 (2d Cir. 2020). “Dealers regularly purchase or sell securities 6 to their customers in the ordinary course of their trade or business.” See Topic No. 429, Traders 7 in Securities. “Dealers are distinguished from investors and traders because they have customers 8 and derive their income from marketing securities for sale to customers or from being compensated 9 for services provided...” Id. Whereas a dealer buys and sells securities from its customer and to 10 its customer for a small fixed commission, investors like Plaintiff buy securities directly from 11 issuers like Defendant, often at a substantial discount, and then resell them into the public market 12 for a variable but potentially large profit. Id. 13 Accordingly, Discover should not be required to register as a dealer due to its participation 14 in the negotiation of the settlement of its claims, the exchange of the claims for shares of stock 15 pursuant to court approval, or the resale of the shares on the open market. Oceana Capital, 150 F. 16 Supp. 3d at 1225-26; Chapel Invs., 177 F. Supp. 3d at 989-90 . 17 ORDER 18 In consideration of the foregoing Findings of Fact and Conclusions of Law, 19 IT IS HEREBY ORDERED AS FOLLOWS: 20 1. The Settlement Agreement (Doc. 7-4), incorporated herein by reference, is adopted 21 and approved in its entirety; 22 2. The Court was advised prior to the hearing on the Motion for Approval of 23 Stipulation for Settlement of Claims, that Defendant would rely on the exemption of Section 24 3(a)(10) of the Securities Act of 1933, as amended, 15 U.S.C. § 77c(a)(10), and NRS 90.280(6)(c) 25 (Doc. 9 at ¶ 9); 26 3. Plaintiff Discover holds bona fide outstanding claims, the terms and conditions of 27 the exchange of the claims for shares of preferred stock of Defendant Beyond, as set forth in the 1 || at which Plaintiff Discovery, the only person to whom it is proposed to issue securities in such 2 || exchange, had the right to appear; 3 4. Defendant Beyond shall forthwith issue to Plaintiff Discover unrestricted and freely 4 || tradeable shares of its preferred stock as stated in the Settlement Agreement; 5 5. Defendant Beyond is not required to register the shares of its preferred and common 6 || stock to be issued pursuant to the Settlement Agreement, because they are exempt from the 7 || Securities Act pursuant to Section 3(a)(10) thereof; 8 6. Plaintiff Discover is not required to register as a dealer under Section 15 of the 9 || Exchange Act, because it is a private investor or trader rather than a dealer under 15 U.S.C. § 10 || 78c(a)(5)(B); and 11 7. The Settlement Agreement having been approved, this action shall be dismissed 12 || with prejudice in its entirety. 13 IT IS SO ORDERED. 15 || DATED: November 17 , 2021 Hon. Miranda M. Du 16 US. District Court Chief Judge [17] 18 || Proposed order submitted by: 19 ROBERTSON, JOHNSON, MILLER & WILLIAMSON 20 50 West Liberty Street, Suite 600 Reno, Nevada 89501 [21] 22 By: /s/ Jarrad C. Miller Jarrad C. Miller, Esq. 23 Attorney for Plaintiff [28] 1 CERTIFICATE OF SERVICE 2 Pursuant to FRCP 5(b) and Local Rule 5-4, I hereby certify that I am an employee of 3 Robertson, Johnson, Miller & Williamson, over the age of eighteen, and not a party to the within 4 action. I further certify that on the 19th day of October, 2021, I electronically transmitted the 5 foregoing [PROPOSED] MEMORANDUM AND ORDER to the following: 6 Aaron D. Shipley, Esq. McDonald Carano LLP 7 2300 W. Sahara Avenue, Suite 1200 Las Vegas, NV 89102 [8] ashipley@mcdonaldcarano.com 9 Attorney for Defendant [10] /s/ Teresa W. Stovak 11 An Employee of Robertson, Johnson, Miller & Williamson