The opinion of the court was delivered by: Hurley, District Judge
Plaintiff Securities and Exchange Commission ("Plaintiff" or "SEC") commenced this action alleging that defendants Ishopnomarkup.com, Inc. ("Ishop"), Anthony M. Knight ("Knight"), and Moussa Yeroushalmi a/k/a Mike Yoroush ("Yeroush") (collectively, "Defendants") participated in a fraudulent offering of unregistered stock and thereby violated antifraud and registration provisions of the securities law. Plaintiff now moves for partial summary judgment on its claim that Defendants violated subdivisions (a) and (c) of Section 5 of the Securities Act of 1933, 15 U.S.C. §§ 77e(a) and 77e(c) ("Section 5") by failing to file a registration statement with respect to the sale of Ishop stock. For the reasons that follow, Plaintiff's motion is denied.
The following facts are undisputed, unless noted. Knight developed the concept of Ishop -- an internet shopping mall offering products directly from manufacturers to consumers at no markup -- and helped form it in or about August 1999. To raise capital, Ishop conducted three private placement offerings of stock. In connection with these private offerings, Ishop distributed confidential offering memoranda ("COMs") to its investors. The COMs contained detailed information about each Ishop stock offering.
The first offering commenced in September 1999. Ishop's COM dated September 21, 1999 states that 5,263,157 shares of common stock were being offered by Ishop for sale at $0.19 per share to "Accredited Investors only pursuant to the exemptions from registration contained in Section 3(b) of the Securities Act of 1933, as amended . . . and Rule 504 of Regulation D . . . ." (Defs.' Ex. B at I, 6.) From October 1999 to early March 2000, Ishop sold all 5,263,157 shares to approximately 180 investors and obtained proceeds of $999,999.83. (Compl. ¶ 25; Answer ¶ 25.) According to Defendants, Ishop's attorney prepared the September 21, 1999 COM. To support this claim, Ishop proffers a September 28, 1999 memorandum from Smith McCullough, P.C. to Ishop providing that "t[h]e offering is to be made exclusively to accredited investors, pursuant to the federal registration exemption contained in Regulation D, Rule 504 adopted under the Securities Act." (Defs.' Ex. A at 1.)
During March 2000, Ishop solicited investors in a second offering of stock. In this offering, Ishop offered an unspecified number of shares at $0.75 per share. In connection therewith, Ishop again distributed the September 1999 COM to potential investors. (Compl. ¶ 25; Answer ¶ 25.) Ishop sold approximately 735,300 shares to at least 60 investors and obtained proceeds of approximately $550,000.
From approximately April 2000 to July 2000, Ishop conducted a third offering. In connection therewith, Ishop distributed a COM dated February 3, 2000, which stated that Ishop offered a maximum of 5,000,000 shares at $1.00 per share. (Defs.' Ex. E.) The COM also provided that the sale was being offered to "accredited investors only pursuant to the exemptions from registration contained in Section 4(2) of the Securities Act of 1933, as amended . . . and Rule 506 of Regulation D adopted under the Securities Act." (Id. at 1.) Ishop sold approximately 750,000 shares to approximately 115 investors, and obtained proceeds of approximately $750,000. (Compl. ¶ 32; Answer ¶ 32.)
In total, Ishop sold approximately 6,748,617 shares of stock to at least 355 investors residing in 21 different states. Ishop obtained proceeds of more than $2.3 million. (Compl. ¶ 33; Answer ¶ 33.) Ishop did not file a registration statement with the SEC with respect to any of the three sales of stock, and there was no registration statement otherwise in effect. (Compl. ¶ 34; Answer ¶ 34.)
According to Defendants, in September 2000, Ishop prepared and filed with the SEC a proposed Registration Statement to bring Ishop public. (Defs.' Rule 56.1 Stmt. ¶ 74.) Over a period of several months, the SEC provided comments and Ishop provided the requested changes and information. (Id.) Eventually, the SEC refused to approve the Registration Statement, effectively driving Ishop out of business. (Id.)
Plaintiff commenced this securities law enforcement action on September 20, 2004, alleging violations of the registration and anti-fraud provisions of federal securities law. Presently before the Court is Plaintiff's motion for partial summary judgment on its Section 5 claims. For the reasons stated below, Plaintiff's motion is denied.
I. Applicable Law and Legal Standards
Summary judgment pursuant to Federal Rule of Civil Procedure 56 is only appropriate where admissible evidence in the form of affidavits, deposition transcripts, or other documentation demonstrates the absence of a genuine issue of material fact, and one party's entitlement to judgment as a matter of law. See Viola v. Philips Med. Sys. of N. Am., 42 F.3d 712, 716 (2d Cir. 1994). The relevant governing law in each case determines which facts are material; "only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). No genuinely triable factual issue exists when the moving party demonstrates, on the basis of the pleadings and submitted evidence, and after drawing all inferences and resolving all ambiguities in favor of the non-movant, that no rational jury could find in the non-movant's favor. Chertkova v. Conn. Gen'l Life Ins. Co., 92 F.3d 81, 86 (2d Cir. 1996) (citing Fed. R. Civ. P. 56(c)).
To defeat a summary judgment motion properly supported by affidavits, depositions, or other documentation, the non-movant must offer similar materials setting forth specific facts that show that there is a genuine issue of material fact to be tried. Rule v. Brine, Inc., 85 F.3d 1002, 1011 (2d Cir. 1996). The non-movant must present more than a "scintilla of evidence," Delaware & Hudson Ry. Co. v. Consolidated Rail Corp., 902 F.2d 174, 178 (2d Cir. 1990) (quoting Anderson, 477 U.S. at 252), or "some metaphysical doubt as to the material facts," Aslanidis v. U.S. Lines, Inc., 7 F.3d 1067, 1072 (2d Cir. 1993) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986)), and cannot rely on the allegations in his or her pleadings, conclusory statements, or on "mere assertions that affidavits supporting the motion are not credible." Gottlieb v. County of Orange, 84 F.3d 511, 518 (2d Cir. 1996) (internal citations omitted).
The district court, in considering a summary judgment motion, must also be "mindful of the underlying standards and burdens of proof," Pickett v. RTS Helicopter, 128 F.3d 925, 928 (5th Cir. 1997) (citing Anderson, 477 U.S. at 252), because the evidentiary burdens that the respective parties will bear at trial guide district courts in their determination of summary judgment motions. Brady v. Town of Colchester, 863 F.2d 205, 211 (2d Cir. 1988). Where the non-moving party will bear the ultimate burden of proof on an issue at trial, the moving party's burden under Rule 56 will be satisfied if he can point to an absence of evidence to support an essential element of the non-movant's claim. Id. at 210-11. Where a movant without the underlying burden of proof demonstrates that the non-moving party's evidence is insufficient as a matter of law, the burden shifts to the non-movant to offer "persuasive evidence that [her] claim is not 'implausible.' " Brady, 863 F.2d at 211 (citing Matsushita, 475 U.S. at 587).
II. There are Genuine Issues of Material Fact as to Whether the Offerings Were Exempt from Registration
A. Registration Requirements
Sections 5(a) and (c) prohibit any person from directly or indirectly selling a security in interstate commerce unless it is registered with the SEC or is exempt from registration. 15 U.S.C. §§ 77e(a), (c). The purpose of the registration requirement is to "is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions." SEC v. Ralston Purina Co., 346 U.S. 119, 124 (1953).
"To state a cause of action under Section 5, [the SEC] must show (1) lack of a registration statement as to the subject securities; (2) the offer or sale of the securities; and (3) the use of interstate transportation or communication [or] the mails in connection with the offer or sale." S.E.C. v. Cavanagh, 445 F.3d 105, 111 n.13 (2d Cir. 2006) (citation and internal quotation marks omitted). Once the SEC has established a prima facie violation of Section 5, the burden shifts to the defendant to prove an applicable exemption or safe harbor from registration. Ralston Purina Co., 346 U.S. at 126. ...