FINRA Lawyer Blog
On September 6, 2022, the SEC issued an order instituting administrative and cease-and-desist proceedings against Perceptive Advisors LLC (“Perceptive”) a New York based investment adviser. In anticipation of the institution of the proceedings, Perceptive and the SEC entered into a Settlement.
Perceptive provides investment advisory advice to pooled investment vehicles and according to its March 31, 2022 Form ADV it had approximately $10.36 billion in assets under management. One of Perceptive’s investment vehicles is the Perceptive Life Sciences Master Fund, Ltd. (the “PSLM Fund”).
The gravamen of the SEC’s order revolves around Perceptive’s activities concerning special purpose acquisitive companies (“SPACs”). A SPAC is generally a publicly-traded, shell company which raises money, through an IPO, for the purpose of acquiring other, privately held companies. SPAC’s have “sponsors” that launch the IPO and generally manage the business of the SPAC, including the process of acquiring target companies. The sponsor is typically compensated on a percentage (often 20% to 25%) of the SPAC’s initial public offering proceeds (in the form of discounted shares and, at times, warrants). This compensation is sometimes referred to as the sponsor’s “promote” or “founder shares,” and it is received upon completion of a SPAC’s acquisition of a target company.
In 2018, Perceptive formed a SPAC and the sponsor was 100% owned by THE PSLM Fund. Subsequently, Perceptive formed three additional SPACs; however, unlike the first SPAC, five of Perceptive’s “supervised persons” took an ownership interest in the sponsors (20% for two of the funds and 30% for the last).
The order goes on to explain how this ownership interest by Perceptive personnel creates conflicts of interest for Perceptive. For example, because the five individuals only earn their compensation as sponsor owners’ when a SPAC makes an acquisition they had an incentive to engage in business combination even though transaction was not necessarily in the best interest of their advisory clients.
The order also noted that Perceptive’s conflict could, and apparently did, cause Perceptive to cause the PSLM Fund to make an investment that would assist the SPAC in completing their acquisitions. The order notes the PSLM Fund purchased stock of two of the SPACs on the open market just prior to closing business combinations.
According to the Commission, Perceptive failed to disclose this conflict to the board of directors of the PSLM Fund. In addition, Perceptive made material misstatements and omissions concerning the SPAC to investors in the PSLM Fund by failing to disclose that Perceptive personnel owned an interest in the sponsor. In a July 28, 2020 email communication, Perceptive stated that the PLSM Fund does not participate in the SPAC outside of the sponsor shares when in fact, at that point in time, the PSLM Fund had already engaged in two PIPE transactions to support acquisitions by the SPACs.
Among other things, the Commission found that Perceptive, “willfully violated Section 206(2) of the Advisers Act, which makes it unlawful for any investment adviser, directly or indirectly, to ‘engage in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client.’” The SEC also found the Perceptive violated Advisors Act Section 206(4) which makes it unlawful for any adviser to a pooled investment vehicle to, “make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading . . . .” The Commission noted that only a finding of negligence is required to show a violation of Section 206(2) and Section 206(4) of the Advisors Act.
For the conduct described above, Perceptive agree to pay a civil, monetary penalty of $1.5 million along with the usual order to cease-and-desist from committing or causing future violations of the same Advisers Act and Exchange Act Rules.
Herskovits PLLC has a nationwide practice defending companies and individuals subjected to SEC investigations. Feel free to contact us at (212) 897-5410.