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9/9/2018 (https://www.growthcapitalist.com/2016/05/shell-factory-charges-reverse-merger-attorney-hit-reg-offering/)
'Shell Factory' Charges Against Reverse Merger Attorney Hit Reg A Offering - Growth CapitalistGrowth Capitalist

‘Shell Factory’ Charges Against Reverse Merger

Attorney Hit Reg A Offering
By Teri Buhl | May 25, 2016

The fallout from recent charges filed by the U.S. Securities Exchange Commission against veteran microcap deal lawyer Gregg Jaclin has
delayed the closing of a prominent Reg A+ offering and may threaten the deal altogether as investors turn squeamish over the implications
of Jaclin’s involvement in the offering.

Jaclin, a legal counsel for online beauty products retailer and Reg A issuer Beautykind, was
charged with multiple counts of securities fraud and obstruction of regulatory oversight in his
role working with a L.A.-based stock promoter, Imran Husain, for nearly a decade to build public
shell companies disguised as emerging growth start-ups.

The SEC’s lawsuit was filed May 12, in U.S. District Court for Central California. Jaclin, who
resides in West Windsor, N.J., denied the SEC charges in an interview with Growth Capitalist.
The regulator is asking for Jaclin to be barred from representing penny stock companies. A penny stock bar would disqualify Jaclin from
representing issuers of Reg A securities under so-called “bad actor” rules adopted in the JOBS Act.

Growth Capitalist has learned Jaclin’s alleged co-conspirator Husain was indicted on March 20, 2014 by the United States Attorney for the
Northern District of California for attempting to cover up his role in the shell factory scheme by asking others involved in the scheme to lie to
the SEC when they were subpoenaed. He was charged with one count of conspiracy and one count of obstruction of justice.

Husain made a secret plea deal with the DOJ in October 2014 for one count of conspiracy and agreed to work undercover for the
government in their continued investigation, according to court documents obtained by Growth Capitalist. Husain’s criminal attorney, Victor
Sherman of Sherman & Sherman Law, confirmed that Husain is out on bail and has not been sentenced yet.

Jaclin was co-founder of Anslow+Jaclin, a Manalapan, N.J., law firm that was one of the most active in
representing Chinese companies seeking to become public in the U.S. via reverse shell mergers during
the reverse merger boom of 2005-2010. That boom was triggered in part by the Securities Offering
Reform Act of 2005 which clarified the rules for conducting reverse mergers and accelerated filing
disclosures surrounding reverse mergers.

The reforms gave both companies and investors greater confidence to conduct the transactions, but also
placed greater restrictions on shells and public companies formed through shell mergers. One significant
restriction was the prohibition of the use of Form S-8 and Rule 144 by holders of any shares issued by a
shell company – restrictions intended to discourage the issue of trading shares to stock promoters to pay
for pump-and-dump schemes that had plagued the reverse merger market for years. Gregg Jaclin

The shell company rule reforms made great strides in cleaning up the reverse merger market, but stock promoters quickly seized on a
loophole that allowed companies to go public without operations or assets – conditions that would otherwise result in their being considered
a shell – but avoid the classification by declaring themselves “development stage companies” pursuing an operating business. Typically,
such a company would make nominal efforts at developing its business plan before announcing a merger with a larger private operating
business.

Such reverse mergers would avoid all the trading and filing restrictions imposed by the 2005 reforms, which made development-stage
shells far more valuable than regular shells – often selling for $200,000 to $500,000 compared to $50,000 to $75,000 for regular shells.

The SEC anticipated just such schemes in a long footnote in the final release of the Reform Act rules, known as “Footnote 32.” Shells
created as development-stage companies with the intent of reverse merging into larger operating companies came to be known as
Footnote 32 shells, which the SEC made clear in the footnote that they considered shells nonetheless.

THE CLAIMS

The SEC complaint alleges Jaclin, while a partner at Anslow+Jaclin, conspired with Husain to create Footnote 32 shells with nominee
officers, and merge them into private companies in exchange for stock and cash. The agency accused the men of making false statements
in SEC filings for nine companies, seven of which were shell companies sold by Husain and Jaclin to sponsors seeking to execute reverse

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mergers.
9/9/2018 'Shell Factory' Charges Against Reverse Merger Attorney Hit Reg A Offering - Growth CapitalistGrowth Capitalist

Anslow + Jaclin participated in dozens of reverse mergers during the heyday of 2005-2010, many with Chinese companies seeking listing in
the U.S. The firm announced plans to merge with another top microcap law firm, Sichenzia Ross Friedman Ference (SRFF), in August
2011, but SRFF backed out of the merger within weeks of its announcement. At the time, rumors swirled through the microcap market that
SRFF was concerned about the liability Anslow + Jaclin held from their previous shell merger work.

Anslow and Jaclin parted ways two years later in 2013 after another merger partner didn’t surface and firm was dissolved. Anslow now
works at New York-based Ellenoff Grossman & Schole. Jaclin was made chair of the Securities Law practice group for New Jersey-
based Szaferman, Lakind, Blumstein & Blader. Both firms are active in taking emerging growth companies public.

From 2006 to 2013 Jaclin and Husain created public companies that had business plans, made financial filings with the SEC for over one
year and had what appeared to be the right number of non-affiliated shareholders, allowing them to avoid scrutiny as shell companies, the
SEC says. But in 2012, during an SEC investigation into one of the issuers called YesDTC for a possible pump-and-dump stock
manipulation, investigators began to suspect that they were really shell companies, according to court filings in the criminal case against
Husain.

The SEC says the agency discovered the companies had straw shareholders and puppet CEOs who were controlled by Husain. According
to the SEC, the only purpose of the companies was to be sold to private companies looking for a prepackaged shell that would allow them a
quicker and cheaper way to become a public company through a reverse merger.

Husain’s main job in the scheme was to find puppet CEO’s, usually women, and secure the nominee shareholders who would hide his true
ownership and control of the companies. Jaclin’s role was to stamp his law firm’s approval on the deal by issuing opinion letters that cleared
the stock for free trading and to review and file financial statements to keep up the appearance that the companies were trying to build real
businesses, the SEC says. Jaclin also did the leg work to find buyers for the shells, which sold for $215,000 to $425,000, for a total of $2.25
million, according to the SEC complaint.

Husain selected the transfer agents for the shell companies and gave them false shareholder information; then Jaclin would send false
opinion letters supporting the removal of the shares’ restrictive legends so that they could be sold into the public market, according to the
complaint. The SEC alleged both Husain and Jaclin would work with market makers to get FINRA to approve the companies for listing,
typically OTC Markets. The SEC accuses both men of misleading these service providers.

THE COVER UP

At one point during the shell factory scheme the SEC says Jaclin told Husain that he should make up email accounts with the names of the
puppet CEOs and use those emails to communicate with him for directions from the issuers instead of his personal email “so the regulators
don’t catch on,” according to documents filed in the SEC complaint. The SEC also accuses the duo of hiring a cyber consultant in 2012 to
scrub emails of one of the companies’ nominee CEOs.

“In 2012, Jaclin asked Husain, and Husain agreed, to hire a computer consultant to ‘scrub’ emails amongst Husain, Jaclin and Jaclin’s firm,”
wrote SEC attorney Amy Jane Longo in the SEC complaint. The regulator says this included email accounts of two associates who worked
for Jaclin at Anslow+Jaclin.

The efforts to sanitize Jaclin and Husain’s email records appear to have started when the SEC began an investigation of PR Complete
Holdings. Husain says he hired Christina Albice to be the CEO and sign SEC filings that stated there were no other control persons. Then
Husain says he paid someone to recruit the nominee shareholders. “In reality Albice took whatever actions were directed by me and Jaclin
and his associates. Then in 2009, PR Complete Holdings was sold, with the assistance of Jaclin, to Barry Honig, as part of a reverse
merger with a new company called YesDTC,” Husain wrote in his sworn plea agreement.

Honig is a well-known equity investor in microcap companies and has been sued for predatory deal tactics in at least three states by
investors or CEOs of the issuers. Most of the cases have not gone to trial and have settled or were dismissed. The former CEO of YesDTC,
Joseph Noel of the San Francisco Bay Area, was also indicted by the DOJ during the same time as Husain in early 2014.

Growth Capitalist obtained a plea deal signed by Noel who stated Honig found the shell to merge his company into and did all the work with
the attorneys to complete the reverse merger. Noel had been an equity analyst at Hambrect & Quist in the 90’s and had started a marketing
company called Emerging Growth Research that was renamed YesDTC in the reverse merger. In SEC filings the company was described
as a “direct-to-consumer marketer and distributor of consumer goods and products” – a description which investigators found to be more
inspirational than actual.

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promoter David Zazoff. Noel stated in his plea agreement that Honig told him, “Zazoff can make magic happen with the stock price,” but
warned him to not ask Zazoff “how he does it.”

Noel also claims Honig told him to sell some of his unrestricted stock during the pump (which Noel had hidden in a brokerage account in his
daughter’s name) and give $45,000 of the proceeds to Zazoff for his promotion work, which Noel says he did, according to the plea
agreement. When Honig was reached through his attorney, Harvey Kesner of Sichenzia Ross Friedman Ference, he said, “Noel is lying and
I deny his statements.”

Honig’s attorney also told Growth Capitalist he never acted as a control person in YesDTC. An SEC filing on January 27, 2012 signed by
Honig stated he owned 9.99% of the company and is not a control person. This filing also shows during one of the promotion campaigns
lead by Noel and Zazoff, Honig bought and sold stock.

Noel pleaded guilty to three felony counts of securities fraud in June 2014, and also agreed to work undercover with the FBI on their
continued investigation. It’s unclear if he’s been sentenced yet since some of the legal filings in his case are still sealed. The SEC also
brought an action against Noel in November 2014, after the DOJ obtained the plea deal, for his role in the stock manipulation of YesDTC.
Noel did not respond to a request for comment.

In August 2014, PR Complete’s CEO Christina Albice called Husain, worried about an SEC subpoena she had received and concerned that
she couldn’t afford a lawyer, according to sworn testimony of Husain in his plea with the DOJ. Husain claims he then called Jaclin about
Albice, who recommended calling Mark Hunter, a defense attorney Jaclin knew at New York –based law firm Taubman Hunter Fischer, to
represent her.

Jaclin told Husain he would talk to Hunter about Husain’s role in the company. Husain retained Hunter to represent Albice, who had been
asked to produce documents for the SEC investigation into PR Complete Holdings, according to Husain’s plea agreement.

Mark Hunter did not respond to a request for comment about Husain’s statements, but the firm confirmed they have worked on microcap
financings with Jaclin in the past. Jaclin said in an email sent on May 14, two days after the SEC filed suit against him, that, “I deny the
claims made by Mr. Husain in his settlement agreement and I am confident there is nothing to back up such claims.”

THE AFTERMATH

Barry Szaferman, managing partner at Szaferman Lakind, sounded shocked when reached by phone hours after the charges were
announced against Jaclin. “I am just trying to figure out what is going here,” he said, and confirmed Jaclin still worked for the firm.
Szaferman followed up with Growth Capitalist the next day to say none of the shells mentioned in the SEC complaint were created or
merged while Jaclin worked at his firm and said the firm is still investigating the matter. Szaferman wouldn’t comment when asked whether
Jaclin had told him about the tolling agreement he had signed with the SEC attorneys in Los Angeles a few weeks prior to the lawsuit being
filed in federal court.

Jaclin has moved on from shell mergers to the latest alternative public offering de jeure, Reg A+. When the SEC action against him was
announced, Jaclin was days from closing an offering for his first Reg A+ client, BeautyKind, an online cosmetics company which had filed to
raise $10 million and list on the OTCQX. Upon learning of the SEC action, Jaclin was fired as outside counsel, according to Rick Van
Warner, a BeautyKind spokesman.

“We were shocked to learn about the charges against Jaclin and immediately severed our relationship with his firm. Neither our
management nor investors had ever worked with the firm or him previously and knew nothing about his prior activities until Friday,” Van
Warner said.

Beautykind is conducting a best efforts offering exclusively lead by investment bank W.R. Hambrecht + Co. Whitney White, who heads
Hambrecht’s East Coast operations, told Growth Capitalist he had put Jaclin on a list of lawyers issuers could choose to prepare Reg A
offerings for SEC approval, after he met him at a conference and Jaclin told him he wanted to get into Reg A deals. White says the firm
didn’t recommend Jaclin though, and felt blindsided when the charges were announced.

Jaclin wrote the legal opinion letter for BeautyKind’s offering. Upon learning of the SEC action the company delayed its anticipated mid-May
closing of its offering so that it could hire a new counsel. As of May 24, Hambrecht’s website noted the offering’s closing date as “TBD.” No
additional filings have been made by the company since the SEC action was announced.

Beautykind's Van Warner said that Jaclin played a very small role in the company's offering, with most of the legal work done by associates
working under him. He said the company had not lost a single investor due to the incident. But others involved in the deal said news of the
SEC action against their deal counsel had shaken the confidence of some of the offering's larger commitments.

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Jaclin is still working on financing
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The office of the U.S. Attorney in Northern California who is running the criminal case against Husain would not confirm if there were
additional criminal indictments in the offing. Husain’s attorney, Victor Sherman of Santa Monica-based Sherman and Sherman Law, told
Growth Capitalist he thought criminal charges would follow shortly. Jaclin is being represented by Denver-based attorney Jeffery R. Thomas
of Thomas Law, who declined to comment.

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