If you’re raising private capital—even from friends or small groups—think twice before diverting investor funds for personal or unauthorized purposes. Recent Securities and Exchange Commission (SEC) enforcement actions show that smaller, private offerings are not flying under the radar. And the consequences for misusing investor money can be severe: including disgorgement, lifetime bans, and even prison.
In past years, it seemed the SEC only focused on cases involving millions in investor losses, but the cases below demonstrate the current SEC means business, even for small offerings involving misappropriation of investor funds. Below are three cases excerpted from just one SEC weekly bulletin that drive home this point:
1. Securities and Exchange Commission v. Diana Mae Fernandez
From 2018 to 2020, Diana Mae Fernandez raised $364,000 from at least 20 investors by portraying herself as a savvy businesswoman with access to “no-risk” investments. Instead of investing the money, Fernandez used it for personal expenses, luxury hotel stays, and to make Ponzi-like payments to earlier investors.
Consequences:
- Criminal sentence: 33 months in prison and $330,000 in restitution/forfeiture
- SEC sanctions: Permanent injunction from securities offerings and violations of certain antifraud provisions of securities laws
- Disgorgement: $296,021 – satisfied through criminal forfeiture
2. Securities and Exchange Commission v. Joshua Thomas Jackson
From 2019 to 2021, Joshua Jackson raised over $2.6 million through promissory notes from 13 investors. He told investors their funds would be used to acquire and renovate properties or fund development projects—promising monthly interest and profit sharing, secured by real estate. In reality, Jackson used much of the money on unrelated properties, personal expenses, and to repay earlier investors.
Consequences:
- SEC seeks permanent injunctions, conduct-based restrictions, disgorgement, and civil penalties
3. Securities and Exchange Commission v. Nicholas A. Palazzo, 4TA Sports, Inc., NP Ventures Holdings, LLC and Play Caller Sports Gaming LLC
Former Harvard football player Nicholas Palazzo ran two fraudulent offerings. In one, he raised $900,000 to buy back a sports media company’s assets; in another, he raised $2.2 million to launch a sports betting app. Palazzo diverted most of the funds to personal use—including private school tuition, Disneyland trips, and rent—misleading investors, including former teammates and a professional athlete.
Consequences:
- Disgorgement: Over $2.6 million, jointly and severally with corporate entities
- Civil Penalty: $150,000
- Bars: 5-year prohibition from serving as officer/director or engaging in securities offerings
- Permanent injunctions for violating certain antifraud provisions of securities laws
Key Takeaways
- Smaller private offerings are not immune from SEC scrutiny. These were not billion-dollar deals—yet the SEC still took action. Offerings as small as $364,000 led to federal enforcement and jail time.
- “Borrowing” investor money is a form of fraud. Even if you plan to pay it back, using investor funds for personal expenses or non-disclosed purposes can result in civil and criminal charges.
- Misuse = Misappropriation = Enforcement. If your offering documents say funds will be used to buy real estate or develop a product, don’t use that money for rent, personal luxuries, or travel.
- Intent doesn’t excuse impact. None of these cases involved mistakes. They involved misrepresentations, diversions of funds, and broken promises.
- The SEC enforces the law—even when investors are friends, teammates, or private individuals.
Final Word:
If you’re raising capital—whether through a syndicate, fund, or direct offering—get competent corporate securities legal advice, stick to your offering documents, and treat investor money with the highest fiduciary care. Missteps, even small ones, can destroy your reputation, finances, and freedom. And don’t forget that there are also 50+ state and territorial securities agencies who are ready, willing and able to take enforcement action against you if you don’t play by the rules.
