The Securities and Exchange Commission today announced settled charges against Eastone Equities, LLC (“Eastone”), which funds and develops real estate projects, and its owner Kevin Yu, arising out of an unregistered offering of $1.4 million in promissory notes in 2019. According to the SEC’s order, the private placement memorandum for the offering stated that Eastone would use the proceeds of the offering to fund the development of a hotel in Long Island City, New York (“the LIC Hotel Project”). Before the offering was initiated, Eastone and various Eastone affiliates owned and controlled by Yu loaned the affiliated developer of the LIC Hotel Project a total of $1,250,000. Approximately $1,225,472 — 85% of the offering proceeds — were used to repay the loans Yu’s affiliated companies had made to fund the LIC Hotel Project, instead of being used to further develop the project. Investors were not told that the proceeds of the note offering would be used to repay the loans from affiliates.  

The SEC’s order also finds that Eastone conducted the offering of the notes in reliance on Rule 506(c) of Regulation D of the Securities Act of 1933 (“Securities Act”), but Eastone failed to take reasonable steps to verify that all investors were accredited investors.    

The Order finds that Eastone violated Securities Act Sections 5(a), 5(c), 17(a)(2), and 17(a)(3) and that Yu violated Sections 5(a) and (c) of the Securities Act and caused Eastone’s violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act. Without admitting or denying the findings in the SEC’s order, Eastone and Yu consented to a cease-and-desist order, and each agreed to pay a $125,000 civil penalty. Eastone also agreed to retain an independent compliance consultant to evaluate Eastone’s policies and procedures and recommend new or revised policies or procedures aimed at ensuring compliance with the federal securities laws in the offering of securities.

Jeffrey Newman is a whistleblower lawyer and former reporter, whose firm represents whistleblowers in healthcare fraud cases under the False Claims Act (FCA) and also under the Securities and Exchange, FINCEN and CFTC whistleblower programs. He can be reached at Jeff@JeffNewmanLaw.com or at 617-823-3217