The Tribune

• ‘Should not need loan’ to pay investors, issuers

• Regulator: ‘Pipeline’ income forecast overblown

• Says wind-up critical for ‘capital market integrity’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

ArawakX’s use of a loan from its largest investor to pay sums due to crowd-funding issuers and subscribers creates “the irresistible inference” it was using client funds to cover operating expenses, regulators charged yesterday.

Christina Rolle, the Securities Commission’s executive director, alleged in an October 5, 2023, affidavit that The Bahamas’ first-ever crowd-funding platform “should not have needed to seek a loan” from James Campbell, the former Colina Insurance Company president, as it should have been holding the required funds “in a fiduciary capacity”.

The capital markets regulator’s top executive, in legal filings designed to rebut ArawakX’s assertion that it remains solvent and has committed no regulatory or governance breaches to justify its winding-up, said loan agreements with P J Enterprises, Mr Campbell’s company, showed the proceeds were partially earmarked to pay sums due to companies that had raised equity capital via the platform or investors that had subscribed to such issues.

Ms Rolle said $95,500 would be used to finance a “payout” to Red Lobster, the restaurant brand which was ArawakX’s first successful crowd-fund raise. Another $9,257 was to be allocated to cover Securities Commission “issuer fees”, while another later loan was to finance a $68,486 “refund” to an investor who had subscribed for shares in the unsuccessful Mifi offering.

Referring to “the use of client funds to fund the operations” of ArawakX, the Securities Commission chief alleged: “The Commission notes that in the case of each of these stated purposes, the respondent [ArawakX] should not have needed to seek a loan for these purposes as they should have been holding the required client funds in a fiduciary capacity.

“Based on this documentation, there is in the Commission’s judgment the irresistible inference that the respondent used client or fiduciary funds to defray shortfalls in the respondent’s financial obligations to other parties.” ArawakX has previously countered that the investor involved with the Mifi “refund” had agreed to convert those funds into an equity stake in the crowd-funding platform itself.

D’Arcy Rahming senior, ArawakX’s chairman and chief executive, was last night understood to be off-island and could not be reached for comment before press time last night. However, Ms Rolle reiterated her position that the crowd-funding platform’s solvency and other woes are “insurmountable and, as such, the respondent must be wound-up.

“The appointment of a provisional liquidator is immediately necessary in order for further investigation to be done of the books and records of the respondent,” she added. “Based on all of the outstanding issues identified in this and the principal affidavit to-date, the continued operation of the respondent would be detrimental to the interest of the investing public.

“In meeting the Commission’s mandate to protect investors, the Commission is obliged to pursue the winding-up.... The winding-up of the respondent is necessary for the protection of the investing public and to maintain the integrity of the capital markets in The Bahamas.”

The Securities Commission is seeking the appointment of Ecovis Bahamas accountant, James Gomez, as ArawakX’s provisional liquidator. The Supreme Court will determine if this happens at an October 13 hearing, where both sides will present their respective arguments for and against why the crowd-funding platform should be wound-up.

Mr Rahming earlier this week accused the Securities Commission of being too focused on accounting matters when examining ArawakX’s solvency. He argued that it was neglecting a $70m-strong crowd-funding “pipeline” of companies who wanted to raise equity capital from investors via its platform - which, with issuer fees of 10 percent, would translate into up to $7m of fee income if all business came through.

Such a “pipeline forecast” was included among documents attached to Ms Rolle’s affidavit. “You will find the active pipeline of companies that represent a capital demand of over $60m,” ArawakX informed the Securities Commission. “These companies are at different stages of onboarding with an objective to be listed on the platform by the end of the year.

“There are other companies that we are in discussions with but are still being evaluated or working with their respective business development managers to fine-tune their products to meet our requirements. The companies represent a wide range of industries, and include companies from outside of The Bahamas seeking to raise capital and establish a presence locally, as well as local companies seeking to grow and expand their operations outside of The Bahamas.”

This, though, made little impression on Ms Rolle and the Securities Commission. She reiterated the regulator’s position that it cannot include unearned revenues or income in its calculation of ArawakX’s solvency. “Tied to the respondent’s solvency claim is the assertion that there is pipeline business that should be considered by the Commission,” she acknowledged.

“In its assessment of the solvency and financial fitness of its registrants, the Commission is not able to entertain hypothetical projections about future earnings. The respondent should be aware of this and the Commission is gravely concerned that they would make such assertions nonetheless.”

Ms Rolle, though, said that “notwithstanding the Commission’s inability to consider the pipeline business as a solution for insolvency”, the regulator had reviewed the forecast provided by ArawakX on May 8, 2023, which projected that it could earn fee income of between $2.4m to $4.7m from the crowd-fund offerings it had potentially lined up.

However, the Securities Commission chief alleged that, based on its analysis and ArawakX’s past fee earnings, the projections were likely overblown. “There were 24 potential companies listed, of which six offerings were already concluded,” Ms Rolle said. “Of the six concluded offerings, four were successful raises and two failed.

“From the six concluded offerings, the respondent projected maximum fees of $1.16m whereas the actual success fees totalled approximately $254,000. Of the remaining 18 companies, seven companies are indicated as having a listing agreement with the respondent, three companies are indicated as having a non-binding Memorandum of Understanding (MoU) or agreement, and seven companies have no agreement.”

While the latter category all possessed a letter from Winston Rolle, ArawakX’s chief of equities, requesting confirmation of their continued interest in listing, Ms Rolle alleged: “Based on the historical success rates of the six concluded listings (with a 67 percent success rate and 32.56 percent actual versus projected fees on successful raises, the Commission estimates that the respondent could reasonably project income of approximately $806,411 on their pipeline of 18 companies.

“Given that only seven of the 18 are indicated as having a listing agreement, that projection should be reduced to approximately $176,703.” As a result, the Securities Commission chief implied this will do little to address ArawakX’s solvency concerns in the regulator’s eyes.