We have been researching Reg D offerings. You can read our previous posts "Reg D Offerings Summary Statistics" here and "$8 Trillion of Broker-Sold Reg D Offerings" here. You can download and print or email this post by clicking here.
In our research, we have come across thousands of interesting Reg D Offerings. HJ Sims Reg D Offerings provide great examples of potential Reg D mischief.
The Reg D exemption from registration requirements is supposed to help small operating firms raise capital. What we observe, at least with the HJ Sims offerings, is sophisticated finance professionals using this exemption to dramatically increase their wealth at the expense of investors.
The HJ Sims Offerings
HJ Sims sold 93 Reg D Offerings totaling $2.2 billion in the past 10 years. Summary information on these 93 offerings can be found in Appendix 1. HJ Sims was the sole brokerage firm selling 84 of the 93 offerings and participated in sales for the other nine. HJ Sims' executives also appear to have created and controlled almost all the issuers of the Reg D securities it sold in the past 10 years.[1]
We observe additional information from customer account statements on 45 of the 93 HJ Sims Reg D offerings listed in Table 1. We also searched state registration records to determine whether the issuers had filed recent annual registration updates.
43 of the 45 issuers listed in Table 1 were registered in Connecticut. Most of them have not filed annual registration forms in 2021 or 2022 required by Connecticut. The "Account Status" column reflects whether the debt securities have been redeemed, defaulted or are still held on account statements. The issuers of 20 of 24 HJ Sims' Reg D securities we observe on recent account statements have not filed these required state forms.[2]
HJ Sims executives owned and/or controlled most of the issuers of Reg D bonds that Sims sold to clients. If a Sims' Reg D offering failed, the executives would suffer a portion of the losses but realize all the gains if an offering succeeded. Thus, in addition to commissions and other fees associated with the offering, HJ Sims executives stood to reap substantial profits while bearing only a small portion of the potential losses on the over $2 billion in Reg D bonds it sold to clients.
An example of this "heads HJ Sims wins, tails their investors lose" strategy is Merrill Gardens V, LLC. HJ Sims executives created this legal entity to buy equity interests in a Reg D offering called RDM Housing Strategies V, LLC and issue Reg D debt securities which Sims then sold to its retail clients. If the RDM Housing Strategies V, LLC succeeded, HJ Sims executives kept all the profits and if RDM Housing Strategies V, LLC failed, Sims' retail customers bore most of the losses. Merrill Gardens V investors were simply providing an unsecured loan to HJ Sims executives to fund the executives' investment in RDM.[3]
Far from being an efficient way for operating companies to raise capital, the Reg D program at HJ Sims appears to have simply been a way for Sims executives to place large bets with their clients' money, keeping any gains for themselves and shifting most of the losses onto its retail clients. HJ Sims ability to shift losses to its clients would naturally lead it to invest in riskier projects with unusually high likelihood of failure.
Defaults Are Common Among HJ Sims Reg D Offerings
Given HJ Sims incentives to take extraordinary risks with its clients money, perhaps it is not surprising that a large number of HJ Sims Reg D offerings defaulted and have become virtually worthless.
At least 10 of the 45 HJ Sims offerings have defaulted on interest and/or principal payments. HJ Sims valued the 10 defaulted bonds discussed below at an average price of $75 per $100 long after the Issuers (8 of which were owned and/or controlled by HJ Sims executives) defaulted on interest or principal payments. These bonds were likely worth no more than $30 on average at the time they first missed an interest or principal payment. They were ultimately worth almost nothing after missing many more payments including maturity payments yet HJ Sims values them at $75 on average.
Defaulted HJ Sims Offerings
1. HJ Sims executives organized Cypress Point Funding, LLC in 2016 and filed Form D on May 4, 2016 to issue $3,000,000 bonds due April 1, 2023. Cypress Point Funding, LLC defaulted on interest payments due July 1, 2020 and October 1, 2020, and was liquidated at $16.67 on December 10, 2020.
HJ Sims valued Cypress Point Funding, LLC bonds issued by an entity its executives owned and/or controlled at $80 per $100 after the bonds defaulted. HJ Sims valued these bonds at $80 on November 30, 2020 even though it made a final liquidation payment of $16.67 just 10 days later. HJ Sims executives who controlled Cypress Point Funding, LLC must have known long before November 30, 2020 that investors were going to only receive approximately $16.67 in liquidation and yet HJ Sims continued to value these bonds at $80. As we explain below, defaulted bonds drop in value dramatically and long before a default. These bonds were very likely worth 20 or 30 cents per dollar when HJ Sims was valuing them at $100 and $80 on customer account statements.
Figure 1 shows the statement prices and key events of the Cypress Point Funding bonds.
Figure 1: HJ Sims Account Statement Prices and Key Events of Cypress Point Funding, LLC Bonds Due April 1, 2023 (CUSIP 23281HAB0)
2. HJ Sims executives organized Gryphon Finance I, LLC in 2014 and filed Form D on September 16, 2014 to issue $2,000,000 bonds due October 1, 2024. Gryphon Finance I, LLC defaulted on principal payments due October 1, 2020 and afterwards, and paid reduced interest since.
HJ Sims valued Gryphon Finance I, LLC bonds, issued by an entity its executives owned and/or controlled, at $85 per $100 after the bonds defaulted. We observe these bonds on recent HJ Sims customer account statements valued by HJ Sims at $85 despite missing 9 quarterly interest payments. These bonds were very likely worth 20 or 30 cents per dollar when HJ Sims was valuing them at $100 and $85 on customer account statements.
Figure 2 shows the statement prices and key events of the bonds.
Figure 2: HJ Sims Account Statement Prices and Key Events of Gryphon Finance I, LLC Bonds Due October 1, 2024 (CUSIP 400511AB7)
3. HJ Sims executives organized Hawkeye Village Finance I, LLC in 2014 and filed Form D on November 4, 2014 to issue $11,000,000 bonds due October 30, 2020. Hawkeye Village Finance I, LLC defaulted on interest payments due May 1, 2016 and afterwards.
HJ Sims valued the Hawkeye Village Finance I, LLC bonds, issued by an entity its executives owned and/or controlled, at $60 per $100 after the bonds October 30, 2020 maturity date despite the bonds not paying interest for more than four years and failing to make any payment when the bonds came due. HJ Sims clients received a distribution of $10.227272 per $1,000 in February 2021 - only 1% of the amount which had been due October 30, 2020. These bonds were almost certainly nearly worthless since 2017 despite still currently being valued on HJ Sims account statements at $50 per $100.
Figure 3 shows the statement prices and key events of the bonds.
Figure 3: HJ Sims Account Statement Prices and Key Events of Hawkeye Village Finance I, LLC Bonds Due October 30, 2020 (CUSIP 42020PAB8)
4. HJ Sims executives organized HJSI Athena Portfolio Finance, LLC in 2015 and filed Form D on December 23, 2015 to issue $41,660,000 bonds due April 1, 2026. HJSI Athena Portfolio Finance, LLC partially delayed the interest payment due October 1, 2021, and made a reduced interest payment due April 1, 2022.
HJ Sims valued the HJSI Athena Portfolio Finance, LLC bonds issued by an entity its executives owned and/or controlled, at $95 per $100 after the bonds defaulted. These bonds are likely worth less than 20 or 30 cents per dollar but are currently being valued on HJ Sims account statements at $95 per $100.
Figure 4 shows the statement prices and key events of the bonds.
Figure 4: HJ Sims Account Statement Prices and Key Events of HJSI Athena Portfolio Finance, LLC Bonds Due April 1, 2026 (CUSIP 40423HAB3)
5. HJ Sims executives organized Madison Funding I, LLC in 2019 and filed Form D on July 3, 2019 to issue $5,115,000 bonds due June 1, 2024. Madison Funding I, LLC defaulted on principal payments due March 1, 2021 and afterwards, and paid reduced interest since.
HJ Sims valued the Madison Funding I, LLC bonds issued by an entity its executives owned and/or controlled, at $100 per $100 after the bonds defaulted. HJ Sims continues to value these defaulted bonds on customer account statements at $100.
Figure 5 shows the statement prices and key events of the bonds.
Figure 5: HJ Sims Account Statement Prices and Key Events of Madison Funding I, LLC Bonds Due June 1, 2024 (CUSIP 557491AB3)
6. HJ Sims executives organized Poet's Walk Funding I, LLC in 2018 and filed Form D on December 13, 2018 to issue $10,000,000 bonds due December 1, 2028. Poet's Walk Funding I, LLC made reduced interest payment due December 1, 2021, missed interest payment due March 1, 2022, and paid reduced interests due June 1, 2022. Poet's Walk Funding I, LLC also defaulted on principal payments due March 1, 2022 and June 1, 2022.
HJ Sims, valued the Poet's Walk Funding I, LLC bonds issued by an entity its executives owned and/or controlled, at $90 per $100 after the bonds defaulted. HJ Sims continues to value these defaulted bonds on customer account statements at $90.
Figure 6 shows the statement prices and key events of the bonds.
Figure 6: HJ Sims Account Statement Prices and Key Events of Poet's Walk Funding I, LLC Bonds Due December 1, 2028 (CUSIP 73045AAA9)
7. HJ Sims executives organized Riverchase Funding, LLC in 2015 and filed Form D on November 30, 2015 to issue $3,650,000 bonds due December 1, 2022. Riverchase Funding, LLC defaulted on interest payments due January 1, 2020 and afterwards.
HJ Sims valued the Riverchase Funding, LLC bonds issued by an entity its executives owned and/or controlled, at $70 per $100 three years after the bonds defaulted and just months before the bonds' maturity. These Riverchase Funding bonds are very likely worthless.
Figure 7 shows the statement prices and key events of the Riverchase Funding, LLC bonds.
Figure 7: HJ Sims Account Statement Prices and Key Events of Riverchase Funding, LLC Bonds Due December 1, 2022 (CUSIP 768579AB0)
8. HJ Sims executives organized Sims Cathcart Funding, LLC in 2012 and filed Form D on June 3, 2013 to issue $6,260,000 bonds due June 1, 2023. Sims Cathcart Funding, LLC paid reduced interest due October 1, 2020 and April 1, 2022.
HJ Sims valued the Sims Cathcart Funding, LLC bonds, issued by an entity its executives owned and/or controlled, at $100 per $100 after the bonds made reduced interest payments.
Figure 8 shows the statement prices and key events of the bonds.
Figure 8: HJ Sims Account Statement Prices and Key Events of Sims Cathcart Funding, LLC Bonds Due June 1, 2023 (CUSIP 82915TAB4)
9. Tuscan Isle ChampionsGate Holdings, LLC was organized in 2015 and filed Form D on March 29, 2016 to issue $6,800,000 bonds due May 1, 2023. Tuscan Isle ChampionsGate Holdings, LLC defaulted on interest payments due May 1, 2019 and afterwards.
These bonds received a $58.823529 per $1,000 (5.8%) final default distribution on November 1, 2022. They are almost certainly worthless despite still being recently valued on HJ Sims account statements at $45 per $100.
Figure 9 shows the statement prices and key events of the bonds.
Figure 9: HJ Sims Account Statement Prices and Key Events of Tuscan Isle ChampionsGate Holdings, LLC Bonds Due May 1, 2023 (CUSIP 90069JAB3)
10. Tuscan Isle Holdings 1, LLC was organized in 2014 and filed Form D on January 29, 2015 to issue $6,200,000 bonds due December 1, 2022. Tuscan Isle Holdings 1, LLC made a reduced interest payment on February 1, 2019 and missed interest payments due May 1, 2019 and afterwards.
HJ Sims recently continues to value these defaulted, likely worthless, bonds at $40.4 per $100.
Figure 10 shows the statement prices and key events of the bonds.
Figure 10: HJ Sims Account Statement Prices and Key Events of Tuscan Isle Holdings 1, LLC Bonds Due December 1, 2022 (CUSIP 90069EAB4)
Bond Prices Decline Substantially Well Before the First Payment Default
Figure 11 below shows the average price of 110 corporate bonds that defaulted on principal or interest payments between January 1, 2019 and October 31, 2022 and have issue price and TRACE prices available on Bloomberg 1 year preceding their default dates. As we can see, corporate bond prices drop dramatically prior to the first default.
Figure 11: Market Price (as % of Issue Price) of Unsecured Corporate Bonds 1 Year Preceding the Default
Appendix 1 HJ Sims Reg D Offerings 11/2012 - 11/2022
# CIK Issuer Date Filed Amount State Registration Status
[1] HJ Sims' executives are listed as related persons on almost all the Form D filings for the 93 HJ Sims Reg D Offerings. These executives appear to own or control the legal entities issuing the debt securities that HJ Sims was selling to its clients.
[2] By November 18, 2022 - three days after we posted this report on November 15, 2022 - Sims had made all its delinquent Connecticut state registration filings.
[3] We previously inadvertently combined elements of two different Sims offerings in this example. The post initially referred to Madison Funding 1, LLC when it should have referred to Merrill Gardens V, LLC.
