Originally Syndicated on April 20, 2024 @ 2:21 am
The case against CAN Capital, Inc. highlights the profound impact that regulatory investigations can have on a company’s operations and reputation. The recent SEC complaint against CAN Capital—a leading provider of merchant cash advances (MCAs) and small business loans—uncovers major concerns related to its financial disclosures and business practices. In this blog, we will delve into the details of the SEC’s allegations, the resulting effects on CAN Capital, and the broader implications for investors and the financial industry as a whole.
CAN Capital: Overview
CAN Capital, Inc. is a financial services company providing alternative financing solutions to small and medium-sized businesses. Founded in 1998, CAN Capital emerged as one of the first companies to address the challenges small businesses faced in securing working capital from traditional lenders.
CAN Capital, a provider of business loans, focuses on simplifying the borrowing process for small businesses through its partnership with WebBank. The company offers streamlined application procedures, flexible funding options, and access without personal asset collateral. It uses advanced technology and proprietary risk models to evaluate business performance and determine lending eligibility.
CAN Capital has facilitated over $7 billion in working capital to over 81,000 businesses, empowering them to grow and navigate financial challenges.
The Allegations: Misleading Investors and Failing to Disclose
The central accusation in the SEC’s lawsuit is that in a 2014 securitization offering, CAN Capital deceived investors. This $191 million offering consisted of a pool of small business loans and merchant cash advances. CAN Capital pledged to keep a certain percentage of performing assets in this pool, according to the SEC. In particular, accounts were to be deemed non-performing and eliminated from the pool if they were not paid for thirty-two days in a row.
CAN Capital is accused by the SEC of breaking this commitment. Alternatively, the business provided “grace days”—brief forbearances that prolonged the time frame prior to an account being labeled as non-performing. A securitization that included non-performing assets worth millions of dollars was made possible since investors were not informed of this practice. Investors suffered large losses by November 2016, especially those who held Class B subordinated notes as a result of these hidden tactics.
The Impact on CAN Capital, Inc
1. Legal and Financial Repercussions
The SEC’s complaint has resulted in a permanent injunction against CAN Capital, which bars the company from further violations of federal securities laws. While CAN Capital did not admit to or deny the allegations, the consent to permanent injunctive relief indicates a serious regulatory stance against the company’s practices.
The financial ramifications have been substantial. The failed securitization led to a rapid amortization event where excess cash flows were used to repay outstanding debt, leaving investors in the Class B notes with substantial losses—over $7 million. This financial strain underscores the severe impact of regulatory and compliance failures on investor returns.
2. Damage to Reputation
Beyond the immediate financial consequences, the damage to CAN Capital’s reputation is significant. The revelations about misleading investors and failing to follow its own policies could lead to diminished trust from both investors and clients. In the financial services industry, trust and credibility are paramount, and rebuilding them after such a scandal can be a daunting task.
3. Operational Changes
The case has highlighted serious deficiencies in CAN Capital’s internal controls and processes. Issues with grace days and the misclassification of assets reveal a lack of robust systems to manage and report asset performance accurately. Moving forward, CAN Capital will need to overhaul its operational procedures and strengthen its compliance mechanisms to prevent future infractions.
Broader Industry Implications
The CAN Capital case serves as a cautionary tale for other financial institutions, especially those dealing with securitizations and alternative financing. It underscores the importance of:
Transparency: Accurate and comprehensive disclosure of financial practices is crucial. Companies must ensure that all material information is shared with investors to avoid misleading them.
Compliance and Controls: Robust internal controls and compliance programs are essential to manage financial assets and adhere to regulatory requirements. This includes clear policies on asset classification and performance reporting.
Investor Relations: Maintaining open and honest communication with investors can mitigate the impact of financial troubles and prevent a loss of confidence.
Summary
The CAN Capital case is a vivid reminder of the critical importance of transparency and adherence to financial regulations. The company’s missteps not only led to significant financial losses for investors but also damaged its reputation and highlighted systemic issues in its operational processes. For investors and industry professionals, it underscores the need for rigorous oversight and integrity in financial reporting and asset management.
As CAN Capital works to address the fallout from this case, it will face the dual challenge of restoring its reputation while implementing necessary changes to regain investor trust and ensure compliance with financial regulations.
