Dive Brief:

• Music streaming business Akazoo S.A. agreed to pay $38.8 million to settle charges it defrauded investors in a special purpose acquisition company (SPAC) that merged with it in 2019, the Securities and Exchange Commission says. 
• Akazoo, an emerging-markets music streaming business, told investors in Modern Media Acquisition Company, the SPAC that merged with it, that it had more than 38.2 million registered users, 4.6 million paying subscribers, and more than $120 million in annual revenue, when in fact it had no paying users and only negligible revenue, the SEC alleges. 
• Based on its misrepresentations, the SEC says, the company entered into the SPAC business combination, generating about $14 million from the SPAC and another $41 million from a private investment in public equity (PIPE) that the SPAC had arranged. 

Dive Insight:

The SEC began looking into the company in 2020 after its operations were exposed by a short seller and the company's board opened an internal investigation that led to its filing a 6-K. The filing disclosed the potentially fraudulent actions of former members of Akazoo’s management team and associates.

"Akazoo admitted that it had only negligible revenue and subscribers, its historical financial statements were materially false and misleading, and 'former members of Akazoo management and associates participated in a sophisticated scheme to falsify Akazoo’s books and records,'" the SEC says in its complaint.

Shortly after the 6-K filing, Nasdaq halted trading in Akazoo’s stock, whose price had fallen from a high of $7.49 in the weeks following its formation to $1.16, and then a month later it delisted the company.

The SEC froze the company's assets after it had depleted more than $23 million of investor funds.

Misrepresentations

During the roughly eight months the company traded on Nasdaq, it made a number of materially false claims, including that it operated in 25 countries, its premium subscribers had grown to 5.3 million, and its revenues at one point were growing almost 40% year-over-year.   

"As Akazoo would soon admit to the public, none of its repeated claims about its subscriber base, operations, or revenues were true," the SEC says. "Akazoo’s streaming business generated, at most, negligible revenue from September 2019 through May 2020. The company operated in only a few countries, and the company had only a marginal amount of non-revenue generating subscribers. Rather, the company’s only significant source of funds during that time was the $54.8 million raised from investors."

 In its settlement with the SEC, without admitting or denying guilt, the company agreed to disgorge the roughly $38.8 million in capital it had as a result of the asset freeze. Of that amount, about $35 million will go to investors who were misled into giving the company money and settlements in connection with several private class action lawsuits.

"One goal in filing [the] emergency action [earlier in the year] was to preserve assets for the benefit of injured investors," says David Peavler, director of the SEC's Fort Worth regional office.

The action is the latest in stepped-up scrutiny of SPAC transactions, says Peavler. 

"The SEC is intently focused on SPAC merger transactions, and we will continue to hold wrongdoers in this space accountable," he says.