LA-based kids VOD platform Toon Goggles and its founder have been charged by the US Securities and Exchange Commission (SEC) for conducting an illegal securities offering.

In its complaint filed in the US District Court for the Central District of California, the SEC alleges that Toon Goggles and Ira Warkol held at least five offerings—or investment or funding rounds—without registering them with the SEC, which is illegal. Between August 2012 through late 2016, the company raised more than US$19 million from approximately 400 retail investors through these unregistered securities.

The court documents state that Warkol used the raised funds to pay large commissions and transaction-based compensation (at least approximately US$1.75 million) to himself and the sales agents. The SEC states, “it was not uncommon for as much as 35% of investor funds to be used towards the payment of commissions and finder’s fees.”

The funding rounds were conducted through various entities, including Nevada-based company NetKids, Toon Goggles video games arm Dinomite Apps, and toon studio Yeti Productions. NetKids and Dinomite were dissolved in July 2016 and 2015, respectively.

The SEC also charged Warkol for acting as an unregistered broker-dealer in connection with the offering. Warkol, who is described as a reoffending convicted criminal in the court documents, founded Toon Goggles in 2010 and controlled the company until he terminated his relationship with the streamer in 2017.

According to the SEC’s complaint, Warkol set up boiler rooms—or places where illegal brokers make high-pressure securities sales by luring people into worthless investments over the phone—inside Toon Goggles’ offices. The SEC says Warkol hired sales agents to cold-call investors throughout the US and solicit investments using scripts and offering documents Warkol provided.

Toon Goggles also failed to maintain accurate and complete records of its investors, the number of shares sold to each one and the amount of money raised from each, the SEC claims.

Without admitting or denying the allegations in the complaint, Warkol has entered a court settlement and has agreed to the entry of a final judgment permanently banning him from further securities sales. Warkhol will return US$2 million and pay an additional US$190,000 fine. The settlement is subject to court approval.

The SEC’s litigation against Toon Goggles will proceed, with the SEC seeking a permanent injunction, disgorgement (a penalty used in US securities law) plus prejudgment interest and a civil penalty. (According to findlaw.com,  prejudgment interest is additional money that a court can award based on the interest that the judgment would have earned over the period of time from when the claimant was entitled to receive those monies.) 

In a separate administrative proceeding, the SEC also charged Toon Goggles’ director of operations, Brendan Pollitz, for facilitating broker-dealer registration violations. Pollitz agreed to a cease-and-desist order and will pay penalties totaling US$43,589.

In a statement from Toon Goggles, CEO Stephen Hodge says, “the individual responsible for the sale of unregistered securities exited the company in 2017. Since then we have cooperated fully with the SEC in regards to their inquisition into the company. We are currently looking forward to resolving this issue with the SEC and continue to look after the best interest of our shareholders.”

Toon Goggles is a privately-held, ad-free preschool and educational content platform that includes animated and live-action programs, games and tween entertainment news. The service is available online at the Toon Goggles website, as an iOS and Android app, and comes pre-installed on devices including the Sharp Aquos LED TV, VIZIO TV, Techno Source’s Kurio Xtreme Android Tablet for Families, TiVO and XUMO-integrated devices.  According to the complaint, the company was not profitable between August 2012 and late 2016, with revenue never exceeding US$200,000 a year.