Three former executives of Endurance International Group Holdings and Constant Contact Inc., acquired by Endurance in 2016, have settled charges with the Securities and Exchange Commission (SEC) for reporting inflated subscription metrics for their web hosting and internet-based marketing products.
More specifically, the SEC found that Constant Contact, Inc. staff were instructed to offer free services to customers intending to cancel their subscriptions. Although those customers were no longer paying for services, Constant Contact kept them listed as active subscribers, concealing the company's slow customer growth pattern.
Endurance also failed to inform investors in a timely manner about an error which resulted in the company overstating its own subscriber count. Inaccurate metrics were then reported to potential investors.
Endurance has agreed to $8 million in penalties. The executives have settled the charges by agreeing to pay $1.38 million and $34,000 respectively in disgorgement, interest, and associated penalties, while not admitting or denying wrongdoing.
In addition, they also agreed to cease-and-desist order from further violations of various anti-fraud, reporting, books and records, and internal controls violations.
The Investment Advisers Act of 1940 ("Advisers Act") requires firms to present accurate information in all sales and marketing activities. Business operating metrics, such as subscriber base figures, are critical in evaluating customer growth patterns and overall profitability for subscription-based businesses - key information allowing potential investors to make informed and fair decisions.
Fair and Honest Disclosures Required in Performance Marketing
Simply put, the expectations for fair and accurate disclosure laid out in the Advisers Act of 1940 must be adhered to.
In fact, the Office of Compliance Inspections and Examinations (OCIE) has identified performance marketing on its list of the most common regulatory examination deficiencies.
OCIE expects that all performance results disclose complete and relevant material information related to performance results, including a thorough explanation of how the returns were derived.
Knowledge of Compliance Regulations Is Key
Compliance can be complicated in the best of circumstances. Performance marketing is no exception where important standards are found in a series of SEC No Action Guidance.
Ultimately, the Advisers Act requires firms, under supervision of their CCOs, to disclose accurate information in all sales and marketing materials. Firms will be held responsible if fraudulent or misleading information is disseminated.
At Jacko Law Group, PC, we have years of experience in assisting firms in developing policies and procedures that keep them in compliance with regulations, and we assist with identifying and mitigating areas of risk.
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