How EverBlu Capital is reaping windfalls from the micro-cap frenzyShare via EmailShare on Google PlusPost on facebook wallShare on twitterPost to LinkedinShare on RedditAlvin Blumenthal, and his sons Darrin and Adam (pictured), founded EverBlu Capital in 2016, an advisory firm that is ...Alvin Blumenthal, and his sons Darrin and Adam (pictured), founded EverBlu Capital in 2016, an advisory firm that is rapidly gaining a reputation for the volume and pace at which it churns out low-revenue and pre-profit floats and backdoor listings. Ben RushtonJemima Whyte AFR Woodcutby Jemima WhyteIn the micro-cap sector fortunes can be made and lost in a day without a company even turning a profit. But the Blumenthals look to have found a way where they almost always come out on top.Alvin Blumenthal, and his sons Darrin and Adam, founded EverBlu Capital in 2016, an advisory firm that is rapidly gaining a reputation for the volume and pace at which it churns out low-revenue and pre-profit floats and backdoor listings.Along the way it has shown a remarkable ability to make money for the Blumenthals, usually in the form of advisory fees, share issues, directors' fees and a not-always-immediately-visible series of personal investments.In its short history, EverBlu has advised on some clear success stories for investors, notably pot stock Creso Pharma which is trading at more than triple its October 2016 listing price. But for some, the numerous levels at which the family is involved are a red flag, though it hasn't slowed down the extraordinary success of the start-up corporate adviser, which is based in Sydney's prestigious Aurora Place in the CBD centre.In its short history, EverBlu has advised on some clear success stories for investors, notably pot stock Creso Pharma ...In its short history, EverBlu has advised on some clear success stories for investors, notably pot stock Creso Pharma which is trading at more than triple its October 2016 listing price. APWithin the clubby broking world, the rise of the Blumenthals has been closely watched by supporters and rivals alike. Not least because Alvin and Adam Blumenthal are well known in markets from their stints at BBY, but also because of EverBlu's success. According to the company website, the firm has advised on 25 capital markets transactions raising $150 million for clients since it was founded.AdvertisementBut an intervention by the Australian Securities Exchange this month in relation to a series of share issues made to the broker and its shareholders from social media micro-cap Manalto could mark the beginning of a crackdown that threatens not just EverBlu but the growing pool of small boutique advisers like it.ASX finds related-party breachIn a highly unusual move, the ASX demanded Manalto, which is advised by EverBlu, place a holding lock on all securities issued to the so-called "Blumenthal parties" and seek shareholder approval to ratify the share issues; having decided the company had breached rules by not seeking shareholder approval for related-party share issues.It may have seemed a sudden strike, but the exchange's interest was actually piqued back in September 2017, when three new directors were installed on the Manalto board: Terence Clee, James Ellingford and Tim Wilson.Within the clubby broking world, the rise of the Blumenthals has been closely watched by supporters and rivals alike.Within the clubby broking world, the rise of the Blumenthals has been closely watched by supporters and rivals alike. SuppliedAccording to the ASX version of events, that was EverBlu's first crucial move in effectively hijacking the company.Manalto is a company with a market capitalisation of just $25 million, which develops and sells software to manage social media promotion at scale.Its Instagram feed has 98 followers, and its Twitter account has 3004, and in the past few months the company has signed up real estate group Ray White and US-based pest control franchise Mosquito Joes. The company has closed offices in the Netherlands, South Africa and Ireland. It has said it will focus on building up its sales team in Australia and the US, and developing software.EverBlu had been advising Manalto before September – it helped on a $2.5 million placement in April 2017 to buy digital software developer Bambu Digital, a deal that was later terminated.Manalto is a company with a market capitalisation of just $25 million, which develops and sells software to manage ...Manalto is a company with a market capitalisation of just $25 million, which develops and sells software to manage social media promotion at scale. Fairfax MediaBy September, after a series of trading halts and more capital raisings, the company's old directors had resigned and been replaced with the three new ones, prompting an ASX query.Among other things, the exchange wanted to know whether there was any connection between the new directors and EverBlu.In response, new chairman Clee disclosed that Wilson works at EverBlu and described his and Ellingford's relationship with the advisory firm as "purely professional". "Neither Dr Ellingford nor Mr Clee are employees of EverBlu; are remunerated by EverBlu; have any agreement, arrangement or understanding with EverBlu under which they may receive any benefit from EverBlu," the statement said.Manalto directors, EverBlu nomineesLess than a month later, the exchange issued another query, asking Manalto to confirm that Clee, Ellingford and Wilson were all nominees of EverBlu, which had agreed to provide funding support in exchange for board control."On further investigation the company has made enquiries of EverBlu Capital which confirms that it was only willing to provide ongoing funding support to the company if there were changes to the board of directors. The company notes that it is not uncommon for brokers to rally support of shareholders in order to bring about board changes," the company responded, adding that EverBlu had committed to provide $550,0000 before October 6, and would seek to provide another $3 million on a best endeavours basis.Following that, it appeared Manalto had gone back to business more or less as usual: capital-raising updates and a half-yearly report. Then, in April this year, the company responded to another ASX query.In this one the ASX went nuclear. It unpicked in detail various entities in which Alvin, Adam and Darrin Blumenthal had been issued stock for EverBlu's advisory work or received personal allocations in various placements; and combined with the fact that the directors were nominees of EverBlu, the ASX said Manalto had breached the ASX Listing Rule 10.11, which requires shareholders approve share issues to related parties.In its reply to the ASX, Manalto remained surprisingly defiant. The company "does not agree with the stance taken by ASX ... it understands that ASX has the discretion", the statement said.Whatever Manalto's view, it's unlikely it will choose to challenge the exchange further, and shares won't trade again unless shareholders approve the share issues.ASX flexes muscleThe ASX's move is significant in that it may serve as a warning to any number of small advisory groups that follow a similar model of buying stock before an initial public offering on a personal basis; being paid in either cash, stock or both for the firm's advisory work; and putting directors on the board. It comes at a time when the ASX is said to be focusing more on vetting which brokers bring companies to market, although the ASX says that has always been a component of its pre-vetting process.It also signals that the ASX is flexing its muscle around Australia's vague and notoriously porous related-party rules.And it raises questions about how other companies that are similarly dotted with people and companies linked to the Blumenthals may or may not change the way they operate in future.EverBlu is far from the only broker that follows this playbook.And unlike others, it's rare that EverBlu employees or shareholders are directors of EverBlu-advised companies, though that is the case at Creso Pharma and Roots Sustainable Agriculture.The common argument for brokers doing so is that it allows them to protect their clients' interest."It's standard. They get a shell, option themselves up to buggery, get on the board, get cheap shares, ignore existing shareholders and pay themselves fees," said one industry observer, who claims the Blumenthals understand this way of doing business better than most.At the heart of the ASX issue with related parties and potential conflicts of interest seems the fees EverBlu has pulled out from Manalto, mainly in the form of shares, as well as the size of the allocations to various Blumenthal personal or nominee accounts.Question of shareholder fairnessAlso, whether board decisions about share issues and advisory fees were made in the interests of all shareholders, or just those linked to the Blumenthals.But is that what they've done?In the past year, EverBlu has received fees from Manalto of more than $350,000, the bulk in the form of shares, for fees from advising on six capital raisings (a standard 6 per cent capital-raising fee) and a $11,000 monthly retainer. The latter isn't completely out of whack with other fees charged at this end of the market, particularly when a company is being restructured, though some rivals questioned whether it should stay at that level.In response to questions about how EverBlu manages potential conflicts when EverBlu owners wear multiple hats, Adam Blumenthal said the company has strict guidelines in place to ensure family members aren't treated differently to any other client."EverBlu has and implements a robust Chinese wall policy both physically and digitally, each involving numerous safeguards which ensure that the Chinese wall is not breached and strict confidentiality is maintained," he said in response to emailed questions."My family members will, from time to time, invest in deals where I co-invest, I may be a director of the company or where EverBlu is an adviser. In reality, my family members are no different to any other investor brought into a transaction through my network or EverBlu. They each exercise independent financial and business judgment and I do not ever attempt to have any influence of their decisions. At the end of the day, if they invest in one of these deals, it should demonstrate their support for the company in question."Vehicles owned by the Blumenthals typically dot the top-20 list of floats and capital raisings on which EverBlu advises. Some do well, others less so. In the past year, the EverBlu team have raised capital for companies as diverse as lithium plays, oyster farms and sustainable agriculture businesses. Investors including Ellerston Capital and Thorney Investments have participated in some of the raisings.Creso Pharma positive for investorsA company where the Blumenthal parties – to borrow the ASX term – have done particularly well is Creso Pharma, which develops marijuana products for pets and humans, and listed in October 2016 at 20¢ a share.In 2017 it posted a net loss of $15.1 million on revenues of $243,798, a substantial increase on the previous year's loss of $4.6 million on revenues of just $8022.Creso, which counts Adam Blumenthal and Ellingford among its directors, is among the most successful EverBlu floats to date – shares soared to $1.35, though have been retreating since and are now closer to 85¢.So far, the family has pulled out about $4 million in shares sales and various advisory fees.For its corporate advice, EverBlu has been paid just over $2 million. Adam Blumenthal has taken home $132,000 in cash for his work as a non-executive director, including bonus payments for the IPO and a company acquisition. And Alvin Blumenthal's Suburban Holdings (Creso's largest holder at its IPO, having participated in early funding rounds) has offloaded at least a portion of his holding at between 75¢ and 81¢ a share, delivering him an average return of 13 times his money as he pulled out $1.9 million in just over a year,It's not just family with the EverBlu network. Like private equity funds, EverBlu tends to rely on the same group of directors to sit on its company boards and occasionally turns to them to provide paid advice.Manalto chairman Clee, who also sits on the boards of Victory Mines and Hardley Resources, has received payment for consulting to Creso. Clee's TAC Professional Services received a 12-month fee of $1.4 million for advisory work, in addition to 1.25 million shares priced at $1.10, for "business development and marketing" from Creso Pharma.So too Asenna Wealth's Assad Tannous, who received Creso shares for marketing and promotional services, though he prefers to describe it as corporate work. Both payments were disclosed following ASX queries."It is common in the financial services sector (and any other sector for that matter) to do business with the same companies or persons on more than one occasion," Adam Blumenthal says. "If a person or a company is performing their services adequately or to a superior standard, why should there be any restrictions in terms of using their services again?"In the meantime, EverBlu's latest offer, Rafaella Resources, a mining explorer in Canada and Western Australia, is due to list next. The company is seeking $5 million at 20¢ a share, a speedy turnaround after issuing shares at 1¢ on February 6 and 8¢ at February 27.It's the same gang: chaired by Ellingford, with Terence Clee as a non-executive director. The company will issue EverBlu 2.5 million shares for its advisory work, in addition to paying a monthly retainer, and its top investors include Alvin Blumenthal's investment vehicle Suburban Holdings and Darrin Blumenthal's Horatio Street.If nothing else, it will be interesting to watch how Ellingford and Clee handle another board seat. But given the ASX intervention at Manalto, a heavy workload may turn out to be the least of their worries.
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