The SEC has announced that it filed settled charges against Kiromic BioPharma and two of its executives for alleged failure to disclose in its public statements and filings, including in its public offering prospectus, material information about its investigational new drug applications filed with the FDA for two of its drug candidates—the only two product candidates in the company’s pipeline. What was that omitted information? That the FDA had placed both of its INDs on clinical hold, meaning that the proposed clinical investigations could not proceed until the company first corrected the deficiencies cited by the FDA. Instead of disclosing in its prospectus that the INDs had actually been placed on clinical hold, the company included a risk factor describing the “hypothetical risk of a clinical hold and the potential negative consequences” on the company’s business. In light of the company’s voluntary self-reporting, remediation and other proactive cooperation, there was no civil penalty for the company, but two executives, the then-CEO and then-CFO, agreed to pay civil penalties of $125,000 and $20,000. According to the Director of the SEC’s Fort Worth Regional Office, the resolution of these cases strikes “the right balance between holding Kiromic’s then-two most senior officers responsible for Kiromic’s disclosure failures while also crediting Kiromic for its voluntary self-report, remediation, proactively instituting remedial measures, and providing meaningful cooperation to the staff.”
Background
As described in the Order, Kiromic BioPharma, Inc. is a pre-revenue biotherapeutics company focused on immuno-oncology, previously traded on the Nasdaq Stock Market. In May 2021, the Order indicates, Kiromic announced the submission to the FDA of two INDs for its two ALEXIS cancer product candidates; Kiromic had no approved commercial products for sale and no other product candidates in its pipeline. The announcement stated that “‘FDA feedback [was] expected within 30 days’ before the company could begin clinical trials in ‘Q3 2021.’” The SEC charged that, on June 16 and 17, the FDA informed Kiromic’s then-Chief Medical Officer that the FDA had placed both of Kiromic’s INDs on clinical hold because, in at least one instance, “a section of the submission was ‘grossly deficient’ and because the lack of information about certain factors, such as manufacturing and testing, prevented the FDA from assessing the risk of the product.” The CMO advised the then-CEO of these clinical holds. Although the CEO was Italian and not a native English speaker, the Order alleges that he reviewed the FDA’s email and “understood that ‘clinical hold’ meant that the FDA did not authorize the continuation of this IND.” He agreed with the CMO that the clinical holds should be promptly disclosed. But that’s not what happened.
The 30-day FDA review windows elapsed on June 16 and June 20, respectively, for the two INDs. At a June 22 Board call convened to discuss the FDA communications, the SEC alleged, the CEO explained (sort of) to the Board about the FDA communications: that “Kiromic had received communications from the FDA about the ALEXIS INDs; the FDA had requested an additional 30 days to conduct a secondary review; and the IND applications were on halt and administratively on hold until Kiromic received further questions from the FDA.” According to the SEC, the Board did not ask further questions. However, the SEC alleges, some of the Board members did not understand from the CEO’s update “that the FDA had already imposed clinical holds on the ALEXIS INDs. Rather, they understood…that the FDA was still reviewing the ALEXIS INDs and had not made a determination about the ALEXIS INDs.” The CEO did not share the FDA email documenting the hold with personnel, including the then-CFO, involved in SEC filings.
As alleged, by July 2021, Kiromic was running out of money and, on July 2, raised $40 million in a public offering. However, the SEC charged, the company did “not disclose in its SEC filings, investor roadshow calls, or due diligence calls that the FDA had placed the ALEXIS INDs on clinical hold, despite being aware of this information approximately two weeks before the Offering began.” Rather, the S-1 stated that the company’s two product candidates “‘are in the pre-initial new drug (‘IND’) stages of the [FDA] clinical trial process. We are currently going through the IND enabling trials process and we expect that first in human dosing in Phase I of clinical trials will commence in the third quarter of 2021.’” The S-1 disclosed only the “hypothetical risk that the FDA could issue a clinical hold but omitted that the FDA had actually placed the ALEXIS INDs on clinical holds,” information that the SEC alleged was key to the company’s projected clinical trial timeline. According to the SEC, the CEO “reviewed, signed, and contributed content to the Form S-1,” including information about the FDA review: as the CEO and Board Chair, and “as someone who knew of the FDA clinical holds,” the SEC charged in the complaint against the CEO, the CEO “knew or should have known that Kiromic omitted the FDA clinical holds before he signed Kiromic’s Form S-1.”
The SEC alleged that company personnel, principally the then-CFO, also participated in a number of roadshow calls, but “failed to inform potential investors that the FDA had placed the ALEXIS INDs on clinical holds,” even advising that they thought their chances of getting FDA authorization were very good. And the CEO “did not correct the CFO’s misstatement by disclosing the clinical holds.” The SEC also claimed that there were due diligence calls with underwriters, lawyers and auditors, but the company did not disclose that the FDA had placed the INDs on clinical hold, even though the underwriters seemed especially interested in when the FDA would authorize the company to commence clinical trials.
After the company received detailed clinical hold letters from the FDA in July, the CFO reviewed the letters and “urged Kiromic to make prompt disclosure of the clinical holds. The Kiromic Board subsequently discussed the letters and approved a press release.” However, the press release stated “that the ‘FDA returned with comments’ (emphasis added) regarding the INDs and that Kiromic still expected to meet its third quarter 2021 clinical trials timeline. Kiromic’s July 16 press release did not use the term ‘clinical hold.’” The stock price dropped over 16%.
The company’s June Form 10-Q filed in August also failed to disclose the clinical holds. However, on the filing date, the company also issued a press release and filed a Form 8-K that made the “first public reference” to the clinical holds, announcing that the company had applied for a meeting with the FDA to discuss “the clinical hold issues” and a “path toward our first-in-human dosing.”
After the Form 10-Q filing, the company received two tips on its anonymous hotline related to its public disclosures. The Board formed a special committee, and an internal investigation found that the company had received the clinical hold communications from the FDA but failed to disclose them. On recommendation of the Committee, the Board adopted several remedial measures including: “(a) appointing an interim CEO who received training on appropriate disclosure controls and procedures; (b) establishing a Disclosure Committee comprised of management; and (c) appointing two new independent directors to the Board.” The company also filed a Form 8-K acknowledging its disclosure failures and announcing its termination of the CEO for cause. In addition, the company voluntarily self-reported to the SEC’s Division of Enforcement.
Violations
The SEC charged that the company violated Sections 17(a)(2) and 17(a)(3) of the Securities Act (sale of securities), Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder (periodic reports) and Exchange Act Rule 13a-15(a) (disclosure controls and procedures). However, in light of the company’s self-reporting, prompt remedial acts and cooperation, the SEC did not impose a civil penalty on the company. The SEC maintained that the CEO was “at least negligent in his conduct” and charged him with violation of Sections 17(a)(2) and 17(a)(3) of the Securities Act, signing inaccurate certifications under Rule 13a-14 and aiding and abetting the company’s violations. He agreed to pay a civil penalty of $125,000 in settlement and a three-year officer-and-director bar. The SEC also charged the CFO with causing the company’s violations of Section 13(a) of the Exchange Act and Rules 13a-13 and 12b-20, and also with signing inaccurate certifications in violation of Rule 13a-14. He agreed to pay a civil penalty of $20,000.
