Question about PPM and investors.

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the CEO is now bringing in new investors to pay the interest to the investors already on board.

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Is the CEO's last name Madoff?

Even if the SEC does not get involved the State's Attorney might if the state believes that it's a Ponzi scheme and fraud is involved.

I did not mean the Attorney General of the US. I meant the State's Attorney for Bama. If Bama is like most states the State's Attorneys Office has a division that investigates fraud...and, yes, for a million dollar fraud they will probably investigate.

Much will depend on how many (if any) defrauded complainants come forward and file charges.

Let me try to address the issues you've raised.

First, the SEC has jurisdiction over practically any security sold in the US. And security is defined very broadly. It's not limited to what the average person would consider to be a security, i.e., a publicly traded security. A passive investment in a private company clearly falls within the SEC's jurisdiction.

Secondly, Rule 504 under Reg D allows a company to raise up to $1 million in a 12 month period without filing a registration statement with the SEC. Under this exemption, there is no requirement that the investors be accredited. Rules 505 and 506 allow for more money to be raised but in all practicality the securities must be sold to accredited investors and generally require a ppm.

Additionally, even if the private placement is exempt under Rule 504, the company should have filed a Form D with the SEC and mostly likely in each state in which the securities were sold.

Finally, if this is a legitimate business then there's probably no problem with selling the additional securities. However, if there is no underlying business and returns to the initial investors are contingent solely upon raising new capital, this is the very definition of a Ponzi scheme and the CEO should start researching countries that don't have extradition treaties with the US b/c he's likely to go the way of Madoff.

That being said, the above doesn't constitute legal advice and the CEO should really consider contacting an experienced corporate and securities attorney. The securities laws are difficult enough for even a seasoned attorney to understand, much less someone with little to no experience on the subject.

Just to add, in addition to the SEC (which is woefully understaffed), each state has a state security agency.

While the SEC might over look this, your state security agency would probably be interested.

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raised money from non-qualified investors

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Sounds like a breach to me.

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...and a queer from what I have heard.

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WTF? That has what to do with anything, besides publishing your bigotry?