SEC Charges 5G Funding and Jacob Garfinkel Over Alleged $4.5M MCA Investment Fraud

The Securities and Exchange Commission has charged 5G Funding, Five G Funding and founder and CEO Jacob Garfinkel with operating an alleged $4.5 million investment fraud built around a functioning merchant cash advance business.

That last part is important.

Unlike some investment schemes tied to the MCA industry, where merchant cash advances appear to have been little more than the story used to attract outside money, 5G Funding was actively funding merchants. It entered into MCA contracts, worked with independent sales agents, pursued collections and, according to the SEC, completed approximately 184 merchant cash advances involving 110 merchants. Public court records also show 5G pursuing merchants over MCA agreements before the company’s collapse.

The SEC’s allegation is not that the underlying MCA business was fictitious. It is that the business was never profitable, while investors were allegedly shown returns and portfolio information that made it appear considerably healthier than it was. At the same time, the agency says Garfinkel collected undisclosed fees, diverted merchant repayments and other money, and continued using investor capital to fund additional deals.

That distinction makes the 5G case particularly relevant to an industry where syndication has long been used as a legitimate way to spread risk and bring outside capital into individual MCA transactions.

According to the SEC, this was a real syndication operation. The problem was what investors allegedly were not being told.

Investors Were Buying Participations in Actual MCA Deals

From approximately November 2021 through January 2023, the SEC says Garfinkel raised about $4.5 million from at least 23 investors, almost entirely from Orthodox Jewish communities in Illinois, New York and New Jersey.

Investors were told that their money would be pooled and divided among participation interests—or syndications—in multiple merchant cash advances. Garfinkel allegedly presented diversification across numerous merchants as a way to reduce the risk of any one business defaulting. 5G decided which merchants to fund, which investors participated in each transaction and how much of each investor’s money went into a deal.

This is where the case differs from several other MCA-related investment cases Funder Intel has covered.

Here, investors were not simply handing money to a company that claimed to be involved in merchant financing. The SEC says their money actually was being deployed into MCA transactions. The company had merchants, brokers, funding activity and a portfolio.

The alleged fraud was layered on top of that operating business.

What Investors Were Told About 5G’s Economics

According to the complaint, investors were generally told that 5G’s compensation would come from the performance of the MCA portfolio.

5G would typically receive a 6% management fee from merchant collections, along with 50% of net profits, while investors would receive their original capital plus their share of the remaining profits. Garfinkel also told investors that collections could automatically be rolled into new MCA transactions unless they requested their money back.

The returns being discussed were substantial.

The SEC alleges Garfinkel told some investors that a typical MCA could generate returns of 35% to 65%. A December 2021 presentation claimed 5G had a track record producing returns ranging from 36% to 65%, while another presentation in 2022 said investors had received returns of 20% to 25% on a quarterly basis.

According to the SEC, those representations were false. Garfinkel allegedly had no prior MCA experience when he formed 5G Funding in October 2021, and when the December presentation was circulated, 5G had originated its first MCA only one month earlier. The SEC says none of those early transactions had yet produced a profit.

The Syndication Structure Is Where the Story Gets More Complicated

Syndication itself is a normal practice in commercial finance.

Funders frequently allow investors or other funding companies to participate in transactions, giving each participant a percentage of the receivables purchased and the corresponding risk and return.

What investors know about the economics of those transactions, however, matters enormously.

The SEC alleges that 5G’s participation agreements and investor communications did not disclose a separate origination fee, typically around 10%, that 5G deducted from investor capital before the remaining money reached the merchant.

According to the complaint, investors funded the full purchase price of an MCA. 5G would then transfer roughly 10% of that amount to an account controlled by Garfinkel’s related company, 5G Capital, as an origination fee and send the remaining funds to the merchant. The SEC says approximately $1.1 million in origination fees was collected this way.

The significance is not simply that another fee existed. According to the SEC, investors were being told that 5G’s compensation consisted primarily of the management fee and profit split tied to collections. The agency alleges investors also were not given the underlying merchant contracts that would have shown how the origination fee was being deducted.

That means investors allegedly did not have a complete picture of how much capital was actually reaching merchants or how much 5G was making before a merchant made its first payment.

The Investor Dashboard Allegedly Told a Different Story Than the Portfolio

Perhaps the most striking part of the complaint involves the online portal investors used to monitor their accounts.

The SEC says the portal and investor reports routinely displayed returns ranging from 25% to 60%. But those numbers allegedly were not realized investment returns. They were projections of what an investor might receive if every underlying merchant paid its MCA completely.

The complaint says investors were not told those percentages were projections.

More troubling, the SEC alleges some merchant accounts were shown as “performing” even when the businesses had missed multiple payments, reduced payments or stopped paying entirely. Investors relied on those reports when deciding whether to put additional money into 5G or allow collections from existing deals to be automatically reinvested.

For anyone familiar with MCA syndication, that allegation goes to the heart of the relationship between a funder and its participants.

A syndicator may not be underwriting the merchant itself. It may not control the bank account receiving merchant debits. It may never speak with the merchant and may not see the complete funding contract unless the lead funder provides it.

The participant is therefore heavily dependent on the funder’s reporting.

A dashboard can show dozens of positions, percentages and projected returns. But the dashboard is only as accurate as the underlying collections and servicing data entered into it.

Renewals Allegedly Made Troubled Deals Look Paid Off

The SEC also focuses on at least five MCA renewals that it says created the appearance that earlier advances had been successfully repaid.

In one example, a Georgia merchant owed 5G more than $266,000 and had missed approximately 15 of its previous 20 scheduled payments. 5G then approved a new $300,000 MCA requiring $449,700 in repayment.

But the merchant did not receive anything close to $300,000 in new cash.

According to the complaint, approximately $266,000 of the new advance was used on paper to eliminate the balance of the previous MCA. That older transaction then appeared as “paid in full” in investor reporting, even though 5G had not actually collected that $266,000 from the merchant.

The SEC says investors were nevertheless charged approximately $14,000 in management fees, a $24,000 origination fee and a $39,000 sales-agent commission related to that renewal.

Four similar transactions allegedly occurred between September 2022 and January 2023. All five merchants later defaulted on the renewal advances, according to the SEC, while the renewals generated nearly $190,000 in origination fees and commissions.

For an MCA audience, this is an important distinction. Renewals and refinances can be legitimate tools when a merchant has performed and needs additional capital. The SEC is alleging something materially different here: renewals involving already troubled merchants were used to generate additional fees and make older positions appear successfully completed.

Where the SEC Says Additional Money Went

The complaint alleges the problems extended beyond fees and portfolio reporting.

The SEC says Garfinkel diverted approximately $400,000 from 5G Funding accounts for personal spending and transfers, including jewelry and cash payments. Another approximately $320,000 in merchant repayments allegedly went directly into an account controlled by Garfinkel through JCG Consulting instead of being returned to investors.

The agency also alleges that about $282,000 in broker commission clawbacks was redirected to JCG Consulting. Those clawbacks came from commissions returned by independent sales agents when merchants defaulted early. Because investors had originally funded those commissions, the SEC says the recoveries should have gone back to them.

According to the complaint, Garfinkel used the JCG Consulting account for a home down payment, gambling expenses, cars and watches. These remain allegations in a civil SEC action and have not been adjudicated.

A Real MCA Business That Apparently Could Not Support the Returns Being Sold

The portfolio itself ultimately tells much of the story.

The SEC says 5G originated approximately 184 MCAs to 110 merchants, but collected the full contracted amount on only about 30 of those advances. Its internal system reportedly classified 61 transactions as paid in full, but the SEC says at least 30 of those appear to have been renewals where an existing balance was rolled into a new transaction.

The agency alleges the overall portfolio was never profitable and collected less than 60% of the total amount merchants owed.

By January 2023, 5G stopped making new advances. Around that time, according to the complaint, Garfinkel stopped returning investor calls. In July, an attorney representing the defendants informed investors that the company was insolvent and that efforts would be made to collect delinquent merchant balances.

The SEC says less than $1.7 million has since been returned to investors. Approximately $170,000 of that allegedly came from another investor who was not invested in 5G Funding, whose money Garfinkel then used to partially repay existing 5G investors.

Of the at least 23 investors identified by the SEC, only one allegedly received more money back than originally invested. The remaining investors lost between approximately $15,000 and $670,000 each.

Allegations Against 5G Predated the SEC Case

The new SEC case is also not the first public allegation involving 5G’s investor program.

In August 2023, investor Joshua Legum filed a federal RICO lawsuit against Garfinkel, 5G Funding, Emerald Oak Capital and others in the Eastern District of New York. During proceedings over a requested preliminary injunction, the judge described the plaintiff’s claims as involving an alleged Ponzi investment scheme.

That description should not be confused with a judicial finding that 5G operated a Ponzi scheme. It reflected allegations made by the private plaintiff, and the SEC’s new complaint does not characterize the entire 5G operation using that term.

The SEC case independently alleges securities fraud, undisclosed compensation, misleading investor reporting, diverted funds and refinancing transactions designed to generate fees.

Another MCA Investment Case - But Not Quite the Same Story

Funder Intel has covered several investment schemes in which MCA was presented to investors as the engine producing high returns.

There is a tendency after cases like this to reduce everything to the same narrative: someone claimed to invest money into merchant cash advances, raised millions, and the MCA business was essentially a cover story.

The SEC’s allegations against 5G Funding are more complicated.

There was an MCA business.

5G funded real merchants, paid broker commissions, collected receivables, pursued merchant defaults and had people operating inside the industry. Investor capital was actually syndicated into MCA transactions.

The allegation is that the real business could not generate the performance being represented to investors. Instead of investors having a transparent view into that deterioration, the SEC says they were shown projected returns, incomplete fee information and transactions classified as performing or paid off even when the underlying economics told a different story.

That distinction may ultimately make this case more instructive for the MCA industry than a scheme where no meaningful funding operation existed at all.

Syndication can provide funders with additional capital and allow investors to participate across diversified pools of deals. But it also creates an obvious information imbalance. The lead funder controls underwriting, merchant contracts, collections, renewals and reporting, while outside investors may see only what the funder chooses to show them.

The SEC’s complaint against 5G Funding is, at its core, about what allegedly happened inside that gap.

The agency has charged Garfinkel and the two 5G entities with violating the antifraud provisions of the federal securities laws. It is seeking permanent injunctions, disgorgement plus prejudgment interest and civil penalties, along with an order that would prohibit Garfinkel from participating in future securities offerings. No criminal charges were announced with the SEC action.