Crowdfunding takes early hit in Massachusetts

Bay State charges two firms with fraudulent securities sales

Dec 6, 2012 @ 2:18 pm

By Bruce Kelly

Massachusetts took aim Thursday at two players in the small but potentially vast arena of crowdfunding, which lets small private companies sell equity directly to investors.

Commonwealth Secretary William Galvin filed fraud charges against two out-of-state oil and gas operations in connection with their sale of unregistered securities to Massachusetts investors. In one, Prodigy Oil and Gas LLC allegedly employed a cold-caller who had been found guilty of theft. According to the complaint, Prodigy principal Shawn Bartholomae was subject to three state securities regulatory actions and two criminal charges.

Prodigy allegedly sold at least $464,000 in unregistered securities to one Massachusetts investor, according to the complaint. Fraud charges against Synergy Oil LLC of Oklahoma and two of its executives allegedly involve the sale of $35,000 of unregistered securities to two investors.

Both companies, along with their officers and directors, were subject to securities orders in other states revoking their use of private-placement exemptions, according to a statement from Mr. Galvin's office.

The attorney for Prodigy Oil and Gas, Dan Waller, said the fraud charges were unfounded. “Certain of the disclosures that the state said were not were, in fact, disclosed,” he said. "And the disclosures about which the state complained were not required to be disclosed under applicable law.”

“The state of Massachusetts never contacted Prodigy or Mr. Bartholomae” before it filed its complaint on Thursday, Mr. Waller said.

Brian McNiff, a spokesman for the Secretary of the Commonwealth, had no comment to Mr. Waller's statement.

Robert Falco, an executive with Synergy Oil, did not return a call to comment.

Crowdfunding was enshrined earlier this year in the Jumpstart Our Business Startups Act. A crowdfunding equity raise can have an unlimited number of investors but is limited to $1 million.

State securities regulators such as Mr. Galvin were against the measure and petitioned Congress not to sign off on the legislation. They believe that the law was essentially opening a door for those with a history of defrauding investors.

The Securities and Exchange Commission has yet to write crowdfunding rules, and Mr. Galvin stressed it was important for the commission to include 'bad actor' rules.

“I support rules that allow early-stage companies to raise capital more easily,” Mr. Galvin said in a statement. “But I would urge the Securities and Exchange Commission to adopt meaningful and effective 'bad actor' rules that will disqualify securities law violators, brokers with revoked licenses and other fraud operators from using these exemptions from the securities registration requirements.”

Meanwhile, the North American Securities Administrators Association said on Wednesday that it had found an explosion in the use of “crowdfunding” online.

“An analysis of Internet domain names by state and Canadian securities regulators found nearly 8,800 domains with 'crowdfunding' in their name as of Nov. 30, up from fewer than 900 at the beginning of the year,” NASAA said in a statement. “Of these websites, about 2,000 contained content, more than 3,700 had no content and more than 3,000 appeared to be 'parked' and serving as placeholders to reserve a domain name for later use or sale. Of the domains with 'crowdfunding' in their name, about 6,800 have appeared since April 2012, when the JOBS Act was signed into law.”

“Investors soon can expect to be inundated with crowdfunding pitches, legitimate or otherwise,” said Heath Abshure, NASAA president and Arkansas securities commissioner, in the statement. Many sites have been established by credible organizations, while others “appear to be created by individuals that may be operating out of their basements,” said Robert Moilanen, Minnesota's securities director.

When crowdfunding does go live, it must take place on SEC registered websites, noted Sherwood Neiss, principal of Crowdfund Capital Advisors LLC. He added that it also requires a crowd, not just one or two people as in the two cases filed by the state of Massachusetts. The legislation for crowdfunding also requires an issuer to hit 100% of their funding target that is listed on an SEC-registered website, Mr. Neiss said.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Latest news & opinion

RIA in a Box acquired by private equity firm Aquiline Capital

New owners plan more growth for the software service provider.

IBDs with the most female reps

Here are the 10 independent-broker dealers that have the most female reps.

Supreme Court decision likely to prevent brokers from filing class-action lawsuits

However, it likely won't bar employees from filing 401(k) lawsuits against their employers.

5th Circuit denies states' second attempt to defend DOL fiduciary rule

The three-judge panel split again, 2-1, in deciding not to take another look at the motion to intervene by California, New York and Oregon.

Pass-through tax strategies for business-owner clients

Shifting business structure, changing filing status and spinning off equipment are examples of ways business owners can take advantage of the deduction.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print