Crowdfunding takes early hit in Massachusetts

Bay State charges two firms with fraudulent securities sales

Dec 6, 2012 @ 2:18 pm

By Bruce Kelly

crowdfunding, fraud, securities
+ Zoom

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

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

INTV

How advisers are helping clients battle the opioid crisis

Editor Fred Gabriel, contributing editor Elizabeth MacBride and reporter Greg Iacurci discuss the financial impact of the opioid epidemic on American families, and how advisers can help.

Latest news & opinion

Alternative strategies boomed after crisis, but haven't been tested

Because the S&P 500 has outperformed, convincing clients they need protection is a hard sell.

7 ways advisers fixed clients' biggest financial dilemmas

Sometimes it takes creativity, along with knowledge and outside help, to get a client out of a jam.

LPL Financial buys NPH, a broker-dealer network with 3,200 advisers

The deal, part of which is based on the advisers and revenue that eventually will move from NPH, could potentially cost LPL $448 million.

3 things advisers should make sure their clients' children take to college

Advisers can help clients avoid scary and painful situations with kids age 18 and older.

Private equity investors zero in on the RIA business

P-E proves to be ready and willing to invest in RIAs, but many will be looking to sell in three to seven years.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print