The state of Ohio is trying to shut down an online crowdfunding platform run by one of the leading advocates for crowdfunding, alleging that the site misled investors about its earnings potential and contacted them in violation of securities laws.
Ohio's Division of Securities has filed a notice indicating that it intends to issue a
cease-and-desist order against SoMoLend Holdings LLC, an Internet portal that connects businesses seeking to borrow money with individuals and businesses willing to lend for an interest rate return on the principal.
The state alleges that SoMoLend raised $2.1 million from 31 investors between September 2011 and last February by selling nonregistered securities through general solicitation and advertising. But capital raising through general solicitation will not become legal until Sept. 23, when a rule lifting the ban goes into effect.
In addition to violating the law for selling unregistered securities, the Ohio Division of Securities also alleges that the company misled investors by making fraudulent financial projections. In presentations to potential investors, SoMoLend, a Cincinnati-based company, said that it would generate more than $45 million in revenue by the fourth year of its operation.
Launched in May 2011, it has produced only $3,404 so far. SoMoLend's founder and chief executive, Candace Klein, also is a leading proponent for crowdfunding. She is a board member of The Crowdfund Intermediary Regulatory Advocates, a group that has pushed the Securities and Exchange Commission to complete crowdfunding rules that are required under a law approved by Congress in 2012 that eases securities registration for startup businesses.
“The allegations are preliminary; this is not a final judgment,” Ms. Klein said about the case, declining to comment on the details. She has requested a hearing, which will take place in October.
The notice was filed June 14. The case was first reported Monday by Cincinnati.com. In investor presentations, Ms. Klein said: “Five-year projections are typically a shot in the dark,” according to the Ohio order. But she then “repeatedly presented five-year projections indicating millions in annual profit and anticipated returns to prospective SoMoLend investors of up to 12,100%.”
“As [Ms. Klein] explained during a February 6, 2013, presentation: 'Always appeal to their greed first. If you always appeal to your audience's greed first, then you can never fail,'” the order continued.
One SoMoLend investor disputes the state's allegations.
“Candace Klein has been the most upfront, transparent person,” said Cheryl Stamm, founder of CCS Software Solution Consulting LLC. “There were never any fake numbers. The investors are absolutely 100% behind Candace.”
Ms. Stamm said that the case might be a political move against crowdfunding.
“This makes me think this is all about the state not liking crowdfunding,” Ms. Stamm said. Ohio Securities Commissioner Andrea Seidt has filed two comment letters with SEC warning about potential investor fraud surrounding crowdfunding and general solicitation.
The North American Securities Administrators Association also has strongly advocated strengthening investor protection in the two areas. The Ohio Division of Securities did not respond to a request for comment. Ms. Klein also has been active in advocating with the SEC. She co-signed a June 5, 2012, comment letter on behalf of Crowdfund Intermediary Regulatory Advocates outlining “safe harbors” for crowdfunding and general solicitation.
“I'm an avid supporter of the industry,” Ms. Klein said.
Judd Hollas, founder and chief executive of EquityNet LLC, doesn't think the Ohio case will undermine the crowdfunding movement, which stresses that raising capital online will help connect entrepreneurs with investors.
The case “doesn't relate to a crowdfunding platform,” Mr. Hollas said. “It reflects whatever happened between [Ms. Klein] and her investors. I don't think it's going to elevate regulatory scrutiny from the SEC or anyone else.”
