First Enforcement Action Taken Against Crowdfunding Site

For the first time, regulators are taking action against one of the many crowdfunding sites that have sprung up since the passage of the JOBS Act.  The Ohio Division of Securities issued a notice of intent to issue a cease-and-desist order against the Cincinnati-based crowdfunding platform SoMoLend and majority owner/CEO Candace Klein in June. If issued, the order will shut down SoMoLend.

SoMoLend advertises itself on its website ( as “a debt-based funding platform that connects small business borrowers with corporate, institutional, organization and individual lenders, such as friends and family or accredited investors.” According to the Ohio Division of Securities notice, SoMoLend’s business model consists of posting loan requests from businesses, selling promissory notes issued by those businesses to investors, and servicing the repayment of the notes. Candace Klein is a well-known proponent of crowdfunding who has been featured in Entrepreneur, among other publications.

In the notice, the Ohio Division of Securities made four sets of allegations. First, it alleged that SoMoLend engaged in an unregistered sale of its own securities, improperly relying upon the exemption from registration provided in Regulation D of federal securities laws and corresponding Ohio securities laws. SoMoLend allegedly offered securities to potential investors with whom it had no previous relationship in violation of Regulation D’s prohibition on general solicitation and general advertising (rules permitting these activities in certain types of offerings have not yet taken effect). Second, SoMoLend allegedly committed securities fraud by making false statements and engaging in other fraudulent activity in making securities sales. According to the notice, the fraudulent statements covered financial projections, current and past performance, and relationships with banks, among other matters. For example, SoMoLend claimed in March of 2013 to have transacted $15 million dollars in loans when the true figure at that time was $234,000. Third, SoMoLend allowed the offer and sale of unregistered securities by business issuers on its platform. It claimed to have provided offering information for 198 businesses, only three of which had made the required filings with the Ohio Division of Securities. Finally, it charged fees for transactions on its platform without being licensed as a dealer or salesperson as required by Ohio securities laws.

Candace Klein resigned on August 14, 2013, telling that she did so voluntarily.  According to, a hearing is scheduled for October, and the platform has stopped making offers and sales of securities in Ohio (but continues to make loans in other states).  Apparently, there have not been any investor complaints; if that’s true, the regulators decided to take this action on their own initiative, which is quite rare for a securities enforcement action.

The sheer number of crowdfunding sites, some of which are operating outside the law (at least until the JOBS Act regulations are finalized) and regulators’ general hostility to this form of offering indicate that this is likely to be the first of many such actions.

© 2013 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Alexander J. Davie

Alexander J. Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

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