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The Deal: States Greet Crowdfunding With Hostility

NEW YORK (The Deal) -- The crowdfunding industry is experiencing growing pains as entrepreneurs and operators of Web-based financing portals complain about a few hostile state securities agencies and the regulators grapple with an industry whose rules have yet to be written by the Securities and Exchange Commission.

While some states, like Georgia, Kansas and North Carolina, have welcomed the advent of Internet-based crowdfunding as a potential boost to their economies, with their own intrastate rules, others have taken a more skeptical and cautious approach.

SoMoLend Holdings LLC, a debt crowdfunding portal launched two years ago by entrepreneur and attorney Candace Klein, faces a public hearing on Oct. 17 and 18 on the Ohio Division of Securities' intention to issue a cease-and-desist order.

The Cincinnati-based crowdfunding portal, whose name is short for Social Mobile Lending, allows entrepreneurs to arrange loans from accredited investors over the Internet. SoMoLend raised about $2 million from investors and planned to arrange loans worth from $500 to $500,000.

The June 14 notice from the Ohio securities division alleges that Klein, who has since stepped down as CEO, and SoMoLend committed securities fraud by making false statements and engaging in other fraudulent activity geared toward investors for the purpose of selling SoMoLend securities.

The division said the statements and related activity include fraudulent financial projections; false and misleading statements regarding current and past performance, like the number of loans that had been transacted on the platform, the total value of those loans and the total revenue they generate; and false and misleading statements regarding SoMoLend's relationships with banks and other institutions.

"Respondents made the foregoing false statements and engaged in the fraudulent activity to dupe investors into believing that SoMoLend was an early and huge crowdfunding success," the notice said. SoMoLend and Klein "repeatedly stated they had already conducted millions of dollars of transactions on the SoMoLend Crowdfunding Platform by 2012, which they had not done and could not legally do pursuant to applicable securities laws and regulations at that time."

Although Klein declined to comment for this article, because the case is pending, a person familiar with their appeal told The Deal that Klein and SoMoLend reached out early and often to Ohio regulators for guidance on how to follow securities laws.