SoMoLend – which stands for Social Mobile Local Lending – is a crowdfunding platform that allows small businesses to borrow money from a network of lender. The State of Ohio claims that SoMoLend failed to meet the regulatory hurdles currently in place for crowdfunding. It’s also claiming that SoMoLend acting fraudulently when seeking its own investment capital.
There are many entrepreneurs and wantapreneurs trying to jump on the crowdfunding bandwagon. For those willing to take the time to understand the securities laws, there are ways to enter the field. For some, the upcoming gate opening on general solicitation and advertising will allow them to jump on board. Others are looking to the Securities and Exchange Commission to issue rules on crowdfunding under the JOBS Act.
Just by looking at that web of requirements, the regulatory landscape for crowdfunding is complicated and currently in flux. That likely means that fraudsters are circling for easy targets and well intentioned businesses can easily make a mistake.
The State of Ohio says that SoMoLend made a mistake when working for lending sources and crossed the line when soliciting its own investors.
The Ohio action is not against the crowfunding aspect, it’s against the way SoMoLend raised its own capital and its business model. Ohio has an exemption from registration for securities offerings that comply with the SEC’s Regulation D. Until September 23, 2013 that means the securities can’t be offered through general solicitation and advertising. Ohio is claiming that SoMoLend violated that ban and therefore does not qualify for the exemption from registration under Ohio law.
On top of that violation, Ohio is also claiming fraud for SoMoLend using financial projections in investor pitches that depicted a more profitable company. The company projected millions in revenue and profits. Those projections lacked any meaningful disclosure about the assumptions that went into the projections and lacked cautionary risk factors for investors.
In a March 2013 article, SoMoLend claimed:
Since the beta site launched in May 2012, SoMoLend has facilitated some 100 small-business loans totaling nearly $3.5 million. Loans range from $500 to $1 million, with interest rates ranging from 3 to 22 percent and terms spanning six weeks to five years, depending on a business’s needs and creditworthiness. SoMoLend also charges a 4 percent transaction fee on funds borrowed.
Ohio claims the true amount of lending activity was 13 loans to 9 businesses for $94,000. According to the Ohio filing, the company has brought in only $3404 in revenue.
On top of that, SoMoLend met with the Ohio regulators who pointed out that the firm would need to be registered as broker-dealer if it was going to collect transaction-based fee for selling notes through the platform. That 4% transaction fee is effectively a commission on the sales of securities. You can compare that to Funder’s Club that took a different approach to crowdfunding by taking a promote on the back-end. Funder’s Club even obtained a No Action letter from the SEC validating its business model.
Finally, the state gets to the crowdfunding piece and alleges that some, or all, of the promissory notes offered through SoMoLend were not registered or exempt from registration. Ohio seems a bit sympathetic to the note issuers when it says SoMoLend “exposed approximately 200 small business issuer to potential liability”.
I decided to take a look at the platform. To start, I saw this warning:
If you are an accredited investor, we require you attest to your status prior to viewing borrowers on the platform.
I still have not gotten any more for verification and am still blocked from seeing any investment opportunities. I assume the business has come to grinding halt, even though the hearing on the order is not until October. SoMoLend’s CEO, Candace Klein recently resigned because of the regulatory action.
According to a story on Cincinnati.com:
Klein is a passionate entrepreneur who was honest about the company’s finances with investors and board members, but consistently lacked discipline and precision when discussing and presenting the company’s actual performance.
A combination of those missteps and the state’s apparent concerns about crowdfunding, lead to trouble.