Associates Of Candace Klein Speak Out On SoMoLend, Fraud Allegations In Ohio

somoLend-2_copyAllegations by the Ohio Division of Securities reverberate through the entrepreneurial class & the crowdfunding industry

Candace Klein has been an extremely visible figure in the world of crowdfunding. Beyond her role as CEO of lending-based platform SoMoLend, she is also the former chair and one of the cofounders of the Crowdfund Intermediary Regulatory Advocates (CfIRA) and a cofounder of the Crowdfunding Professional Association (CfPA).

As we’ve previously reported, the State of Ohio Division of Securities has delivered a notice outlining allegations of fraud toward Candace Klein acting on behalf of SoMoLend, which is based in Cincinnati. The charges levied against Klein on behalf of the State of Ohio sent shock waves through the crowdfunding industry.

Allegations include improper use of general solicitation, fraudulent projections, material omissions and a myriad of other charges. All charges involve her actively seeking funding under Rule 506(b) of Regulation D, which specifies a framework under which entrepreneurs can seek funding from unlimited accredited investors and up to 35 non-accredited investors without the use of general solicitation. (The full document by the state and a brief breakdown is available on our website here.)

We recently reached out to two people who have worked with Klein in an effort to provide their perspective on these allegations and the associated ramifications for Klein, SoMoLend and the impact on entrepreneurship in Ohio – a state that has recently prided itself on being friendly to small businesses and entrepreneurs.

On Character

Carlin Stamm 2013Carlin Stamm is an early investor in SoMoLend. I asked Stamm about his view of Candace Klein as a person and as a businesswoman.

“I know Candace Klein to be a person with a good heart, a person who wants to do well by doing good,” Stamm told Crowdfund Insider. “That was the original concept of the enterprise. She saw a need from her past experience to help with funding for small business and that was the beginning of her concept with SoMoLend. Also, she had done some research on crowdfunding, Kiva and other crowdfunding sites that had been operating for some time successfully.”

DJ Paul is Chief Strategy Officer at GATE Impact and has worked with Klein extensively on regulatory efforts, and he highlighted her work to advance crowdfunding as a means of capital formation in America.

dj paul“I have worked with her as a fellow citizen and fellow advocate for crowdfunding since the beginning of 2012. I cofounded with her – and several others – both the CfPA and CFIRA. Candace has been a tireless advocate for crowdfunding, both debt-based and equity-based, so in other words not just on her own behalf but on the behalf of portions of the industry that have no direct relevance to her,” Paul said. “She has been as involved as anyone has been with the Securities and Exchange Commission and the ongoing dialogue between industry representatives, including CFIRA, and the SEC. But for her, certainly CFIRA would not exist and I dare say crowdfunding would not be as imminently close to being actionable as it is. She has been an incredible asset to the industry and to entrepreneurs that would seek to raise capital in this manner.”

Gray Matters: Pitch Events & Projections

The notice sent on behalf of the State included verbiage outlining an allegation of general solicitation on behalf of SoMoLend by Candace Klein.

…if the possibility of being prosecuted for fraud would exist if you have optimistic projections in your offering documents, then I dare to say the vast majority of companies that have sought to raise money would be susceptible to allegations of fraud. That’s kind of scary.DJ Paul

Beginning on or around April 9, 2011, up to and including the date of this Notice Order, Respondents have offered SoMoLend Securities for sale through general solicitation and general advertising in Ohio and other states. Said solicitation and advertising have occurred through Respondents’ own actions: as well as through the actions of others on Respondents’ behalf through numerous investor presentations and investor pitch events, videotaped recordings of investor presentations and investor pitch events posted to the internet, content and links on Respondents’ websites and- social media sites, and press releases and other communications published in newspapers, magazines, and other broadcast media; [Notice]

There are also allegations that Klein provided misleading projections on behalf of her company in offering materials.

By way of example, on April 19, 2011 during the GCVA Presentation, Respondent Klein projected annual revenues of $1.5.million in 2012, $10.2 million in 2013, $15.5 million in 2014, and $45.5 million in 2015. Respondent Klein projected that Respondent SoMoLend would “breakeven,” commonly understood to mean the first point at which revenues would equal expenses, in the third quarter of 2012. At the time of the GCVA Presentation, Respondents had not conducted a single loan transaction or obtained licensure or registration necessary to conduct their proposed business activities; [Notice]

These two points present concerns for entrepreneurs that participate in pitch events and demo days, where interfacing with accredited investors for the first time can be the norm.

ohio state legislature

Projections are also often requested or included as part of offering materials. Any able entrepreneur knows that often times projecting revenues years into the future within months of starting a company can be an exercise in futility. Lofty idealism is part of the entrepreneurial spirit, and it sometimes does make its way into projections for better or for worse.

I asked DJ Paul if these two particular aspects of the charges against Klein warrant further clarification on behalf of state or federal securities regulators.

“To the extent that the SEC can offer some additional guidance about certain common practices that have existed for the better part of the last 20 years regarding, say, pitch events, pitch contests and other types of what are now 506 activity to determine whether or not those constitute general solicitation, yes. I think that the public would like some clarification, both issuers and potential intermediaries, around what constitutes general solicitation and what doesn’t,” Paul said.

candace kleinHe continued, “With respect to projections, part of what I personally – again, I’m speaking on behalf of someone who is involved in the industry – part of what I find most chilling about some of the State of Ohio’s allegations is the suggestion that projections that all startups put in their offering documents… that if they are not accurate or if the State of Ohio deems them to be overly optimistic, that that somehow constitutes fraud.

“If that’s the case… if that’s proven… that would have a stultifyingly dramatic impact on new companies’ and startups’ abilities… not just crowdfunding intermediaries, crowdfunding sites, but all entrepreneurs… if the possibility of being prosecuted for fraud would exist if you have optimistic projections in your offering documents, then I dare to say the vast majority of companies that have sought to raise money would be susceptible to allegations of fraud. That’s kind of scary.”

The sentiment about clarity on behalf of regulators was echoed by Carlin Stamm, who clarified that he was not seeking any ridiculously exorbitant returns despite any potential returns referenced by Klein herself.

“I think there needs to be more clarity because it is difficult for me to see the difference between any pitch in an accelerator type format. They’re generally technology oriented and have the potential for rapid growth… these are the types of companies that appeal to venture capitalists, and they are openly soliciting funds,” Stamm told Crowdfund Insider“They’re projecting big returns, they may not be asking for a specific amount but often they do. Often someone says I’m looking for $200,000 or $500,000 in funds, and to me that is a solicitation.

Image courtesy Wikimedia Commons“If we’re talking about venture-type investors or accredited investors, I think that… I hate to have a bureaucrat making recommendations about what the projections should be, because I think a person has to use some intelligence when they look at projections. The Cincinnati Enquirer mentioned, I believe, that the projections were something like an 8,000% return on investment, which is ludicrous. No one looks for that kind of return on investment. We were hoping when we invested to see 8 or 9 times. We felt that that would be a reasonable rate for an investment with some risk.”

Entrepreneurship And Capital Formation In Ohio

DJ Paul points out that the State of Ohio has historically taken a stance that is critical of the JOBS Act and Title III crowdfunding. This stance was encapsulated in a letter published as comment on the JOBS Act in January of 2013.

“I would note that many aspects of their concerns and complaints seem to parallel some of the complaints against SoMoLend. The recent legal action that the State of Ohio has taken against SoMoLend,” Paul told me in the interview. “And it would appear that perhaps the State of Ohio is using its case against SoMoLend in order to bear in a different forum some of the very same complaints that the State of Ohio expressed in its January newsletter to the Securities and Exchange Commission.”

The document is embedded at the bottom of this article for reference, or alternatively it is available for viewing on our Scribd page.

Carlin Stamm expressed dismay at the fact that the allegations against SoMoLend and Candace Klein hurt SoMoLend’s investors, a majority of which live in the State of Ohio – the very state that brought the charges to light. He is also concerned that CincyTech and the North Coast Angel Fund were caught up by proxy. Both early-stage investment funds are funded in part with state money, and according to Stamm both were invested in SoMoLend.

“I guess the ironic thing about this is that the state is hurting its own investments by going after SoMoLend for to me a mythical or illusionary act of fraud,” he said.

As for the overarching state of support for early stage endeavors in the state of Ohio, Stamm’s take was simple.

“Lots of talk, very little action.”

In Search Of A Victim

fraudAs an early investor in the company, Stamm is left wondering who the victim is in SoMoLend’s allegedly fraudulent activities. He said, “I don’t understand how we have a notice of fraud when you have no injured party complaining. It seems to me that someone that doesn’t like the concept and felt that Candace had made some statements that were perhaps inflated saw the opportunity and used it. That’s why we find ourselves in this situation.”

DJ Paul also echoed this sentiment. “Who has been harmed here? To my knowledge and belief, and I look forward to someone correcting me on this, but have any of the investors in SoMoLend claimed fraud? Have they claimed damages? Have they claimed losses? Have they claimed to have been misrepresented to? Who is it that the State of Ohio is protecting here? Which investors have been harmed? Where’s the damage? Where’s the victim? Perhaps there is one, but I am unaware of it at this time. It seems like the State of Ohio is creating a victim where none exists.”

Crowdfund Insider has reached out to a representative of the State of Ohio and will follow up with any additional information as soon as it becomes available.

The comment letter published on behalf of Ohio Division of Securities Commissioner Andrea L. Seidt and posted on the SEC web site this past January shares the State’s concerns regarding non-accredited crowdfunding. The document is embedded in its entirety below.

Sponsored Links by DQ Promote

  • Pingback: Angel Investors Share Concerns With SEC Ahead Of General Solicitation « The Crowd Funding Times™()

  • Pingback: Angel Investors Share Concerns With SEC Ahead Of General Solicitation | Hue Funder()

  • Pingback: Show #012 - Customer Satisfaction Ratings with Jim Stein and News - Small Business File()

  • Pingback: Show #011 - Cross Cultural Business Communication with Michael Soon Lee and News - Small Business File()

  • Donald McIntyre

    I’ve seen Candace in numerous press articles, conferences, and “business plan competitions”, there are dozens of videos and written pieces on the web.

    If presenting to qualified investors and within the limits of the law then is broadcast to the world it is not crazy to conclude that she is, in practice, advertising and offering to the public.

    It is amazing that Candace was an architect of part of the regulation and huge promoter and she is the first one to allegedly brake the rules!

  • Daryl Montgomery

    While U.S regulators are doing and have done almost everything possible to delay, curtail and try to stop crowdlending in the U.S, there are over 300 sites operating in China (one reason their economy grows 5 times faster than the U.S.), a number in the UK, many in Europe and some in Australia. Both Prosper and Lending Club were closed down by the SEC, but reopened and managed to survive and thrive. Things were only worse in South American countries, where crowdlending entrepreneurs not only had their operations closed down, but were threatened with jail because they dared to threaten the corrupt banking establishment’s monopoly. Apparently, things are not so different in the U.S.
    The SEC claims that consumer loan area involves issuing securities, although this is absurd (every bank would be doing the same thing and should therefore also be regulated by the SEC — and why not your child’s lemonade stand on the corner as well). While the SEC was busy stopping Prosper from arranging consumer loans at the height of the Credit Crisis in 2008, when the economy was starved for money and America was on the brink, it had previously ignored Bernie Madoff’s $65 billion fraud (his son turned him in), something they most certainly had jurisdiction over. The rich and powerful seem not to be bothered by the regulators no matter how crooked they are or how blatant their crimes. It should be obvious who is really being protected by the regulators.
    Congress passed the JOBS Act and it was signed into law in April 2012. The unelected SEC was supposed to move quickly to set regulations and has not done so, repeatedly ignoring demands from Congress and thereby the will of the American people. Is this not a crime? Why isn’t anyone indicting the people running the SEC?
    As for people being cheated, what about all the savers that get 0.3% interest from the banks, but could get high single or even double digits in interest from crowdlending? Aren’t regulators cheating them by denying them this opportunity and isn’t the amount involved many, many, many times greater than any potential fraud? And if the regulators were actually capable of preventing fraud, why was there a global banking collapse in 2008? Their success record seems to be minimal if that is indeed their objective.
    As for Ms. Klein, she has been a high profile political activist in the crowdfunding arena and her real “crime” is challenging the banking monopoly and its friendly regulators.

    • tstorey

      If you choose to comment on a legal matter it is best to research it. The regulators have been working with SoMoLend since 2011 on this. SoMoLend, in fact, has done a great deal to HURT the efforts of crowdfunding advocates. Ms. Klein is not a political activist, she is a chief executive of a firm that is regulated by the government. Study the laws and listen to your lawyers….like all of the rest of the chief executives.

  • Abbey

    Instead of obtaining proper licenses, Klein has been traveling, speaking at the Milken Institute and planning her move from Cincinnati to New York. One has to wonder if the move was motivated by advance knowledge of this event. It appears that the job of grabbing publicity got in the way of her actual work.

  • Charles

    I swear, if equity crowdfunding dies it will be from suicide. The state is laying out some pretty strong evidence of fraud, and instead of being cautious and waiting to see what happens, the usual suspects are jumping up and down screaming “anti-small business”, “wall street entrenchment” and “anti-women.”

    Why is it the State of Ohio can come up with thirty pages of what looks to be well thought out issues in the crowdfunding law, but we can’t do anything more complicated than the usual stupid sound bites. We sound like idiots. I don’t agree with some of the things in the letter, but if any of the crowdfunding “leadership” took the half hour to read that letter to the SEC, they’d realize the Ohio people were trying to help sort through the law. At least some of it is a good roadmap to get these rules going. Was it biased and overreaching? Maybe. But it was at least constructive and well argued. What do we do? Attack people personally.

    And has anybody (DJ Paul?) read the Ohio laws on this? They don’t have to prove anybody was harmed. It’s a criminal in Ohio (and I think everywhere really) to deceive investors AND POTENTIAL INVESTORS.

  • Mark

    Just to make sure I’m understanding Paul’s logic: the State – aware of securities violations (numerous), should not interfere until the violations produce a victim who suffers financially?

    • John

      Not much logic in these arguments if you read the complaint. Very clear, textbook fraud proved out in countless specific videotaped instances. Standing up for this only further hurts the industry – this is an example of the biggest risk facing this industry. Ironic that someone fighting for less regulation in crowdfunding would so blatantly violate securities laws. Regulation or litigation – I’ll deal with regulation.

  • tstorey

    I am not a securities lawyer. The case as presented by the Ohio Department of Securities (ODS) represents over two years of investigation and open discussions between ODS and SoMoLend (firm). In 2011 the firm was instructed to obtain licenses for the sale of securities. The firm has not complied.

    At numerous presentations the firm misrepresented current revenues. These are not “projections” these are revenues that have been “booked.”

    General solicitation is not a “grey area.” It is fully defined and governed by securities law. Questioning the root of these laws or, why they are in place means little. The agency ODS is chartered by the state of Ohio to enforce these laws.

    A question for the management of the firm, did you at any time advise your investors/potential investors that the ODS had met with you in 2011 and instructed you to obtain proper licensure for the sale of securities? And did you inform investors and potential investors that you had not complied?

    Is there a victim in this case? If I was at an investor’s presentation and was informed that the firm presenting was under investigation by a state regulatory agency I would have made an important conclusion about the potential investment. This firm’s management does not warrant my investment. The moment a critical piece of information is left out of investor materials, management is committing fraud.

    This is the purpose of due diligence on any investor’s part. Besides the prospects for a company, you must learn about their management. Any executive that chooses to misrepresent one fact is likely to follow a “pattern of misrepresentation.”