The U.S. Securities and Exchange Commission is serious about regulating not only startups looking to raise money through crowdfunding portals, but the platforms themselves.

Case in point: In September 2021, the SEC brought its first crowdfunding regulation enforcement action against two cannabis and hemp real estate companies, 420 Real Estate LLC and Transatlantic Real Estate LLC, as well as the crowdfunding portal, TruCrowd, Inc.

What is crowdfunding? The Jumpstart Our Business Startups Act (JOBS Act) established crowdfunding provisions in 2016, and the SEC subsequently adopted crowdfunding regulations that allow small startups to raise equity from a large number of investors. It is generally viewed as a cheaper and less cumbersome way to raise money, but issuers must still abide by SEC rules designed to protect investors and prevent fraud during the fundraising process.

What prompted the SEC to act?

In addition to 420, Transatlantic and TruCrowd, the SEC’s enforcement action named the companies’ principals: Robert Shumake, Nicole Birch, Willard Jackson and Vincent Petrescu. Shumake and Birch led TransAtlantic’s campaign, which raised over $1 million using TruCrowd’s platform. Shumake, with Jackson, also led 420’s campaign, which raised over $800,000. Petrescu was TruCrowd’s CEO.

According to the SEC, investors were led to believe the funds would be used to acquire real estate that would be leased to cannabis-related businesses. Instead, the funds were diverted for personal use.

Shumake also had previously pled guilty to two felony counts of allegedly accepting fees for mortgage audit services. And during the offerings, he was on an 18-month probation, which prohibited him from holding positions where he could manage other people’s money. That was not disclosed in the offering documents, the SEC said.

Despite receiving notifications from investors of Shumake’s prior criminal record, Petrescu and TruCrowd continued to work with Shumake on both offerings. Petrescu never ran a bad actor check on him.

Where are we now? Without admitting or denying the SEC’s allegations against them,

• in December 2021, TruCrowd settled with the SEC by agreeing to pay $243,747 in disgorgement, interest and penalties. Petrescu also agreed to pay a $9,700 fine and was suspended from appearing and practicing before the SEC as an accountant. He may apply for reinstatement after three years.
• in January 2022, Birch consented to the entry of the judgment permanently suspending her from appearing and practicing before the SEC as an attorney. She agreed to pay a $800,712 fine and to be barred from assuming a future role of an officer or director.
• on February 2, 2022, Jackson and 420 Real Estate consented to the entry of bifurcated judgments, permanently enjoining them from violating certain securities laws. Jackson is also barred from assuming a future role of an officer or director.
• Shumake, the last man left standing, continues to fight for dismissal.

Let this be a lesson for all: The SEC expects intermediaries like TruCrowd, in addition to issuers and investors, to be “gatekeepers.” They must thoroughly vet fundraising efforts and not ignore red flags when they pop up.

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