SEC Finds Crowdfunding Website a General Solicitation and Violated Broker-Dealer Rules

Stinson - Corporate & Securities Law Blog

In a settled enforcement action, the SEC alleged the defendant failed to implement procedures reasonably designed to prevent U.S. persons from accessing and investing in securities through its crowdfunding website.  The defendant operated a global, online, securities-based, crowdfunding platform that connects issuers with investors to raise funds in exchange for equity. Its website hosted offerings of securities from non-U.S. based companies.

Visitors to the website were permitted access to the names of the offerings, the amount of the offerings, and informational videos about the offerings without registering. According to the SEC, none of this information was password protected or restricted in any way.  Users had to register on the website to gain access to additional information about the offerings of securities listed on its website and to invest in these offerings. To register, users had to provide their names, dates of birth, email addresses, countries, and phone numbers. No representation regarding accredited investor status was requested. Additionally, the website did not contain any disclaimer or definition of “accredited investor.”

The website did include a disclaimer on its website that its services were not being offered to U.S. persons.  Despite the disclaimer that the services could not be used by U.S. persons, users who selected “United States” as their country were allowed to register on the website and gain full access to offering materials, and under certain circumstances, deposited funds with the defendant for the purpose of investing. As of May 2014, the defendant permitted over 50 persons who selected the U.S as their “country” during the website registration process to register on the website. Three U.S. residents who registered on the website invested in unregistered offerings of securities through the website.

The defendant received a percentage of the funds of the fully funded offerings of securities as compensation for its services upon closing of a deal.

The defendant allowed two of the U.S. investors to self-certify that each was an accredited investor. The defendant sent an email to two of the U.S. investors asking each to confirm their status as an accredited investor via email prior to investing in the offerings. The emails did not define or otherwise explain what the term “accredited investor” meant. Each of these U.S. investors confirmed they were accredited investors via email. The defendant did not take any further action regarding whether these two U.S. investors were accredited investors prior to allowing them to invest in offerings of securities on its website. The defendant did not request any information to verify whether the third U.S. investor was an accredited investor prior to allowing him to invest in the offerings of securities on its website.

The SEC found the actions were an unlawful public offering and that the defendant was acting as an unregistered broker dealer.  In settling the matter the SEC considered remedial acts promptly undertaken by the defendant and voluntary cooperation afforded the SEC staff.  The defendant did not admit or deny the findings in the order.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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