SoMoLend and equity crowdfunding: What does this say about the industry?
The last few weeks have not been pretty for peer-to-peer lending platform SoMoLend. According to the state of Ohio, the company behind the platform (SoMoLend Holding LLC) may have have committed many instances of securities fraud. In response, the city of Cincinnati cut off the lending platform, along with many banks and organizations that had previous ties to it. Perhaps most telling, SoMoLend's CEO Candace Klein resigned.
Is all of this a bellwether for the future of crowdfunding?
While one company an industry does not make, SoMoLend's problems may be a harbinger for the entire concept of crowdfunding. As a theoretical concept it's beautiful, the democratization of venture capital, the revenge of the 99 percent. Anyone who likes a project can participate and help entrepreneurs realize their funding dreams. But with this freedom comes the potential for fraud. There have already been numerous cases.
So it's of no surprise that the SEC has kept a tight rein on equity crowdfunding. Up until now, government regulation has hampered small companies' participation in crowdfunding campaigns. Businesses could only receive funding from SEC accredited investors, even if they weren't looking for large investments. Accredited investors had to be those who met stringent financial requirements by the SEC. Many of these regulations were decades old, causing advocates to call for new, more germane legislation.
Last month the SEC finalized two important facets of the JOBS Act, both of which work very much in favor of crowdfunding platforms. Title II of the Jobs Act lifts an 80-year-old ban on public solicitation for fundraising. In short, it allows companies to freely advertise a need for funding on capital. In addition there's Title III, which will finally allow non-Accredited investor participants.
Both of these legislative changes indicate a changing tide in equity crowdfunding, making it easier for smaller entrepreneurial endeavors to partake. These titles change both how to participate in equity crowdfunding campaigns, as well as who is eligible to invest. Crowdfunding platform EquityNet CEO Judd Hollas called this legislative change "truly huge," because the playing field is being greatly expanded.
Others may not be as thrilled. In a recent Forbes article, DJ Paul, the vice chairman of the crowdfunding industry trade group CIFRA, claims that Ohio's investigation may not be pointed just at SoMoLend, but to something bigger. “Look at the contents of Ohio’s letter to the SEC, and then read the state’s Notice/Order against SoMoLend. What’s clear to me is that Ohio is using Candace (Klein) and SoMoLend to go after an industry and not just SoMoLend.com,” he said.
Why? According to Paul, state regulators feel their power over funding regulations are being slowly usurped by the national powers that be. Thus, legislations like the JOBS Act come as a slap to the face to states who have been regulating these kinds of transactions for almost a hundred years.
So perhaps recent moves by Ohio indicate a flexing of its state-powered muscles. That's what Dinsmore & Shohl securities attorney Steve Watts believes. He told Cincinnati Business Courier that he expects a heightened scrutiny from state officials, "until they’re confident companies and their attorneys have implemented processes to make sure the proper due diligence has been done." So while fraud is a legitimate concern of both state regulators and the SEC, perhaps this recent state intervention is just an excuse for regulators to show their waning might.
Hollas wouldn't necessary go that far. He is quick to point out that SoMoLend's problems don't stem from crowdfunding, but from its own fundraising. "SoMoLend did not seek their funding on a platform," he told me. "They raised funds in a traditional manner." So while it is coincidental that there's a large-scale investigation of a prominent crowdfunding platform, it doesn't reflect poorly on the industry itself, just the company in question.
Hollas, in fact, would add that this is a very positive time for the future of crowdfunding. What with the the two JOBS Act titles enacted, there's great momentum for platforms like his. In addition, he noted that other states are much more favorable to crowdfunding. According to him, five states have already adopted intrastate crowdfunding platforms for non-accredited investors.
So while SoMoLend may make a good headline, people like Hollas want to reiterate that it's not indicative of equity crowdfunding as a whole. What he does want to emphasize is the fact that on September 23 Title II will take effect. From there we'll be able to see the change this legislature will make. While some old-school regulators may foresee a rise in fraud, Hollas sees a more widely available crowdfunding landscape.
But until then, people like Hollas will just have to hope that another SoMoLend-like investigation won't be executed on another crowdfunding heavy hitter.