September 26th, 2018
Somolend’s Investors To Regulators: ‘Where’s The Beef?’
Update August 15, 2013: Candace Klein has confirmed that she has officially resigned, saying, “I have officially resigned from SoMoLend. The press has seemed to focus on a personal attack against me, and I don’t want this to affect the value of the company, so I suggested resignation to my board.”
In a surprising move today, Somolend investor Carlin Stamm issued a written statement figuratively asking, “Where’s the beef?”
The statement reads, in part:
Recent news reports have indicated investors were somehow misled by the leadership of SoMoLend into investing into this important company. From my perspective as an investor in SoMoLend, nothing could be further from the truth. SoMoLend’s investors were fully aware of the risks and rewards of investing in this startup company and were in no way misled by Candace Klein. SoMoLend’s investors have received regular updates, detailing company’s financial results and continue to believe in the mission and viability of the company’s business model. I am greatly concerned about what we believe to be unfounded allegations of fraud against the company by the state of Ohio. To my knowledge no investor complaint has been lodged against SoMoLend. If the investors don’t believe they were misled or harmed, where is the fraud?
On June 14, 2013, Ohio regulators issued a “Notice of Intent to Issue a Cease and Desist Order” that alleged Somolend had engaged in a variety of securities law violations, including making a “general solicitation” and “securities fraud.”
Stamm, whose wife served as a paid consultant to Somolend, asserted by email that “I know as a fact that no one [among the investors in Somolend] had a complaint.”
Speaking on behalf of the investors, Stamm, indicated that they do not feel that they have been harmed by Somolend’s conduct nor by the CEO, Candace Klein’s. On the other hand, they feel they have been harmed by the regulator’s actions.
Klein declined comment on the record for this article. Similarly, the Ohio Division of Securities did not answer the phone after hours or respond to an email request for comment on this article.
DJ Paul, who is a player in the crowdfunding community, working at Gate Global Impact, spoke with me on the record about the situation. He said, “I can’t speak to what Somolend did or didn’t do.” With that preface, he went on to comment at length about the regulator’s case.
Paul noted, too, that entrepreneurs outside the crowdfunding community should be concerned about the allegations in the Division’s Notice. The regulator alleges that making “hockey stick” projections—which he argues are universal among early stage ventures—is being criminalized by the state of Ohio.
The State of Ohio appears to be using the Somolend case as a way to make a political point, Paul argues. He notes that in February the Division published a comment letter strongly and broadly condemning crowdfunding. “Ohio is going after a ‘bad’ industry,” he said.
He also noted that the issue of what constitutes a general solicitation is not widely agreed upon. The Notice alleges that by participating in a variety of “Shark Tank” style pitch contests, Somolend was effectively conducting a public offering. Given the number of business plan competitions going on around the country, the argument that participation in one is a violation of securities laws is distressing, Paul argues.
In response to the Notice’s allegation that 229 people shared the online DropBox due diligence folder for Somolend also constituted a general solicitation, Paul asked, “How many is too many? Five? 100?” The entrepreneurial community needs clear guidance in this regard, Paul says.
While no one is refuting any of the allegations in the Division’s notice, some of which can only be described as egregious, it is interesting that those the Division seems to seek to protect—the investors—say they have not been harmed. Conversely, some of the Division’s allegations seem remarkably benign and threaten not only the viability of crowdfunding but the viability of entrepreneurship in Ohio.