By: Kim Wales, 11/13/14 —
An unfortunate yet necessary “Cease and Desist” action was taken by the Securities and Exchange Commission (SEC) against a crowdfunding platform, Eureeca, which is domiciled in Dubai and doing business in the Cayman Islands.
As a platform conducting private placements using Title II of the JOBS Act, which allows General Solicitation, and Advertising for Accredited Investors, Regulation D, Rule 506(c) and Rule 144A has drawn significant attention since September 23, 2013, due to significant changes in rules governing certain private offerings.
Historically, a Regulation D, Rule 506 offering has been exempt from SEC registration, provided that the offering is not publicly advertised and that the purchasers are largely qualified institutions or accredited investors—those whose net worth is greater than $1 million (excluding a primary residence) or whose individual income exceeded $200,000 ($300,000 for couples) for the past two years with the expectation for that level of income to continue in the current year.
Title II of the JOBS Act called for the SEC to lift the ban on mass marketing these offerings, provided that the issuer has taken reasonable steps to verify that the buyers of the private securities are in fact accredited.
In the case of Eureeca, what are some of the things that went wrong?
- Eureeca’s posting of securities offerings on its unrestricted website constituted general solicitation and advertising.
- Eureeca had a disclaimer on its website that its services were not being offered to U.S. persons.
- Eureeca was not registered as a Broker with FINRA or the SEC; nor was there any disclosure of Broker of record on the platform.
- The roughly 465 deals listed on the platform were not registered with the SEC.
- There was no firewall that prevented at least three U.S.A investors from gaining access to the deal room on the site.
- There were no ‘reasonable steps taken to verify’ that investors are “accredited.
- “Accredited” investor definition was not disclosed on the platform, as a mechanism to educate the potential investor pool.
- Disclosures were lacking on the on the platform
As a result of conduct described, Eureeca willfully violated section 15(a) of the Exchange Act, which makes it unlawful for any broker or dealer to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security, unless such broker or dealer is registered is or associated with a registered broker-dealer.
Eureeca will have to pay civil penalties of $25,000 to the Securities and Exchange Commission in 10 installments of $2500 over the next year. In my opinion they got off easy.
Things for Funding Platforms to Remember
- Unless you are registered with the Securities and Exchange Commission as a Broker, or partnered with Broker, you cannot legally sell securities to the accredited investor via a funding platform using Title II, Regulation D, 506(c).
- The entity “Registered Funding Platform” does not yet exist until the final rules are issued for Title III and FINRA registers the platform to sell securities.
- Listing registered broker of record and disclosure documents on the platform is a must.
- Seek legal advice and or contact Crowd Finance consulting companies like Wales Capital to ensure that your platform is in compliance.