A few months ago, I blogged about a recent study suggesting that there was an epidemic of non-compliance when it came to crowdfunded offerings. So, maybe it isn’t surprising that in its first Regulation Crowdfunding enforcement proceeding, the SEC’s Division of Enforcement targeted not only alleged fraudsters, but a crowdfunding portal that the SEC claims ignored “red flags” and otherwise failed to comply with its obligations to protect investors. Here’s an excerpt from the SEC’s press release:
According to the SEC’s complaint, Robert Shumake, alongside associates Nicole Birch and Willard Jackson, conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies, Transatlantic Real Estate LLC and 420 Real Estate LLC. Shumake, with assistance from Birch and Jackson, allegedly hid his involvement in the offerings from the public out of concern that his prior criminal conviction could deter prospective investors. The complaint alleges that Shumake and Birch raised $1,020,100 from retail investors through Transatlantic Real Estate, and Shumake and Jackson raised $888,180 through 420 Real Estate. Shumake, Birch, and Jackson allegedly diverted investor funds for personal use rather than using the funds for the purposes disclosed to investors.
As alleged, TruCrowd Inc., a registered funding portal, and its CEO, Vincent Petrescu, hosted the Transatlantic Real Estate and 420 Real Estate offerings on TruCrowd’s platform. Petrescu allegedly failed to address red flags including Shumake’s criminal history and involvement in the crowdfunding offerings, and otherwise failed to reduce the risk of fraud to investors.
In its complaint filed with a Michigan federal court, the SEC contends that portal’s alleged shortcomings violated Section 4A(a)(5) of the Securities Act and Rule 301(c)(2) thereunder, which obligates an intermediary to deny access to its platform if the intermediary “has a reasonable basis for believing that the issuer or the offering presents the potential for fraud or otherwise raises concerns about investor protection.”
– John Jenkins