Kickstarter has shown the world that crowdfunding is a viable option for funding great ideas. Because of US securities laws, the funding arrangement on that platform cannot be for an equity interest. That’s selling securities and that practice is subject to decades of protections built to protect consumers. The JOBS Act opened the possibility of equity crowdfunding sites for the masses, but the implementation is still hung up in SEC rulemaking.
That has not stopped internet entrepreneurs from firing up crowdfunding sites. There are ways to do so legally, but there are lots of regulatory and operational landmines that need to be navigated.
Of course, it’s very easy to set up an illegal crowdfunding site. Eureeca.com did that and subjected itself to the wrath of the SEC.
Eureeca.com’s approach was to make international investments available for crowdfunding. From looking at the funding proposals on the site, most seem to be coming out of the Middle East and North Africa. Since I see the proposals and can seemingly participate, Eureeca.com subjected itself to the jurisdiction of the SEC.
The website is a general solicitation for securities purchases. None of the securities are registered. Eureeca.com is not making any attempt to limit participants to accredited investors and is not taking steps to verify that investors are accredited investors. That would allow it to use the new Rule 506(c) exemption for public private placements.
The SEC wrath was a charge of failing to register as a broker-dealer.
According to the SEC order, three US investors put $20,000 into four offerings. That resulted in a $25,000 fine and new big disclaimer on the site:
The securities and services on the Eureeca platform are not being offered in the USA or to U.S. persons. For further information please read our FAQs.
If the offerings were in the US, the SEC would also be able to interfere with the private placements as violations, but the issuers are outside the reach of the SEC. I’m not familiar with the securities laws in the foreign jurisdictions, but I would guess that Eureeca.com is violating the securities laws in many other countries.
The SEC will continue to bring the hammer down on crowdfunding sites. The SEC worried about consumer protection and fraud in this area. I think they are right to concerned.
Sources:
- Eureeca Capital Administrative Cease and Desist Order (.pdf)
- SEC Scrutiny of Crowdinvesting Sites Not Registered as Broker-Dealers by Breton Leone-Quick in Mintz Levin’s Securities & Compliance Matters
- AngelList No Action Letter 2013 (.pdf)