Candace Klein at her state hearing in February 2014.
SoMoLend screen shot dated Aril 7, 2014.
The state administrative hearing for embattled entrepreneur Candace Klein has been postponed again.
Lawyers for Klein and Ohio regulators were scheduled to face off again in Columbus April 8, resuming a hearing that began in February after several other delays.
But a state Department of Commerce spokesman notified WCPO that the hearing won’t start again until June.
The continuance was granted because Assistant Ohio Attorney General Keith O'Korn, lead counsel for the state regulators, became ill.
Whenever the hearing resumes, it’s a sure bet that Klein’s friends and investors won’t be the only ones watching to see which side prevails. The nation’s crowdfunding industry will be, too.
“A lot of people are keeping an eye on it from the sidelines,” said Joy Schoffler, a board member of the national Crowdfund Intermediary Regulatory Advocates, or CFIRA, and author of a book on crowdfunding.
“There’s kind of a feeling that maybe she was used as a little bit of a scapegoat,” she said. “While they couldn’t stop crowdfunding, they could make an example of someone who was such an advocate for it.”
Klein became a nationally known proponent of crowdfunding after starting Cincinnati-based SoMoLend, which stands for social, mobile, local lending. Crowdfunding is a way to raise money from large numbers of people who contribute small amounts, typically using the Internet.
SoMoLend was designed to help small businesses borrow money in small amounts as one of the nation’s first debt-based crowdfunding platforms.
Troubles Started in 2013
But the company and Klein ran afoul of Ohio state regulators last year. The Ohio Division of Securities filed a document last June known as a “notice of intent” to issue a cease and desist order. That document accused SoMoLend and Klein, the company’s CEO at the time, of a variety of misdeeds.
Those included selling unregistered securities, committing securities fraud by overstating SoMoLend’s early success and making fraudulent financial projections by exaggerating revenue projections during public presentations and statements.
SoMoLend reached a settlement with the state Feb. 10. Lawyers for Klein have said the company is essentially defunct. Klein resigned as CEO last August in an attempt to save the business.
She has been fighting the state’s allegations, and the administrative hearing represents her opportunity to defend herself. The stakes for Klein are high: If the hearing determines she committed fraud, it would become difficult – if not impossible – for her to work in the financial sector where she’s spent years building her career.
A spokesman for the state’s securities division said the hearing shouldn’t be interpreted as anything more than it is – a hearing on the specific allegations outlined in the notice of intent.
But some crowdfunding industry insiders argue the proceedings represent much more.
Insiders can read why those industry insiders are watching the state so intently. They also can read comments from a spokesman for an association that represents state regulators, led by the Ohio Securities Commissioner who signed the "notice of intent" issued against Klein and SoMoLend. And they can read about a hearing examiner's ruling regarding whether Commissioner Andrea Seidt will have to testify in the matter.
COLUMBUS – The state administrative hearing for embattled entrepreneur Candace Klein has been postponed again.
Klein became a nationally known proponent of crowdfunding after starting Cincinnati-based SoMoLend, which stands for social, mobile, local lending. Crowdfunding is a way to raise money from large numbers of people who contribute small amounts of money, typically using the Internet.
The company and Klein ran afoul of Ohio state regulators last year. The Ohio Division of Securities filed a document last June known as a “notice of intent” to issue a cease and desist order. That document accused SoMoLend and Klein, the company’s CEO at the time, of a variety of misdeeds.
Their concern is that if state regulators in Ohio win their administrative hearing against Klein, regulators in other states could try similar strategies to go after crowdfunding businesses elsewhere.
“The Ohio case could set a horrible precedent nationally,” said DJ Paul, chief strategy officer for Gate Global Impact, a New York-based global investing firm, and CFIRA co-chair. He testified as a witness for Klein during her hearing in February. “They invented a scare and then found a poster child to justify their concern about it.”
Klein, Paul and other crowdfunding advocates were big supporters of the federal JOBS Act, which became law in 2012 and paved the way for businesses such as SoMoLend.
But the North American Securities Administrators Association, which represents state securities regulators, opposed the legislation in 2012. In a news release, the association called it “an investor protection disaster waiting to happen.”
In October 2013, Ohio Securities Commissioner Andrea Seidt became president of that association. She’s the official who signed the “notice of intent” sent to Klein and SoMoLend last June.
A spokesman for the regulators’ association, known as NASAA, said the group accepts that the JOBS Act is now the law of the land and isn’t actively opposing crowdfunding.
“Our concern isn’t with crowdfunding itself,” said Bob Webster, NASAA’s director of communications. “But we know how unscrupulous people can try to subvert even the most well intentioned of offerings. We know that cons kind of gravitate towards the headlines, and they look for the new and the not widely understood and exploit that.”
Webster said he was aware of Klein’s case. He doesn’t think members of NASAA are watching the hearing to set any kind of precedent, he said.
A spokesman for Seidt said she wouldn’t comment on the case because she will have
to rule on the hearing officer’s recommendation once it’s issued.
Seidt As A Witness
It looks like Seidt also will be a witness in the hearing.
Klein’s lawyers issued a subpoena in February to compel her to testify. They wanted Seidt to testify about:
• Facts about her interpretation of the securities law that she charged Klein with violating;
• Her knowledge about several meetings that occurred between Klein and state regulators;
• Seidt’s stance on the “Common Sense Initiative,” which is designed to create a more “jobs-friendly regulatory climate” in Ohio;
• Seidt’s continued prosecution of Klein after the state settled with SoMoLend, the company she founded.
Lawyers for the Ohio Division of Securities argued that Seidt should not testify because she has the ultimate decision-making power in the case, similar to those of a judge.
Hearing Examiner Ronald Alexander decided Seidt would not have to testify about her interpretation of securities laws, her stance on the Common Sense Initiative or her continued prosecution of Klein.
But he ruled she would have to testify as a “fact witness” regarding meetings she had with Klein.
Impact In Ohio
However Klein’s case turns out, it’s already had a big impact on the way Ohio is perceived by investors across the country, said Charles Sidman, a retired University of Cincinnati professor. He’s also a board member and president of the Crowdfunding Professional Association, a member of Queen City Angels and an investor in SoMoLend.
“It’s a national case study in overzealous and over-reaching regulators,” said Sidman, who expects to be called to testify on behalf of Klein during her hearing.
Potential investors now have a “heightened level of caution and a heightened level of reserve” when it comes to Ohio, he said.
“It sets the whole state and its business and investment climate back substantially compared to everyone else,” Sidman said.
The state’s action has cost Ohio jobs – all the jobs SoMoLend could have created if the company had been able to continue to thrive, he said.
As it stands now, SoMoLend is little more than its homepage.
Click on a link to start or fund a campaign, and a screen pops up that says: “We apologize. We are no longer accepting new lenders and borrowers.”
For more stories by Lucy May, go to www.wcpo.com/may . Follow her on Twitter @LucyMayCincy.