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SEC Issues Warning to Investment Crowdfunders

In late April, the U.S. Securities and Exchange Commission (“SEC”) issued a warning to premature investment crowdfunders, and the SEC’s warning contains implications for filmmakers. In its warning, the SEC pointed out that on April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. Among other thing, the Act requires the SEC to adopt rules to implement a new exemption that will allow investment crowdfunding (Title III of the JOBS Act, the so-called Crowdfund Act). Until then, the SEC is reminding issuers of securities that any offers or sales of securities purporting to rely on the investor crowdfunding exemption for the time being would be unlawful under the federal securities laws.

The SEC actually brought an enforcement case the week after the JOBS Act was signed. In that case, the SEC charged a Silicon Valley man who raised millions for two Internet start-ups by falsely promising investors that his companies were on the verge of undergoing successful IPOs and were well on their way to becoming the “next Google.”

The SEC alleged that Benedict Van, of San Jose, California, lured investors into web-based start-ups hereUare, Inc. and eCity, Inc. by falsely telling them that the companies would go public within a matter of months and generate millions in quick returns. In truth, Van had no plans to take the companies public and relied solely on investor funds to stay in business. Ultimately, when investor funds ran out by the end of 2008, Van was forced to shut down operations.

Marc Fagel, Director of the SEC’s San Francisco Regional Office stated that “Van played on the hopes of investors, tricking them into believing that his companies were on the verge of becoming the next Silicon Valley success stories.” He added that “investors should be wary of pitches promising IPO riches from companies with minimal operations and track records.”

According to the SEC’s complaint, filed in federal court in the Northern District of California, Van raised more than $6.2 million from investors for hereUare in 2007 and 2008, and raised $880,000 in investor funds for eCity in 2008. In presentations to prospective investors, chiefly in homes in Sacramento and Stockton, Van held himself out as a wealthy venture capitalist with prior IPO experience. Van told prospective investors that the companies had lucrative deals and patents, and that he had retained Goldman Sachs and an international law firm to help take the companies public within six months. According to the SEC, all of these representations were false.

The SEC’s complaint charges Van and hereUare violated the anti-fraud and registration provisions of U.S. securities laws, and charges eCity with violations of the anti-fraud provisions. Van, hereUare, and eCity have agreed to settle the charges against them without admitting or denying the SEC’s allegations and have consented to permanent injunctions. Van also consented to a district court order permanently barring him from serving as a public company officer or director, and hereUare has consented to an administrative proceeding order deregistering its stock with the SEC. The SEC waived any fine against Van based on his demonstrated inability to pay.

It is important for filmmakers considering raising funds from others to understand the difference between the more traditional donation or gift-based crowdfunding (e.g., through IndieGoGo and Kickstarter), and the new investment-based crowdfunding as authorized by Congress in the JOBS Act (see my three previous articles posted here at baselineintel.com in their “ResearchWrapBlog” relating to the JOBS Act provisions, including the section on the newer form of crowdfunding). Also, understand that this newer form of investment-based crowdfunding must be conducted through SEC registered “funding portals” or SEC registered broker/dealer firms and these funding portals are not yet available. Further, in the JOBS Act, Congress provided that the new crowdfunding law would not go into effect until after the SEC promulgates a set of rules designed to protect investors, and the SEC has until early 2013 to issue its rules. Until then, this new form of investment-based crowdfunding is not available, and filmmakers seeking to raise funds by selling securities online or through any form of general solicitation (including many of the postings we regularly see among the Facebook or LinkedIn film-related group blogs) may be subject to similar action by the SEC or any of the state securities regulatory authorities.