The SEC is suing a Michigan man and two business partners over a crowdfunding initiative gone awry. According to the commission, the three individuals and an international crowdfunding platform committed and facilitated fraud in multiple ways.
SEC’s first crowdfunding lawsuit
On Sept. 20, the United States Securities and Exchange Commission filed suit in Michigan’s Eastern District, accusing three individuals of crowdsourcing fraud. Starting in 2018, the trio offered investors a real estate opportunity on TruCrowd.com, but authorities allege that the group collected funds and squandered the money on personal expenses. The SEC also took issue with the crowdsourcing group’s failure to disclose one of the creator’s criminal history.
TruCrowd also landed on the defendant list. In the eyes of the SEC, the website violated the law by failing to act when presented with “multiple warning signs of possible fraud.”
Crowdfunding legalities
In 2001, ArtistShare.com became the first crowdfunding website to hit the internet. Today, the industry has mushroomed, and analysts estimate that it will be a $25-million business inside the U.S. by 2027. However, as websites like Kickstarter and Indiegogo grow in popularity, authorities are pressuring platforms to self-regulate and weed out fraud.
Consumer watchdog agencies, like the FTC and SEC, are cracking down on parties that take the money and run. However, authorities sometimes overstep and go after startups that try and fail. After all, about 90% of startups don’t make it, and 21.5% crumble within the first year. However, legal problems can arise if no effort is made to fulfill the project’s stated goals.
To avoid clashing with the Securities and Exchange Commission, it’s important that crowdfunding initiatives comply with local, state, federal and even international statutes. Otherwise, accusations of fraud could follow.