RIA Compliance Blog
In a settlement that underscores the SEC’s increased scrutiny of crowdfunding sites and whether they are acting as broker-dealers, the SEC agreed to a settlement with Eureeca Capital SPC (“Eureeca”), on November 10, 2014, over charges alleging willful violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. The settlement involves Eureeca’s failure to register as a broker-dealer and to conform with the exemption from securities registration provided by Rule 506(c). According to the terms of the settlement, Eureeca, while neither admitting nor denying the SEC’s allegations, consented to the cease and desist order and the accompanying sanctions.
Eureeca is a crowdfunding portal organized in the Cayman Islands. The site connects issuers with potential investors looking to invest in businesses in exchange for equity. Eureeca receives a percentage of the funds raised in successful offerings as compensation. During the period of time covered by the settlement agreement, the offerings of securities listed on Eureeca’s website were neither registered with the SEC nor did they meet the registration exemption of Rule 506(c) that allows for the sale of unregistered securities for which general solicitation occurs.
Rule 506(c) provides a “safe harbor” for exempting non-registered securities offerings sold exclusively to accredited investors that would otherwise have to be registered with the SEC because investors are sought through general solicitation. To meet this exception, an issuer that engages in general solicitation in connection with the offering must ensure that reasonable steps have been taken to verify that all of the investors taking part in the offering are accredited.
Eureeca only offered securities from non-U.S. based companies. Moreover, the website, according to the SEC, also contained a disclaimer stating that U.S. investors were not permitted to invest through the site. Nevertheless, the SEC alleged that three U.S. investors – who indicated that their country was “United States” prior to investing – were allowed to invest approximately $20,000 in a number of unregistered offerings through its website. The SEC alleged that Eureeca failed to require potential investors demonstrate their “accredited” status before information about the offerings was made available.
Only before the investments were actually accepted by Eureeca, the SEC contended, did Eureca seek to determine whether the U.S. investors were accredited. However, the methods in which Eureeca determined accreditation were not considered to be adequate by the SEC for the exemptions conditions to be met. Eureeca was alleged to have allowed two U.S. investors merely self-certify that they were accredited and the third U.S. investor was never asked to verify its accreditation status before investing.
The SEC also contended that Eureeca failed to register as a broker-dealer when it encouraged investments in the offering of securities on the website, received a percentage of the funds from the offerings as a fee, and accepted funds from the three U.S. investors, among other things.
The SEC and Eureeca agreed that, as a result of Eureeca’s failure to meet the private offerings exemption under Rule 506(c) and Eureeca’s actions as an unregistered broker-dealer, Eureeca pay $25,000 in civil penalties to the SEC.
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