Crowdfunding Disclaimers Aren’t Adequate to Avoid Liability under U.S. Securities Laws

Regina M. Joseph

Regina M. Joseph

Warning to non-United States equity crowdfunding sites: it’s not enough to warn that offerings are not being made to United States residents.  Your procedures must verify that investors are not United States residents.  On November 10, 2014, the United States Securities and Exchange Commission (“SEC”) entered a cease and desist order (the “Order”) against crowdfunding site Eureeca Capital SPC (Case No. 3-16265).

Eureeca’s website hosts securities offerings of non-U.S. based companies. Its website states, “Eureeca is the first global crowdinvesting platform where businesses raise capital to expand and grow from a crowd of investors in exchange for shares in their business.”  Nevertheless, Eureeca’s “Terms of Business” excluded United States investors, as did its “Terms of Use.”  When the Order was entered, such Terms were hyperlinked at the bottom of the webpage.  Website registration was required to obtain detailed information and to invest, but offering names and amounts, as well as informational videos, could be seen by any site visitor.  And registration was not difficult.  It was a simple matter of supplying basic personal contact information.  In keeping with the disclaimer that offerings were made to U.S. investors, registrants were not required to supply representations in compliance with United States securities laws.

The SEC charged Eureeca with failure to implement procedures reasonably designed to prevent United States persons from accessing and investing in unregistered securities. In so doing, it acted as an unregistered broker-dealer.  Thus, the SEC charged Eureeca with a willful violation of the Securities Act of 1933 and the Securities and Exchange Act of 1934 (the “U.S. Securities Laws”).  In the SEC’s view, Eureeca conducted a general solicitation of investors because it did not take reasonable steps to verify that the purchasers were accredited investors, as required by Regulation D Rule 506(c).  Rule 506(c) was adopted by the SEC pursuant to the Jumpstart Our Business Startups Act (See Shumaker Insights Newsletter).  An “accredited investor” is defined in the SEC’s Regulation D, Rule 501.

Despite the disclaimer that offerings were not being made to U.S. residents, the Order states that Eureeca in fact accepted registrations from over fifty persons who selected the United States as their “country.” Moreover, three United States residents completed an investment in unregistered securities by wiring money into Eureeca’s escrow account.  In doing so, each U.S. investor provided a copy of his/her U.S. passport and proof of a United States address.  The amount at stake was not large – only $20,000 total in four separate offerings.

Under the Order, Eureeca agreed to cease and desist from committing any future violations of the U.S. Securities Laws, and to pay a civil penalty of $25,000.

Reward-based crowdfunding, through sites such as Kickstarter, continues to be available to United States persons (at least at present) because contributors are not viewed as making an investment. Crowdfunding for equity investments, even though contemplated by the JOBS Act, remains unavailable.  The SEC’s implementing regulations were proposed over a year ago, and there is no timetable for adoption.  A few investment sites have received no action letters from the SEC by implementing procedures that limit access to those who submit advance verification that they meet the United States definition of “accredited investor.”  E.g., FundersClub Inc. and FundersClub Management LLC (March 26, 2013) and AngelList LLC and AngelList Advisors LLC.