Massachusetts has filed fraud charges against two out-of-state companies, Prodigy Oil and Gas LLC and Synergy Oil LLC, in connection with their sale of unregistered securities to Massachusetts investors. Prodigy raised at least $464,000 from one Massachusetts investor and Synergy raised $35,000 from two investors, according to Commonwealth Secretary William Gavin’s complaint.
At the time, Prodigy allegedly employed a convicted thief as a cold-caller, and Prodigy principal Shawn Bartholomae had been named in three securities regulatory actions and two criminal charges. Both Prodigy and Synergy, and their officers and directors, reportedly had been ordered to stop using private-placement exemptions from registration.
These are the kinds of companies and people that Secretary Gavin and other critics of crowdfunding are worried about when they contemplate the advent of crowdfunding (“Crowdfunding takes early hit in Massachusetts,” InvestmentNews). Unless SEC regulations are written to rein it in, anyone with a computer can advertise and sell up to $1 million of unregistered securities to anyone over the internet through SEC registered portals called crowdfunding sites with little or no oversight. Critics are concerned that crowdfunding makes it easier for those with a history of defrauding investors to do so.
While securities crowdfunding is not permitted until the SEC adopts rules for it, promoters are gearing up to take advantage of it as soon as possible. The association of state securities regulators known as NASAA says that there are already nearly 8,800 domains with “crowdfunding” in their name as of November 30, 2012.
Mr. Galvin and other state regulators believe that it is important for the SEC to include “bad actor” rules in the regulations it writes. “Bad actor” rules are needed to disqualify securities law violators, brokers with revoked licenses and other fraud operators from using these crowdfunding sites.
For some inexplicable reason, the SEC does not seem to be interested in doing that. Its initial draft of regulations contain little more than a bare-bones recitation of what is already in the Jumpstart Act ? and, contrary to its usual practice, the SEC at first was not going to published its proposed rules for public comments. Only after state regulators strenuously objected did the SEC reluctantly agree to submit its proposed regulations for comment. What is going on at the SEC, which is supposed to protect investors and market integrity?
Page Perry, LLC is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.