SEC Censures Crowdfunding Website for Selling to US Investors

Securities Law Blog

On November 12, 2014, the Securities and Exchange Commission (the “SEC”) censured Eureeca.com, a Cayman Islands-based crowdfunding website for its failure to implement procedures “reasonably designed” to prevent U.S. investors from using its funding portal as a means to invest in securities offerings.

In May 2013, Eureeca, through its website (www.eureeca.com), started a securities-based, crowdfunding platform that connects issuers with investors to raise funds in exchange for equity.  Eureeca’s website offers securities of non-U.S. issuers.

The securities offerings listed on Eureeca’s website were not registered with the SEC.

Under U.S. securities laws, Eureeca’s posting of securities offerings on its unrestricted website constituted a general solicitation.  Visitors to the Eureeca website were permitted access to the names of the issuers conducting the securities offerings, the amount of the offerings, and informational videos about the offerings without registering on the site.  None of this information was password protected or restricted in any way to the public.

Users had to register on the Eureeca website to gain access to additional information about the offerings of securities listed on its website and to invest in these offerings.  To register, users had to provide their names, dates of birth, email addresses, countries, and phone numbers.  No representation regarding accredited investor status was required to invest and the site did not contain a definition of the term “accredited investor.”

Eureeca had a disclaimer on its website that its services were not being offered to U.S. persons.  Eureeca did not implement procedures reasonably designed to prevent U.S. investors from using its crowdfunding portal.  Despite the disclaimer that Eureeca’s services could not be used by U.S. persons, users who selected “United States” as their country were allowed to register on the Eureeca website and gain full access to offering materials, and under certain circumstances, deposited funds with Eureeca for the purpose of investing.  As of May 2014, Eureeca permitted over 50 persons who selected the U.S as their “country” during the website registration process to register on the website.  Three U.S. residents who registered on the website invested in unregistered offerings of securities through the Eureeca website.

Once registered, Eureeca sent registered users automated emails about the open offerings of securities listed on its website.  The emails detailed the investment status of specific offerings, provided a brief overview of the offerings, and encouraged investment in the offerings.

To invest in offerings of securities on the Eureeca website, registered users had to wire money directly to Eureeca’s escrow account. Users then could direct the money from their Eureeca account to be applied by Eureeca to the various offerings, with the minimum investment of $100.  Eureeca received a percentage of the funds of the fully funded offerings of securities as compensation for its services.  In 2013, Eureeca accepted funds from three U.S. persons that had registered on its funding portal website.  Each investor provided Eureeca with their U.S. passport and proof of U.S. address.

Eureeca allowed two of the U.S. Investors to self-certify that each was an accredited investor but provided no definition of accredited investor.  Eureeca did not take any further action regarding whether these two U.S. investors were accredited investors prior to allowing them to invest.  Eureeca did not request any information to verify whether the third U.S. investor.

According to the SEC, Eureeca’s conducted violated Sections 5(a) and 5(c) of the Securities Act, which make it unlawful for any person, directly or indirectly, to sell or offer to sell a security for which a registration statement is not filed or not in effect or there is not an applicable exemption from registration, and Section 15(a) of the Exchange Act, which makes it unlawful for any broker or dealer to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security, unless such broker or dealer is registered or associated with a registered broker-dealer.

Eureeca consented to cease and desist order prohibiting it from committing or causing any violations and any future violations of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act.  Additionally, Eurecca is censored and ordered to pay a civil penalty of $25,000.

With an increasing number of funding portals appearing on the internet both domestically and offshore, we anticipate seeing many more of these types of SEC actions in the future, particularly where intrastate and accredited crowdfunding are being offered.

For further information about this article, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202N, Boca Raton, Florida, (561) 416-8956, info@securitieslawyer101.com or visit www.securitieslawyer101.com.  This memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com