Offshore Crowdfunding Portals Are Not Shielded From Liability Under U.S. Securities Laws
The SEC’s recent Cease and Desist order against Eureeca Capital demonstrates that we may begin to see enforcement activity involving offshore crowdfunding portals soliciting investments from U.S. investors. In Eureeca, its website claimed, “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.”
The SEC’s main focus is on these two legal issues: whether the crowdfunding portals offer and sell securities in unregistered transactions to US persons in violation of the Securities Act, and whether the crowdfunding portals act as unregistered broker-dealers to US persons.
According to the SEC Cease and Desist Order, Eureeca’s “Terms of Business” excluded United States investors, as did its “Terms of Use.” Nonetheless, Eureeca accepted funds from U.S. investors even after they were provided with passports reflecting U.S. addresses and residence.
When the SEC’s Cease and Desist Order was entered, visitors to Eureeca’s website were required to submit a simple registration to obtain detailed information and invest despite that company names and offering amounts were available for viewing by the general public without registration.
Eureeca matched companies seeking capital with U.S. investors and as such it acted as an unregistered broker-dealer. Further, because Eureeca posted unregistered securities offerings on its website that could be viewed by U.S. investors and failed to implement procedures reasonably designed to prevent unaccredited U.S. investors from investing in the offerings, it violated the SEC’s registration provisions. In the SEC’s view, Eureeca’s posting of the offering information on its website was a general solicitation and because it did not take reasonable steps to verify that the U.S. purchasers were accredited investors, the exemption provided by Rule 506(c) was unavailable. The SEC’s Order reflects that Eureeca accepted registrations from more than fifty persons who reflected they were U.S. residents.
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.
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