COLUMBUS, Ohio – Two SoMoLend investors testified on behalf of Candace Klein Tuesday morning during the second day of the embattled entrepreneur's state hearing.
Cheryl and Carlin Stamm, who are married, testified that they made two separate investments in SoMoLend as accredited investors because they believed so strongly in the mission of the company.
Each also testified that they knew there was a high risk that they would lose their money because of the risks associated with any new startup.
SoMoLend, which stands for social, mobile, local lending, was designed to help small businesses borrow money in small amounts as one of the nation’s first debt-based crowdfunding platforms.
But the company and Klein ran afoul of Ohio state regulators last year.
The hearing represents Klein’s opportunity to defend herself against the Ohio Division of Securities allegations against her and SoMoLend.
The division filed a document last June known as a “notice of intent” to issue a cease and desist order. That document accused SoMoLend and Klein, the company’s CEO at the time, of a variety of misdeeds.
Those included selling unregistered securities, committing securities fraud by overstating SoMoLend’s early success and making fraudulent financial projections by exaggerating revenue projections during public presentations and statements.
SoMoLend reached a settlement with the state on Feb. 10. Klein is fighting the state, and Tuesday’s hearing marked the second day of that fight. The proceedings could last 10 days or more.
Cheryl Stamm, who worked for SoMoLend on a contract basis as the company's vice president of sales, testified that Klein was always honest and forthcoming with investors and never used investor money for her own benefit.
"She lived like a pauper," Cheryl Stamm said. "We used to tell her, at least get new little heels on your shoes."
Carlin Stamm added that Klein used to sleep on friends' couches when she went out of town for business to save money.
Cheryl Stamm said she blames the state of Ohio for the demise of SoMoLend, which she and her husband testified is essentially “defunct.”
"The state of Ohio put us out of business," she said. "The irony I feel as a taxpayer and investor, a huge injustice has been done at the taxpayers' expense because people lost their jobs, investors lost their money, the future tax base we're not going to have, and most importantly all the small businesses that wanted loans."
State Continues Questioning Klein
Much of the afternoon’s testimony focused on the details of state securities law and something known as a “Series A” round of investment.
Series A would have been the next investment round for SoMoLend and could have resulted in millions of dollars in more investments if the company had continued to grow. The company raised over $2 million in two initial “seed” rounds of investing.
Klein testified that the Series A round didn’t occur because crowdfunding regulations hadn’t been approved before the state’s allegations forced SoMoLend to divert its resources into defending itself. Those regulations were necessary, she said, for SoMoLend to reach its full potential as a business.
Assistant Attorney General Keith O’Korn projected an email from Klein onto a wall of the hearing room that started, “Hello Potential Series A Investors!” to illustrate that SoMoLend’s fundraising was ongoing.
Klein’s lawyer, Eric Fogel, argued that the email was irrelevant because the Series A round never happened.
“There is no Series A,” Fogel said. “So for them to chase the ghost and say we’ve got to find some kind of solicitation on Ms. Klein that hasn’t occurred – it’s fundamentally unfair for Ms. Klein.”
O’Korn argued the email speaks to the state’s allegations that Klein improperly solicited investors.
Hearing Examiner Ronald Alexander, a Columbus lawyer, ruled that the email could be admitted into evidence because, he said, the state has “a very broad definition of sale” that is not limited to transactions that occurred.
O’Korn also showed a video of Klein at a South by Southwest event in Austin, Texas, in March 2013 where Klein said “we’re about to walk into a $5 million Series A later this summer.”
Klein confirmed the timing of the presentation and the fact that she was the person speaking.
Another video showed a presentation Klein made to the Greater Cincinnati Venture Association in April 2011.
O’Korn’s questioning about the 2011 presentation is expected to resume Wednesday afternoon after the state calls two other witnesses in the morning.
For more stories by WCPO Reporter Lucy May, go to www.wcpo.com/may. Follow her on Twitter @LucyMayCincy.