SoMoLend, once a shining star in the constellation of Cincinnati startup companies, might have to cease operations before a January hearing that was supposed to determine its future.
CINCINNATI – A once shining star in Cincinnati’s startup universe might be out of business before a January hearing that is supposed to determine its fate.
SoMoLend Holdings and its founder, Candace Klein, are scheduled to face state regulators at a hearing starting Jan. 23. The goal is to determine whether Ohio’s Division of Securities can issue a cease and desist order that accuses the online lending platform of selling unregistered securities, committing securities fraud by overstating the company’s early success and making fraudulent financial projections, among other misdeeds.
But two SoMoLend investors told WCPO they expect the company will be out of business before the hearing starts.
“The business is going to be gone,” said Carlin Stamm, an investor in SoMoLend and a friend and advisor to Klein. “In the end, I suspect it will be almost a 90-cent-on-the-dollar loss.”
Added SoMoLend investor Ian Edwards: “I’m really at a loss as to understand how such a brilliant idea got so royally screwed up by the people involved in it.”
SoMoLend Chief Operating Officer Chris Calvert, who has been running the company since Klein resigned, would not confirm a potential liquidation of the business.
“The company continues to look at all of its strategic options,” Calvert said. “And no formal actions have been taken to date.”
Calvert added that SoMoLend continues to work with the state “to find a resolution to the matter without having to go to a hearing,” which he said has always been the company’s goal.
Investor Calls State Actions Politically Motivated
The trouble for Klein and SoMoLend started in June when the Ohio Division of Securities issued what is called a “Notice of Intent to Issue Cease and Desist Order.” That document lists the allegations against Klein and the company.
The notice is dated June 14 but didn’t make headlines until August. That same month, Klein resigned as CEO of the company she founded in an effort to save it. She now has a Chicago-based attorney defending her while SoMoLend has lawyers in Columbus representing the business.
From Stamm’s perspective, though, the state’s action has essentially put SoMoLend out of business over what he considers to be minor accusations.
Stamm thinks that’s because Ohio Securities Commissioner Andrea Seidt wanted to make an example of SoMoLend because Seidt opposes crowdfunding generally.
Crowdfunding is a way for individuals or businesses to raise money by getting small amounts from lots of people. SoMoLend has been working to create an online crowdfunding platform for small businesses that need loans that often are too small to appeal to traditional banks.
In October, Seidt became president of the North American Securities Administrators Association, an organization that CrowdfundInsider.com said “has a history of being cautious on the topic of crowdfunding exemptions at the federal level.”
Seidt declined comment through a spokesman. But Ohio Department of Commerce spokesman Brian Hoyt said the purpose of the state’s action and the hearing is straightforward.
“The hearing is about everything that is in the notice of intent,” he said. “We’re bound by law and duty to make sure we follow the process.”
Still, Stamm argues the allegations in the notice amount to a “tempest in a teapot.” After all, there are no criminal penalties attached to the state’s allegations, he noted.
If the state determines that SoMoLend and Klein have done everything as alleged in the notice, regulators simply would require SoMoLend to stop those practices.
More Than Two Dozen Investors Impacted
For his part, Edwards agrees that many of the allegations amount to exaggerated statements made by Klein, who recently turned 33. Edwards described her as an “over-enthusiastic” and “inexperienced” CEO who should have been supervised more closely by the company’s board of directors.
Whether the state’s actions against Klein and SoMoLend were politically motivated or not, Edwards said, “there is an Ohio law. And if you follow the law as it’s written, it doesn’t really matter what the political considerations are, does it?”
Stamm and Edwards are among more than 20 accredited, individual investors who put money into SoMoLend along with five large investment groups, including CincyTech, Queen City Angels, Blue Chip Venture Company and North Coast Angel Fund.
CincyTech declined to comment for this story because of the upcoming hearing. None of the other investment groups could be reached for comment.
Clifford Holekamp, a major SoMoLend investor from St. Louis, wouldn’t comment about the company’s future but did tell WCPO “losing Candace was a tough blow for SoMoLend.”
For her part, Klein hasn’t spoken publicly in months.
She was the face of the company and the force behind it. She started
SoMoLend, she has said, because of her passion for helping small businesses and her belief that it was a company that could “change the world.”
Stamm and Edwards both said they have come to terms with their belief that SoMoLend won’t survive as a company. But Stamm is worried the state actions could destroy Klein’s career, too.
“I don’t believe she knowingly wanted to mislead people. But there is evidence that suggests what she said was factually incorrect,” Edwards said of Klein. “And you can’t as CEO of the company say factually incorrect things and get away with it.”
Still, Edwards said he doesn’t feel duped in any way.
He invested $10,000 in SoMoLend as a founding investor and expects to be able to write off $4,000 once the company goes out of business.
“I’ve lost $6,000 on something I thought was incredibly speculative in the first place,” Edwards said. “Do I care? Not really. It’s not going to affect my purchase of red wine.”
Edwards said his bigger concern is what a disappointment the whole thing is for the state of Ohio.
"We need small businesses," he said. "And it’s disappointing that Ohio has the reputation for being a very rigid state and unwelcoming to new ideas. I don’t know whether that’s true or not, but it certainly feels like it."