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The Deal: States Greet Crowdfunding With Hostility

They submitted numerous documents being used to sell securities to investors, which the person said are now being used against them.

Klein and SoMoLend did so to avoid the fate of Prosper Marketplace Inc. and Lending Club, two peer-to-peer lending companies that were shut down in Ohio in 2008. Both remain active in other states.

The person said Klein and SoMoLend directly asked Ohio regulators about how they could avoid the fate of Prosper Marketplace and Lending Club in the state, to no avail.

Brian Hoyt, a spokesman for the Ohio Division of Securities, declined to comment, citing the pending nature of the case.

Charles Sidman, a retired professor at the University of Cincinnati and managing partner of venture capital fund ECS Capital Partners LLC, invested $10,000 in SoMoLend. He said that Ohio regulators have made themselves "a laughingstock" in the securities business.

"They have a beef with [Klein] because her enterprise is based on crowdfunding," Sidman said. "They're trying to make an example of her in the last few weeks that they're able to."

In September, new rules approved by the SEC will take effect that will give private-company managers, like Klein, more freedom to speak publicly about their companies' prospects without running afoul of securities laws.

In the past, communications that could be considered marketing of private company securities had to be limited to affluent "accredited" investors who are allowed to buy stock that isn't registered with the SEC.

Under Title II of the Jumpstart Our Business Startups Act, the SEC is now lifting the ban on what is referred to as "general solicitation" of private securities offerings. The end of the general solicitation ban is one of a number of provisions in the JOBS Act that are meant to make it easier for small companies to raise capital.

Sidman dismissed the Ohio securities division's case about false statements about financial projections as "complete nonsense and utter rubbish."

He said in speaking before the Greater Cincinnati Venture Association, Klein gave projections because she was asked to do so and would have been "dinged" if she hadn't.
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