Risk & Compliance

SEC Brings First Crowdfunding Fraud Case

A Michigan businessman and two associates allegedly misrepresented that their crowdfunding offerings would raise money for cannabis real estate inv...
Matthew HellerSeptember 20, 2021

The U.S. Securities and Exchange Commission has brought its first enforcement action against promoters of crowdfunding offerings, alleging three people defrauded investors of more than $1.9 million.

In a civil complaint filed on Monday, the SEC said Robert Shumake and his associates Willard Jackson and Nicole Birch conducted two fraudulent and unregistered crowdfunding offerings that they marketed as an opportunity to invest in cannabis real estate.

Among other things, the complaint alleges, the three defendants failed to disclose Shumake’s criminal history and diverted more than half of the funds they raised from investors for their own personal use rather than for acquiring commercial real estate and leasing it to cannabis growers.

The SEC also accused crowdfunding portal TruCrowd and its CEO, Vincent Petrescu, of allowing the offerings to proceed despite being aware of “multiple warning signs of possible fraud or other harm to investors.”

“Crowdfunding offerings enable issuers to cast a wide net for potential investors, emphasizing the importance of full and honest disclosure,” Gurbir Grewal, director of the SEC’s division of enforcement, said in a news release. “As companies continue to raise funds through crowdfunding offerings, we will hold issuers, gatekeepers, and individuals accountable and enforce the protections in place for all investors.”

According to the SEC, Shumake, a Michigan businessman, was sentenced to 18 months’ probation after pleading guilty to illegally collecting upfront fees from clients of his mortgage audit company.

While he was still on probation, he allegedly “began taking steps to raise money from the public to enter the cannabis industries,” forming Transatlantic Real Estate LLC and enlisting Birch, a Georgia attorney, as its nominal CEO.

From September 2018 through May 2019, Transatlantic raised more than $1 million from crowdfunding investors. Shumake and Jackson raised another $888,180 through an offering for 420 Real Estate from May 2019 through June 2020.

“None of the money raised in either offering was used to acquire or improve cannabis real estate,” the SEC said. “None of the investors in either crowdfunding offering has received any return on their investment, and few investors have recovered any of the funds they invested.”

Courtesy of Flickr user Rocío Lara. CC-BY SA