Bad Girl, Interrupted

Editorial note: On December 26, the state of Ohio granted Candace Klein’s request for a continuance. Her hearing was rescheduled for late February. On February 12, the state announced it had reached a settlement with SoMoLend in which the company conceded to the June allegations and agreed to cease and desist. The agreement does not cover Klein, whose hearing is scheduled for February 19.

Candace Klein got the big news while on the other side of the world. In an Internet café in Pokhara, Nepal, Klein—the founder of Bad Girl Ventures and the crowdfunding platform SoMoLend— learned that her two-year quest to allow companies to seek investors over the Internet was finally at hand. On that day in late October, she read e-mail after e-mail from friends telling her about the breakthrough: new rules proposed by the U.S. Securities and Exchange Commission that would allow equity and securities-based crowdfunding. If all goes as planned, a new financial lifeline will open this spring for entrepreneurs who can’t secure traditional loans or investment.

The moment was bittersweet. Klein, the 33-year-old former sweetheart of the Cincinnati start-up scene, wasn’t celebrating the achievement with her colleagues at SoMoLend headquarters in Over-the-Rhine. She was nearly 8,000 miles away on a self-described “spiritual pilgrimage,” a trip she took in part to recover from the public humiliation she suffered earlier in 2013. “It was an anti-climatic day for me,” Klein recalled when we talked by telephone in November after her return. “But all the same, it was a really important day for the industry. That doesn’t change.”

In August of last year, Klein resigned as CEO of SoMoLend amid accusations of securities fraud from Ohio regulators. Though her investors supported her, the scandal made her too much of a distraction to stay with the company. She stopped talking to the press for a while (not an easy thing for the gregarious, media-friendly Klein to do); stopped traveling the country to promote SoMoLend; and stopped speaking out as a champion of crowdfunding, a role that had put her on the national stage.

In Nepal, Klein didn’t dwell on the new SEC rules. She’d come to the Himalayan country to hike mountains, volunteer at orphanages, and spend time at a hillside yoga and meditation retreat. She wanted to escape, purposely choosing a destination that would force her offline—even if she still could take the occasional peek at her Gmail account. After sending a few congratulatory messages to friends, she logged off, hiked back to the ashram, and resumed her search for inner peace.

You can’t see video of Candace Klein lotus-posing in the mountains of Nepal; her fall journey was comparatively social media-free. But you can, if you like, see her in action most everywhere else.

At Startup 2012, the New York business plan contest sponsored by the website Business Insider, she paced across the stage in stiletto heels, a playful red skirt, and a white blouse with a popped collar, a trademark of hers. Quick, confident, and passionate—speaking without notes or prepared remarks—Klein commanded the stage for about eight minutes: marshalling statistics, telling personal stories, and outlining how SoMoLend (short for “social mobile local lending”) would dominate the emerging field of debt-based crowdfunding. When one of the six judges asked if he could use the service to lend to a specific venture, Klein replied: “You can lend to me, and thank you for the offer.” The crowd roared with laughter.

The pitch—posted on Business Insider—impressed the venture-capitalist judges. “I love the idea,” announced one immediately after Klein finished. She took home the $75,000 first-place prize, beating out seven other finalists, as well as hundreds of other applicants who didn’t make the final cut. It was familiar territory for Klein, the Floyd Mayweather of start-up competitors. At that point, she’d already won 25 of these events.

Entrepreneurs, however, weren’t the only ones paying attention to what Klein said that day. The video, along with several others posted on the web, ended up in a dossier that the Enforcement Section of the Ohio Division of Securities compiled about her public statements and business practices. In another video that drew the attention of the state—this one recorded in August 2012 when she spoke to a group of Salt Lake City business people—Klein explained how she attracts investors. “Always appeal to their greed first,” she said. She spilled other secrets, too. Her financial projections? A lot of conjecture is involved, she admitted. “I don’t know how to do five-year projections,” she said. “It is an art. It’s not a science.” And her easy confidence and rapport? Not as natural as it seemed. She mentioned the laugh line during the Business Insider pitch. “That was something I consciously practiced, actually,” she told the Salt Lake group.

The Ohio Division of Securities was less than charmed. Last June, the state named Klein and SoMoLend in a “notice of intent to issue a cease and desist order.” The 15-page document (which didn’t become public until the Cincinnati Enquirer broke the story in August) paints an unflattering picture of Klein, accusing her of using web videos, press releases, and other public statements to skirt restrictions on selling securities to unaccredited investors and then pumping up her sales pitches with phony financial data. Among other things, the state alleged that during a talk Klein gave at the South By Southwest Festival in Austin, Texas, in 2013, she claimed to have raised $15 million for small business owners. The actual number, according to the state, was $234,000—a sum that generated a miniscule total revenue of $3,404 since SoMoLend launched in 2011. In a presentation she gave to the Greater Cincinnati Venture Association in 2011, Klein projected annual revenues of $1.5 million in 2012, $10.2 million in 2013, $15.5 million in 2014, and $45.5 million in 2015. At the very least, she missed her targets.

Klein faces an administrative hearing in January at ODS headquarters in Columbus. When I spoke to her in November, she declined to discuss the case other than to say she hopes to reach an “amicable resolution” prior to the hearing. To do that, however, it appears the two sides will have to bridge a big divide. Ben Dusing, one of Klein’s attorneys, told me in late October that negotiations had stalled over the allegations of securities fraud—the state’s claim that Klein misled her investors. He says his client vehemently denies that claim, a position bolstered by the public support she’s received from her financial backers. (ODS officials declined to comment for this story.)

The case is not criminal, nor does Klein face any monetary fine. All the state wants is for her to stop the actions alleged in the June notice. Klein asserts she has already done that, and the company has stopped doing business in Ohio. (As this story was going to press, Ian Edwards, a retired Procter & Gamble executive who invested in SoMoLend, said that despite having the majority of individual investors’ support to keep the company going, the board of directors voted in late November to liquidate SoMoLend. According to Edwards, the board is also in the process of selling the company’s proprietary software. As of December 13, the company’s website was still live.)

If Klein accepts the securities fraud claims, she could face harsh collateral damage to her career as an attorney in Kentucky—where she started her work in securities and corporate law and continues to represent clients. Essentially, she may have to abandon the field she’s been involved in for most of her professional life. Moreover, the black mark could doom her once-promising entrepreneurial career. How could she persuade a venture capitalist to fork over millions for her next great idea if there’s a public acknowledgement of misleading investors on her record?
It’s quite a turn of events for Klein, who not that long ago was hobnobbing with business titans and congressmen as one of the leading voices of the crowdfunding revolution. “She’s gone from the poster child for what crowdfunding is supposed to be to a cautionary tale overnight,” Dusing says.

Crowdfunding advocates view it as the great equalizer. Through the broad reach of the Internet, all kinds of underdog ideas—from self-published urban dining guides to erotic Lindsay Lohan movies—can find support. How powerful can it be? Consider the case of the Pebble Smartwatch. When the developer of the customizable smart watch struggled to raise venture capital in 2012, he turned to the crowdfunding website Kickstarter. He hoped to raise about $100,000. Instead, he attracted almost $10.3 million from nearly 69,000 backers in 37 days.

The crowdfunding industry is already significant, with the likes of Donald Trump’s FundAnything joining Kickstarter, Indiegogo, and other pioneers in the field. And it’s about to get a lot bigger. The JOBS Act, a 2012 law that attracted bipartisan support in Congress, opens the door for equity crowdfunding, a sector that at least one prominent venture capitalist, Fred Wilson of Union Square Ventures, thinks could swell to $300 billion in time.

Most crowdfunding platforms are rewards- or donation-based. For instance, folks who contributed to Pebble Smartwatch’s Kickstarter campaign were promised watches; no one received an ownership stake. So far, private businesses have been prohibited from attracting investments through these websites; but this spring, the Securities and Exchange Commission is expected to approve a brand new (and much-anticipated) set of crowdfunding rules developed as a result of the JOBS Act.

Klein saw firsthand the potential for equity crowdfunding after she founded her first start-up, Bad Girl Ventures, in 2010. The Over-the-Rhine micro-lending organization (which now has branches in Columbus and Cleveland) is a non-profit, created to work with female entrepreneurs struggling to get financing. About two years after launching BGV, Klein debuted SoMoLend; at the end of 2012, she left BGV to concentrate on the new venture.

SoMoLend was a challenging prospect. Her idea—a website that connects small business borrowers with institutional and individual lenders—was not allowed under federal law. “I thought it was a long shot because of the regulatory issues,” says Ian Edwards, who’d been an early Bad Girl Ventures donor.

But Klein saw an opportunity. Peer-to-peer lending—driven by financial intermediaries who offer more funding opportunities than banks and other traditional lending institutions—is booming, with the two leaders in the field, Prosper Marketplace and Lending Club, reporting that loans are growing at a rate of 300 percent a year. SoMoLend would occupy a unique niche: It would focus on small business owners who have faced tightening credit in the aftermath of the Great Recession. She also bet that individuals and corporations would be willing to pony up small loans that offer the promise of above-average returns without much risk.

Klein’s passion and intelligence impressed Edwards, and he decided to roll the dice with a $10,000 investment in SoMoLend, despite his doubts. “If not for her personality and how driven she was, I wouldn’t have bothered at all,” he says. “I never expected her to be as successful as she has with it.” Other investors felt the same way. “The first thing that attracted me to SoMoLend was Candace,” says venture capitalist Charles Sidman, a retired University of Cincinnati professor who invested $10,000, too. “She is the epitome of what an entrepreneur should be—smart, energetic, hardworking.”

Before long, Klein became a spokesperson of sorts in the movement to exempt smaller investment offerings from the stringent requirements demanded of public companies. Already a media darling in Cincinnati (this magazine named her one of the city’s “Next Power Brokers” in 2011), she began to establish a national reputation. She advised Patrick McHenry, a Republican congressman from North Carolina, and Senator Jeff Merkley, a Democrat from Oregon, on crowdfunding legislation and was profiled in The New York Times, Forbes, and other major publications. In a rare example of swift legislative action and bipartisan cooperation, the JOBS Act was passed by Congress in March 2012 and signed into law by President Obama about a week later. The law allows private U.S. businesses of any size to raise a maximum of $1 million through crowdfunding entities such as SoMoLend over a 12-month period.

The Ohio Division of Securities, however, was critical of the idea. Some states have embraced equity crowdfunding; Georgia and Kansas, for instance, both passed laws allowing the practice. But Ohio and most other states have gone the other way, following the lead of the North American Securities Administrators Association (NASAA), the trade group for state regulators that has argued that the loosening of restrictions will allow unscrupulous operators to bilk unsophisticated investors. Ohio Securities Commissioner Andrea Seidt, the current president of NASAA, detailed her concerns in a 24-page letter she submitted to the SEC in January 2013, six months before her agency went after Klein. “Claiming that the crowd is immune from fraud because of its Internet research savvy takes a far too simplistic view of the ways fraudulent and abusive practices occur in the securities context,” Seidt wrote.

The irony is that while the state says it targeted Klein to protect investors, some of Klein’s financial backers are her most ardent supporters. They say Klein hasn’t lied to them; rather, they claim the state has misunderstood some of Klein’s public statements and is holding her to an unfair standard. Sidman calls the state’s criticism of her inaccurate financial projections “inane.”

“Investors all know they are only visions,” he says. “And if an entrepreneur doesn’t provide them, we force them to. We want to know what the project is, and what is hoped it will achieve. And yes, we take them with multiple shakers full of salt.”
Klein’s supporters contend that she’s the victim of a witch hunt. They say Klein went out of her way to work with state regulators from the beginning. She wanted to avoid the fate of peer-to-peer lenders Prosper Marketplace and Lending Club, both of which were shut down by Ohio regulators in 2008, though they still operate in other states.

Yet Klein’s cooperation seems to have gotten her nowhere. Some believe the state targeted her for her prominent role in developing the regulations of the JOBS Act, which undermines the authority of the Ohio Division of Securities. “She was made a scapegoat,” Sidman says.

Klein’s backers wonder about the origins of the investigation. Security fraud cases often begin with a group of angry investors—people who take their claims of being deceived to the state and demand action. That doesn’t seem to be the case here. In fact, investors have rushed to her side. “I haven’t heard a single whiff of an investor being upset at Candace,” Sidman says. “But I have heard a gale storm against the state for killing a promising venture.” Adds Edwards: “If the Ohio regulators were trying to protect me in some way, they’ve done me a lot of harm. They got rid of the CEO and the most prominent spokeswoman for the business.”

Klein’s first job after graduating from Northern Kentucky University in 2003 was as a lobbyist for the Northern Kentucky Chamber of Commerce. Her audacity won her the position.

Steve Stevens, then the head of the chamber’s public affairs department, was about to hire someone else when Klein, an intern, marched into his office and demanded an interview. “It was done in a humorous way, but in a very assertive way and a serious way, too,” recalls Stevens, who has served as president of the organization since 2006. “She meant it. She said, ‘I can do this job, and you need to hire me.’ ”

Stevens was looking for someone more seasoned. But Klein had done well as an intern, and he was impressed with her drive and guts. “I thought, ‘OK, if somebody has that kind of attitude, I’m willing to take a chance on her,’” he says. “You can teach a lot of things, but you can’t teach attitude.”

Klein is an odd mixture of ambition, generosity, and naïveté. She was a super achiever at NKU, earning scholarships, winning academic awards, and participating in student government. She was passionate about politics and public policy, and during her junior year she held a press conference announcing she intended to run for governor of Kentucky in 2027. No one took her seriously, of course, but she was sincere. “The reason I had it in the first place,” she says, “was so that I would be accountable to this goal. If I just kept it private and I didn’t do it, then nobody would be the wiser.”

Her self-aggrandizing tendencies haven’t disappeared as she’s aged, nor has her occasional tone deafness. It’s shallow to judge someone by his or her wardrobe—and a distinctive look isn’t a bad idea in business (think Steve Jobs)—but Klein’s unabashedly exuberant, girlish fashion sense (more Sarah Jessica Parker than Sheryl Sandberg) can give cynics an excuse to dismiss her as a lightweight. Also, her aggressive courtship of publicity and her sometimes overblown rhetoric are a bit much, even in the chronically self-promoting world of entrepreneurs.

Yet plenty of people find Klein to be charming and visionary. And, unquestionably, her personal story is inspiring. She’s the oldest of five children and the first in her extended family to go to college. Her mother gave birth to her as a teen and was on welfare for the first five years of Klein’s life, when they lived in a Clermont County trailer park. Klein also is a cancer survivor. She was diagnosed with cervical cancer (it later spread to her ovaries) at the end of her senior year in college, and it reoccurred six years later. The disease was caught early both times, but during her first bout, expensive medical bills waylaid her plans to attend law school.

James C. Votruba, then the president of NKU, introduced Klein to Alice Sparks, a philanthropist and a former regent of the university. “What I’ve done over the years with a number of students, when I felt that they showed promise and were having some financial hurdles, was to put them in touch with people in the community who might be interested in investing in their future,” Votruba says.

Sparks and Klein met over lunch. After a one-hour discussion, Sparks agreed to pay for Klein’s tuition at NKU’s Chase College of Law. “She is very forthright, and she’s got a great personality,” Sparks says. “She’s cute. She’s bubbly. And you feel good when you’re around her. And I think a lot of us recognized her potential.”

Klein asked Sparks what she could do to repay her. Sparks recalls that she told Klein to help other people. Klein remembers it slightly differently, that Sparks asked her to invest in women. Either way, Klein made charity and public service an important part of her life. “It’s not hard to find someone who’s been touched by Candace,” says Shelli Gilman, a close friend who was involved with her first start-up.

When Klein began practicing corporate law, she discovered that many of her female clients struggled to attract traditional capital for their businesses. She studied the issue and concluded that the best way to help women was to teach them how to be better business people (and thus more credit worthy). So in 2010 she founded Bad Girl Ventures. She called her partners “bad girls,” but perhaps a better description would be “bad ass.” She believes female entrepreneurs need to be fearless to succeed. “It takes a very special kind of woman,” Klein says. “A woman who’s bold and brave, willing to take risks and fight for what she believes and think outside the lines.”

Klein has embraced those virtues herself, which has come in handy during her bout with Ohio securities regulators. Her friends say she has mostly maintained her trademark enthusiasm and positive attitude through the ordeal. “That’s Candace,” says her attorney Dusing, who is also a friend. “She’s the definition of can-do.” But she’s struggled at times, too. After all, her career meant everything to her. “She’s going through something kind of unusual and extreme,” says her friend Katy Crossen. Privately, she can be emotional and bitter. Klein believes the state targeted her unfairly, says Sparks. “She didn’t feel it was justified,” Sparks adds, “and some of those in power were angry and wanted to get her out of the picture.”

Joy Schoffler, the owner of an Austin, Texas-based PR firm, has gotten to known Klein through crowdfunding circles in recent years. They both are involved with CrowdFund Intermediary Regulatory Advocates (CFIRA), an industry trade group. Schoffler describes Klein as someone with a good heart and a deep passion for helping entrepreneurs. “This is her life, and obviously, it’s disheartening,” Schoffler says. “But Candace has such an amazing spirit, and is such a positive person that she’s really trying to look for the silver lining.”

It’s early November, two days since Klein returned from Nepal. She’s got a vicious case of jet lag (“I’m completely off my rocker,” she says), but she’s also feeling rejuvenated. “I was so overwhelmed over the past year with a lot of heavy weight on my shoulders,” she says. “I forgot who I was or what was important in life. This trip was helpful to remind me that life is much bigger than what you do for a living.”

Unable to do much as she waited for a resolution in her fight with Ohio regulators, Klein made a dramatic decision to take the trip in the fall. After attending her sister’s wedding in early October, she left for the month-long solo journey through Nepal. She says she went on a jungle safari, slept under the stars as she hiked the Himalayas, taught English to children at several orphanages, and calmed her restless spirit at that ashram in Pokhara, a lake town about 200 kilometers northwest of Kathmandu.

She describes the trip as her own version of Eat, Pray, Love—minus the love. “This has been one of the tougher years of my life,” she says. “If ever I needed clarity and to regain my sense of self, this was the year.” She says she learned a lot from people she met during her trip, mentioning a conversation she had with a fellow traveler, a businessman who’d experienced both success and failure in his career. He told Klein her business is not her “baby,” though everyone may have told her so. It’s a possession, he said, something you build, buy, and sell—and doesn’t define her.

“I think for the past three-plus years, I’ve been completely 100 percent identified by what I do for a living,” she says. “I have no other life. I’ve given my entire self to my companies. I think this has taught me that I have to develop the other piece of who I am. I have to spend time building my relationships with my family, with my friends, with the world around me again.”

Klein’s future is up in the air. She’d love to stay involved in crowdfunding, she says, but she recognizes her troubles with the state could force her to move on to something new. She should have some opportunities; she’s still got plenty of admirers. About a week after returning from Nepal, she flew to Sweden to attend a conference about empowering women in business.  “Welcome to a day in my life,” she says.

Since 2012, Klein has split time between Cincinnati and New York, where she’s still active in start-up circles and is of counsel for the law firm Ellenoff Grossman & Schole. But she remains committed to the Queen City. She started SoMoLend and BGV to open doors in her community, and she wants to continue to help people in her hometown. “I just don’t know what that specifically means yet,” she says.

Originally published in the January 2014 issue.