Crowdfunding platform YieldStreet settles SEC fraud charges

Investors sunk money into loans backed by already dismantled ships

Crowdfunding Platform YieldStreet Settles SEC Fraud Charges
YieldStreet's Michael Weisz (LinkedIn, Getty)

As fraud allegations rock real estate crowdfunding, YieldStreet, a New York-based player in the space, settled SEC charges that it failed to give investors key information about risks.

The omission may have cost investors millions of dollars, according to an SEC filing. YieldStreet agreed to pay $1.9 million in the settlement but did not admit to wrongdoing.

Founded in 2015 by Milind Mehere and Michael Weisz, YieldStreet offers investment opportunities in real estate. But the New York-based alternative investment platform also offers securities in art, private credit and, previously, financing to firms involved in the deconstruction of ships.

In so-called ship-breaking, ships are dismantled for sellable parts or scrap.

The SEC found YieldStreet and a subsidiary formed a fund in 2019 to offer investments in loans made to borrowers who transport retired ships and arrange their deconstruction.

The ships served as the collateral for the debt that the borrower agreed to repay with the money it made from breaking them up.

Ahead of the fund’s final offering, YieldStreet learned that ships backing loans it had already provided to the borrowers – a group of United Arab Emirates-based companies — had already been broken up, yet the group hadn’t repaid the debt.

YieldStreet did not disclose that information to investors before raising $14.5 million to fund additional loans to the borrower. It also failed to tell investors of the heightened risk that it would be unable to seize the collateral if the borrower defaulted.

Ultimately, YieldStreet discovered the borrower had stolen the money it made from breaking up several ships, including the one securing the loan in the offering.

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“YieldStreet aims to unlock the complex alternative investments market for retail investors but failed to disclose glaring red flags it had about the security of the collateral backing this offering,” SEC official Osman Nawaz said in a statement reported by Reuters.

YieldStreet, in a statement, said it brought the fraud to the attention of authorities three years ago. A spokesperson said YieldStreet had secured an $85 million judgment in its favor from the High Court of England and Wales over the fraud.

The firm, which is in talks to buy real estate investment platform Cadre, said all settlement funds would be used to pay YieldStreet investors.

“We continue to aggressively pursue recovery for our investors through ongoing litigation and collection efforts both here and abroad,” the firm’s statement added.

Other scandals have recently hit the crowdfunding world.

This summer, Nightingale Properties came under fire for allegedly diverting tens of millions of dollars raised to purchase two buildings into accounts held by its CEO. The sales never closed, and the Department of Justice and SEC have since opened investigations.

The money was raised by crowdfunding platform CrowdStreet, which is facing backlash from investors. The Real Deal reported investors expressed outrage that CrowdStreet failed to keep funds in escrow until the deals closed.

CrowdStreet’s CEO Tore Steen was replaced by board member Jack Chandler, the former chair of BlackRock’s global real estate arm, immediately after the scandal broke in late July.

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