The investigation of the Ohio-based crowdfunder may signal trouble ahead: States are likely to be a powerful regulatory force in equity crowdfunding.

Over the weekend, Cincinnati.com reported that SoMoLend, a crowdfunding site that distributes loans to local small businesses, was under investigation by Ohio’s Division of Securities–i.e. the state’s commerce regulators.

In a notice dated June 14 but not previously reported, the state alleges that SoMoLend and its CEO, Candace Klein, made statements and engaged in activity that included making fraudulent financial projections; false and misleading statements regarding current and past performance; and false and misleading statements about SoMoLend’s relationships with banks and other institutions.

The state’s 15-page cease and desist order, which has effectively shut SoMoLend for the time being, alleges that Klein made a series of exaggerations about SoMoLend’s success. In one particularly brazen example, Klein told Entrepreneur magazine in March 2013 that the site had distributed $15 million in loans to 100 businesses. The State, however, claims that at the time Klein made those statements, SoMoLend had distributed only $234,000 to 18 businesses.

The news was particularly surprising, considering Klein herself was a chair of the Crowdfund Intermediary Regulatory Advocates (CFIRA) that last year supported an anti-fraud intitiative backed by the North American Securities Administrators Association (NASAA), “the oldest international organization devoted to investor protection.” “CFIRA and its partner organizations are working diligently with the SEC to ensure that investors and borrowers are protected from fraudulent practices, and we welcome NASAA to join us in this effort,” Klein said last year in a news release.

I reached out to Klein this morning, but she declined to comment on the allegations. The company is “in sensitive negotiations with the state of Ohio and therefore cannot make any formal comment,” she told me over the phone. After I spoke with her, however, the news broke that Klein resigned as SoMoLend’s CEO and board member.

A Warning Shot for Crowdfunders

There will be an official hearing in October, but regardless of what happens then, there’s an interesting side-story developing. The irony, of course, is that the state regulators with whom Klein had partnered to theoretically combat fraud–the NASAA–were ultimately the same regulators who filed the cease and desist against the company. (Ohio’s Commissioner of Securities, Andrea Seidt, who filed the letter to SoMoLend, is the official NASAA regulator.) NASAA is emerging as a serious thorn in the side of crowdfunders around the country.

In January 2013, the Wall Street Journal reported that the NASAA was launching a full-scale investigation into 200 crowdfunding sites.

In anticipation of the rules, the North American Securities Administrators Association, which represents state securities regulators, is taking steps to try to weed out possible problems lurking among thousands of nascent crowdfunding operations.

In a year-end trawl of the Internet, the association of securities regulators found 9,001 website names containing the word “crowdfund,” according to a spokesman. The total is up more than tenfold from a year earlier. Officials have reviewed about 2,000 of those site names, concluding that about 200 need a closer examination or monitoring, the spokesman said.

Now, some are pinning SoMoLend’s fall on the NASAA’s “overzealous” regulators that see the crowdfunding industry as a threat to investors. “The North American Securities Administrators Association (NASAA) doesn’t like their power being usurped by Congress and its rules regarding crowdfunding,” DJ Paul, the vice chairman of CIFRA told Forbes yesterday.

NASAA has a fiduciary duty to protect investors, so it’s not altogether surprising that they advise their constiuents to be careful about crowdfunding opportunities online. Last year the group warned of “unscrupulous” parties who might try to use the yet-to-be-defined crowdfunding rules to steal from investors.

It’s clear, now, that NSAA is serious about taking action. The Securities and Exchange Commission has ultimate authority in setting up the rules regarding equity-based crowdfunding, but the SoMoLend case should be a very clear reminder that state securities’ entities may be potent as a regulatory force. So if you’re a crowdfunder, it’s probably a good time to introduce yourself to your state regulator.