A Spokane Valley board game company and one of its co-founders violated state law by raising at least $354,000 from investors without offering necessary information about the company’s finances, sales projections or risks, according to preliminary charges by a division of the state Department of Financial Institutions.
Chum Chum Game Co. and former company President Charles Smaltz may both face fines of $10,000 for violating the Securities Act of Washington by improperly offering or selling securities from at least 162 investors, many of them from Washington, according to charges by the Securities Division. Chum Chum representatives, however, contended while the company may have been “naïve” and made some errors, it wasn’t intentionally misleading and will follow the department’s recommendations.
The company had 20 days to request a formal hearing, but Chum Chum will waive that right, Smaltz told investors in a Saturday letter. Chum Chum will ask for reduced fines, he said.
The department occasionally settles matters with a “consent order,” said Jill Vallely, enforcement attorney for the division.
Founded in 2003, Chum Chum sells Politics, a board game invented by Smaltz, and other games through Amazon.com. The company boasts Politics, which allows players to rise from mayor to president, contains all U.S.-made components.
At least 121 of those offered investments between December 2003 and August 2007 were Washingtonians, according to state documents. They bought common stock for $1,000 a share.
The department alleges Chum Chum once maintained a public Web site with information about ordering shares, and Smaltz gave a few presentations to small groups of potential investors.
Chum Chum “was a new company without significant operating history or experience in the toy or board game industry and provided no source or basis for the projections made to investors,” state documents say.
A projection given to investors in 2004 estimated Chum Chum would sell 55,000 copies of Politics in the fourth quarter that year and pay a dividend of $1,400 per share, according to the state. But the company has not paid dividends, documents say.
The company, which still has a few hundred of an initial Politics run of 2,700 in inventory, has not turned a profit, Smaltz said.
Company founders wanted it to stay privately held, and most of the investors were friends, family and people who played the game, he said.
“We didn’t go out and sell shares,” Smaltz said. “People literally called and wanted shares.”
About $175,000 of $250,000 raised in 2004 went directly to a TV commercial, he said. Other funds paid for a promotional lake cruise.
The current board had trouble accessing some financial records because they were created using Quicken, Smaltz said.
Chum Chum hasn’t made recent offerings and doesn’t have plans for future ones, he said.
Smaltz asserted the investigation started because one shareholder wanted to write off shares but can’t do so while the company is functioning.
In his letter to shareholders, he wrote: “There was no intent on my part or Chum Chum’s to be misleading to any investor,” and sales projections “may have been overly optimistic.” The company should have provided more information and left investors’ signatures on some agreements, but it did offer budget breakdowns and advised investors they could lose money, he wrote.
“People did know they could lose,” he said.
Currently, sole employee Chris Dawe sells the games out of his house and doesn’t take a paycheck, Dawe said. If department fines are too steep, it may end the company, he said.
The company will assess its viability based on this quarter’s returns, Smaltz said. But he has hope for the future – company representatives talk about getting the game in the hands of celebrities or featured on TV.
“This time around, we’re hitting it in the election, and because nobody has heard of us; we are brand-new,” Smaltz said.