The Dark Side of Equity Crowdfunding

By Wayne Mulligan, on Friday, May 23, 2014

Equity Crowdfunding is on a roll.

Angels have already invested $393 million into deals on the biggest platforms.

And this is still the first inning: many predict this new form of venture capital will become a $300 billion industry.

To put that in perspective, traditional sources of early-stage financing, like venture capital, equal just $60 billion each year.

This is great news for entrepreneurs, investors, and the economy.

It has us very excited.

But frankly, it also makes us worried...

You see, anytime a new investment product gathers steam, “scam” artists come out of the woodwork and try to make a quick buck.

Who’s their target? Individual investors like you.

As just one example: if we had a penny for every “penny stock” scam we heard about during the technology boom of the 90s, we’d be wealthy men.

We’re concerned about this happening with equity crowdfunding...

So today, we’ll tell you about the three most common scams you’re likely to see, and how you can protect yourself.

Crowd-Scam #1 – The Cold Call or Email

Imagine you’re sitting on the couch on a Thursday evening...

You just finished dinner with your family – the homemade lasagna was delicious – and now you’re happily watching TV and snoozing through the commercials.

The phone rings.

But it’s not one of your buddies or your mother-in-law.

It’s someone you don’t know… a “financial advisor.” And instead of calling to discuss stocks, he wants to tell you about a new law that, for the first time ever, lets you invest in pre-IPO companies.

As it turns out, he has the “perfect opportunity” for you.

He pitches the benefits of the company... how much progress it’s already made… how it’s on the verge of going public for billions of dollars...

And at the end of his pitch, he offers to FedEx you the businesses plan and subscription documents. “Just sign the documents and send me a check!” he says.

What do you do?

Well, if the lasagna hasn’t turned your brain into mush, hang up the phone!

Look –

We know you’re excited about start-ups...

We are, too.

But if you’ve already educated yourself about early-stage investing, and now you’re getting ready to invest, start with the legitimate equity crowdfunding platforms...

Start with WeFunder, OurCrowd, or any of the other platforms we cover here at Crowdability.

(Please note: we have no financial relationship with these platforms. We don’t make a dime telling you about them. We’re an independent source of education and research.)

The start-ups listed on these platforms have already gone through some level of due diligence. Their teams have already passed background and “bad actor” checks.

Sure, start-ups are risky, and you still need to do your own research...

But at least you’re protecting yourself against outright fraud!

That’s just not the case when a stranger calls you out of the blue.

Crowd-Scam #2 – The Self-Dealer

Now imagine that your puppy is almost out of dog food.

Instead of going to the grocery store, you decide to order the Purina online...

Sitting at the kitchen table, you stumble across a new website that specializes in selling pet food.

The site is beautifully designed. The products look great. They seem to really care about animals...

And it just so happens that they’re accepting new investors!

Now, there are cases where the fundraising could be legitimate...

But more often than not, this should be a red flag.

Here’s why:

1.  Most legitimate start-ups want the stamp of approval that comes from being listed on a crowdfunding platform. It makes the start-up’s job of raising money easier.

2.  Maybe the company tried to get listed on a platform, but was rejected.

Either way, you’re better off avoiding the deal.

Bottom line?

Stick to the platforms.

Crowd-Scam #3 – The Look-Alike

Now imagine visiting a crowdfunding platform that you find on your own.

It has multiple deals listed, and it touts the millions of dollars it’s raised for some of the most promising companies in the world.

It looks legitimate... but it’s not!

In fact, it’s the online equivalent of the cold-call you received – it’s a scam.

How do you spot it?

Simple. Only look at deals from the platforms we list on Crowdability.

We know that might sound self-serving, but think about it this way:

We invest a lot of time and energy making sure we feature only the portals and deals that are legitimate. And we have no financial relationship with the ones we feature.

That’s not to say that every deal will become “the next Google.”

We might be honest – but we’re not fortunetellers.

But it does mean the platforms we aggregate from are screening for bad behavior and bad actors.

It means your likelihood of encountering fraud is dramatically reduced.

Moral of the Story: Stick to Quality Platforms

Once equity crowdfunding heats up, a lot of new companies will be raising money.

Some will be legitimate, others not so much.

To greatly increase your chances of success (and not fall victim to fraud), learn as much as you can about early-stage investing...

And stick to the high-quality platforms!

You can find a list of all of the platforms we cover here »

And you can read all of our educational essays and free white papers here and here.

Happy (and Safe) Investing!

Best Regards,
Wayne Mulligan

Founder
Crowdability.com

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