Startups and new businesses often need some financial assistance. Great ideas and the individuals that drive those ideas don’t always have the financial ability to create these businesses that could be the next big thing that can potentially create hundreds of jobs. In order to create a new avenue for these new businesses to raise capital, the Jumpstart Our Business Startups (JOBS) Act was created to allow for crowdfunding. With this new development one of the big concerns is potential fraud.
The JOBS Act was signed into law a year ago and the SEC is months late on releasing the rules to allow crowdfunding sources to go live. Trying to ensure that fraud is limited as much as possible seems to be one of the hang-ups. Many experts believe that investing through this forum will self-regulate itself.
The social networking aspects of crowdfunding portals create a level of transparency that will provide greater security than any regulation can. Not only will potential fraud be spotted because of all the eyes that will vet the idea and the founders but even if someone is able to defraud the public, they likely will not get away with it twice because of the reputation they will carry.
This is on top of the fact that the person attempting to defraud the public will have to create a phony company, personal background and idea, product or service that are enticing enough to attract investors. Looking at sites like kickstarter.com or indiegogo.com, not every idea receives funding. With crowdfunding sites, there will be just as many startups (if not more) that fail to reach their funding goals. The businesses looking to defraud the public will have a lot of work cut out to fool everyone.
If a person or business is able to create such a fake history and product to fool the thousands of eyes that will be on it, it doesn’t seem that far from being able to dupe even accredited investors either.
There are always going to be people that will try to skirt the system and steal from others. Crowdfunding, while it seems less formal than the public trading that you see in images from Wall Street, it is still investing and ultimately there will always be risk. And even with all the regulations that the SEC has set up on current investing, there still are those that defraud the public of millions of dollars.
The bigger concern for those using crowdfunding sources to receive the much needed capital that they need is whether or not they want to have equity shareholders in their business that might not have much experience in investing or business ownership. Accredited investors who have some experience in the role know how to treat their investment (i.e. when to get involved and when to stay out of the way). Crowdfunding should be seen as just another option in a group that your startup can use. Experienced advisers can help guide your startup and find the best options to fit you.
Source: “CROWD CONTROL? Social nature of crowdfunding should control fraud, advocates say” by Mark Sanchez of MiBiz