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Consumer Beware: Crowdfunding vs. Crowdscamming
Category :- General

Author :- Robert Temme 
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Posted on January 28, 2015, 9:40 pm
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It has been about two years since President Obama signed the Jumpstart Our Business Startup (JOBS) Act, which was designed to help new startup companies raise money and prosper. The foundation for this fundraising is what is known as crowdfunding. Most consumers are familiar with crowdfunding and may not even know it.

The most common form of crowdfunding that has been around for some time is known as donation-based crowdfunding. In this funding model, individuals donate money in return for products, perks or rewards. An example of this would be donating money to a local youth baseball team in return for getting your name printed on the team's banner, or donating to a local theater group to get free tickets to the show and recognition in the playbill. There is little fraud and a small amount of risk exposure in donation-based crowdfunding.

The crowdfunding model, which remains a potential area to generate the greatest number of fraud victims, is known as equity crowdfunding. This is where money is solicited from a large number of individuals in return for stock in a new company, or some other return on your investment. This is a danger zone for investors since the JOBS Act circumvented the checks and balances put in place by the Securities Exchange Act of 1934 and exempted crowdfunding securities from the registration requirements of the Securities Exchange Act. As a result, an explosion of Internet-based crowdfunding companies have popped up to facilitate the offer and sale of securities without having to register with the Security Exchange Commission as brokers.

A recent crowdfunding industry report showed the overall crowdfunding industry has raised $2.7 billion in 2012, and while the totals are not in yet for 2013, the industry is projected to grow to $5.1 billion. New and unique crowdfunding ventures are appearing all over the Internet. There is a recent trend of crowdfunding college costs. On websites designed for this purpose, investors can donate to someone's education in exchange for a percentage of that person's income after graduation.

Internet-based crowdfunding websites allow entrepreneurs to reach a large number of potential investors with the hope that these investors believe that the entrepreneur has a good idea and will want to help to get the venture off the ground. Crowdfunding is a noble business model but one that is not without risk. Investors need to be careful that crowdfunding does not become crowdscamming. As online fundraising expands, so do the potential pitfalls. Potential investors must keep in mind that anyone can create a project on a crowdfunding website and some of these startup businesses are seeking hefty sums of money. Anytime there is money for the taking, rest assured there are skilled scammers who will go out of their way to make their illegitimate projects look legitimate and worthy of investment.

One recent example was a crowdfunding site that almost handed over $120,000 to a fake Kobe-beef-jerky startup company. Individual investors pledged money for a fractional ownership in this fictitious company. Once the goal of $120,000 was reached, the crowdfunding Internet site was preparing to turn the money over to the entrepreneur. Many crowdfunding sites release funds only if a threshold is met. So if an organization says it wants to raise $120,000, it doesn't release the funds until $120,000 or more is pledged. Fortunately, the Kobe-beef-jerky startup company's fraudulence was discovered before the funds were released, and the backers did not lose their money.

So how do you avoid falling victim to a crowdfunding scam? On the crowdfunding website, look for a profile or biography of the creator. Look for details that can be validated and confirmed,


This article contributed courtesy OutreachNC Magazine. Look out now for the latest free issue of the magazine now on newsstands or visit them 24 hours a day at outreachnc.com

Source: http://www.aberdeentimes.com/index.php/special-interest/senior-living/item/1168-consumer-beware-crowdfunding-vs-crowdscamming

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