In a recent discussion about the risks in making a crowdfunding pledge or investment, we were talking about the JOBs Act equity investment. But that conversation veered off to a discussion about fraud. The issues seem to overlap in peoples’ minds, but there are clear distinctions.
First, in any investment, whether someone is making a pledge with the expectation of a reward in traditional crowdfunding or an investment in a traditional equity deal, there is inherent risk.
An investor should always do their own investigation, search, due diligence and ask questions about the business or product they are interested in. Do your homework before you invest in anything. Even if you are making a pledge to a crowdfunding project, there is nothing stopping your from Googling or researching the people involved in that project. Find out if they have any history of failure or alleged fraud. Think about the success rate of similar projects. Use common sense.
Investing is not the equivalent of rolling the dice, but should be a considered process, even for a crowdfunding project. Certainly, people look for projects they feel strongly about, but emotion should only be one element of the decision of where to put your money. And, if you are conflicted for fear of fraud, don’t invest.
There is always the possibility of failure of any business, whether it’s a crowdfunding project or a business investment. Businesses fail for a myriad of reasons. Sometimes the rewards people expect for their pledge don’t get delivered or they are delayed. That doesn’t necessarily mean there is fraud involved or even the intention of fraud. It might just mean things didn’t work out in the manufacturing process, a patent didn’t come through, licensing or FDA approval didn’t happen or there was a partnership dispute and the company folded. As I said before, there are a myriad of reasons for failure.
Consider this; if a crowdfunding project is successful
and the funds are distributed to the project owners (business), then the company can move forward into manufacturing, writing the book, hiring staff, putting a marketing campaign into action. If this project has offered a reward, like the product the new company is making, then there may be a lag time to actually make that product. Then it has to be shipped. I’ve heard of many companies that got their seed money from a crowdfunding project
and those funds enabled them to move into manufacturing. That doesn’t always go smoothly. But, that doesn’t mean that don’t intend to make good on their promise to send you your “reward”. It just means they’ll be late in delivery. That isn’t fraud, it’s just life.
Now, there probably are people who post crowdfunding projects who, once they get the money, decide they don’t need to fulfill that promise. That percentage is very low in the crowdfunding industry, mostly because the Internet is so transparent and the fraud get’s exposed pretty quickly.
A smart business owner knows the people who made the pledge to give money to them will be lifelong fans if they succeed. They are built in consumers and savvy business owners continue to keep them in their client datebase and continue to be in touch with updates about the company’s progress, new products and other news. They see the opportunity to continue the conversation with the very people who helped them get started in business.
So, be wise, careful and please, don’t stop investing, pledging and supporting new business. Crowdfunding is a wonderful new mechanism to be involved in helping new business to grow, making dreams come true and you as the donor or investor can get new products, a good feeling of giving and the chance to be a really good citizen of the world.