Why Fraud Won’t be an Issue in Crowdfund Investing

When Crowdfund Investing starts in 2013, some regulators would have you believe that the Wild West of securities fraud will be perpetrated on the American people.  Give the regulators a break.  All they see, all day long, is securities fraud.  They don’t understand that 99.9% of the markets function just fine.  That fraud is a minute part of any efficient market and that markets don’t stop operating because there are bad actors.  Remember, people still invest in the public markets despite Worldcom, Enron, Bernie Madoff and even Facebook. People still use credit cards despite identity theft.  eBay never went out of business because of a few bad deals but introduced rating systems to provide clarity and credibility based on reviews.

Here are the steps a perpetrator will have to take to commit fraud within the Crowdfund Investing legislation and framework.  Please note, fraud committed outside of the legislation and framework is fraud.  It isn’t “crowdfunding fraud.”  Just fraud.  With that said, here’s what conniving fraudsters need to know.

1)    Stay Hidden & Stay Situated: I asked an FBI securities fraud agent at a self-direct IRA conference in Scottsdale, AZ recently how many fraudsters self identify themselves.  He said “none.”  Unfortunately within Crowdfund Investing before anyone begins he has to submit to a background check.  What does this mean?  Well it means validating that he is an actual person at a valid address and he don’t have a checkered past.  Know how else to prevent fraud?  Look for people who have resided at an address for over 4 years.  Fraudsters are on the move, average Joes aren’t.

2)    Come up With a Brilliant Idea with a Great Revenue Model: Be creative here and realistic. This pitch is going up on a SEC-registered websites and it really needs to engage the crowd. All of this will be overseen by portals, regulators and the crowd.  At the end of the day a fraudster’s idea needs to entice people to come to his pitch page and then he will need to defend why this is such a good investment to people who are going to be posting comments like, “This is a scam.”  The backbone of crowdfunding is the dialog that takes place between the entrepreneur and investor.  That dialog either builds confidence and trust or not.  If a fraudster can’t win over the crowd in this open, many-to-many dialog then he won’t get funded.

3)    Build a Large and Strong Social Network of People You Wish to Swindle: For Crowdfund Investing to efficiently operate one’s social network will be the center point of success.  After a fraudster has loaded his amazing idea up to that SEC-registered website, he will connect his Facebook, LinkedIn, Twitter, Google+, etc friends. This is how he will market his pitch within the Crowdfund Investing regime.  So make he needs to have lots of friends that believe in him AND his idea.  Because those first-degree people are the ones he will need to take advantage of.  That’s correct, those closest to him!  And finally,

4)    AIM for 100%: The legislation requires that a shyster hit 100% of his funding target or no money is exchanged.  So he will need to aim low.  He doesn’t want to put a pitch up there for $250,000 and only get commitments for $249,000 and fail.  It is mandatory that in this open platform users win over the confidence of their community, get them to commit funds that go into an escrow account (the funds don’t get released until 100% of the target is reached and, if the target is reached in less than 21 days since the pitch went live, the issuer MUST WAIT 21 days to get his money.  So let’s hope no one blows his cover).

And there you have it!  If a shyster has a lot of time to waste building a real social network and has the ability to develop a smart business idea that will garner lots of small dollar investments from those people who trust him, and he can convince all of them to help him hit 100% of his funding target, AND no one blows his cover as has been shown with pretty much every fraud that’s been perpetrated on crowdfunding platforms to date, then voila he’s done it!  Seem like a lot of work for probably a little amount of money?  It is.  In reality fraudsters look for quick and easy ways to make a buck.  Crowdfund investing won’t be that for fraudsters and unfortunately either for sincere entrepreneurs who aren’t prepared to use this powerful tool.

The way to prevent fraud is not by preventing people from investing but educating them.  Our job (everyone’s job that is) is to make sure that people understand if something sounds too good, it probably is too good.  Our government needs to start a nationwide campaign featuring the Nigerian Prince, the Abducted Nephew and the Securities Fraudster saying, “if you don’t know me, don’t believe me.”  It will cost both our nation and our economy far less money then the amount of money gullible people currently lose to these shysters.

Conclusion, “Just say NO, to people you don’t KNOW!”  This doesn’t just go for investing in crowdfund securities down the road but people who randomly call you on the phone telling you about the next Facebook and how you can invest through them. Or asking you for donations or to bail your nephew out of jail.  Or just investing in something you don’t know or understand.  Heck it goes back to what our parents taught us as children, “ don’t taking rides from strangers or trust candy from that suspicious people!”

Sherwood Neiss is a Principal at Crowdfund Capital Advisors.  CCA is a strategy and technology advisory firm that works with Governments and NGO on implementing a CFI infrastructure.