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.
Scott McIntyre is currently in his 8th term as Chairman of the CfPA’s Board of Directors and has served in leadership since formation in 2012, including four terms as President & Chair.
Sara Hanks, Founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field. CrowdCheck provides due diligence, disclosure and compliance services for online capital formation. Its services help entrepreneurs and project sponsors through the disclosure and due diligence process, give investors the information they need to make an informed investment decision and avoid fraud and help intermediaries avoid liability.
Jenny Kassan has almost three decades of experience as an attorney and advisor for mission-driven enterprises. She has helped her clients raise millions of dollars from values-aligned investors and raised over $3 million for her own businesses.
Brian is the Founder of Crowdwise, LLC, and is an angel investor in 80+ private startups through equity crowdfunding.
Patrick Tracey is Director of Business Development for Morrow Sodali. In this role, Pat brings expertise in a number of areas including Proxy Solicitation – Activism – Corporate Governance Advisory – IPO Prep – Demutualization (Insurance Companies, Community Banks and Credit Union) – Stock Surveillance for Public, Private and Mutual companies.
Blaine McLaughlin is the Chief Product Officer of VIA Folio, an innovative IPO, private and alternative investment platform that makes it easy for online platforms, issuers, investors, brokers and advisors to engage with IPOs, private and alternative debt and equity offerings. Part of Folio Investments, Inc., VIA Folio supports issuance, custody, servicing and secondary transactions in public and private equity and debt investments, and other listed and unlisted securities. McLaughlin joined the company in 2007, and has led retail customer acquisition and management, partnerships, portfolio acquisition, introducing broker services, and other business development activities.
Jordan Fishfeld is the former CEO and co-founder of PeerRealty (sold), and current Chairman of the Board and co-founder of CFX Markets and OpenFinance Network, secondary market platforms for traditionally crowdfunded and digital assets, respectively. In this role, he focuses his time on strategic planning and general oversight in the new and growing digital marketplace. With over 8 years of compliance, legal, investing, and sales experience in regulated markets, Jordan understands the need for a single coherent voice in the crowdfunding and blockchain industries.
Over 35 years of experience in Information Technology with the majority of time being spent in the Financial Services industry. Possesses detailed knowledge of all aspects of the online capital formation/crowdfunding, international brokerage, hedge fund and asset management businesses. Able to recruit and motivate strong teams capable of solving mission critical business problems.
Devin is a journalist, author and educator. He calls himself a champion of social good. As a new-media journalist and founder of the Your Mark on the World Center, Devin has established himself as a champion of social good. As a Forbes contributor, with over 400 bylines and over
Vincent Molinari is the CEO of Templum Markets, (FINRA Registered Broker Dealer and ATS) and Co-Founder of it’s parent company, Templum, Inc. He is also a Co-Founder and Co-Chair of the Blockchain Commission for Sustainable Development and is a Co-Founder and Co-Chair of Blockchain for Impact.
David N. Feldman concentrates his practice on corporate and securities law and mergers and acquisitions, as well as general representation of public and private companies, entrepreneurs, investors, and private equity and venture capital firms. Mr. Feldman also advises emerging growth companies with regard to alternatives to traditional financing through initial public offerings. He is also considered an authority on public offerings through the recently implemented SEC Regulation A+. Mr. Feldman also represents investors, social media sites, public and private issuers and applicants for grow and dispensary licenses in the emerging cannabis industry.
Alon is the Managing Partner of Stacked Capital, an early-stage industry agnostic venture capital fund. Previously Alon was the co-founder, Chief Financial Officer, and Chief Technical Officer of crowdfunding platform RocketHub, acquired in 2015. Alon is a founding member of the Forbes Technology Council, and a Strategic Advisor to Zombie Soup (Artificial Intelligence, Virtual Reality, and games); he has twice testified in front of U.S. Congress on equity crowdfunding, co-authored three acclaimed whitepapers on the JOBS Act, and was selected to lead FINRA’s Capital Markets Series on crowdfunding. Alon oversaw RocketHub’s partnerships with the White House, U.S. Department of State, Fulbright Foundation, Cisco, Microsoft, Chrysler, and others. Alon has led large speaking engagements for organizations including American Express, TEDx, Campaign Summit, Re.Comm, and Make Innovation. Alon earned his M.Sc from Columbia University and was a fellow at the Earth Institute’s Advanced Consortium of Cooperation, Conflict, and Complexity; he specialized in genocide prevention and social network theory.
Jason Paltrowitz is Executive Vice President and Global Head of Business Development at OTC Markets Group, where he is responsible for all international and domestic corporate services new business and relationship management. Prior to joining OTC Markets in October 2013, Mr. Paltrowitz was Managing Director and Segment Head at JP Morgan Chase and was responsible for the custody, clearing and collateral management business in the Corporate and Investment Bank division. Mr. Paltrowitz started his career at BNY Mellon serving in multiple senior management positions, most notably as Head of M&A for the Financial Markets and Treasury Services Sector and 11 years in the Depositary Receipt Division as the Head of the Global Capital Markets Group. Mr. Paltrowitz also served as a member of the Board of Directors at OTC Markets Group from 2008 – 2011.
Thell Woods, a former interim president of the CfPA, founded and currently serves as chairman of Crowdfunding Services LLC. The company helps establish “Community Centric Crowdfunding” programs offering both non-profit and securities offerings. Thell serves specifically defined communities throughout Michigan developing the www.C3funding.com website as the base for these programs.
Dr. Richard Swart is recognized as the global thought leader in the crowdfunding industry. Richard is a founding board member of the Crowdfunding Professional Association (CfPA), the Crowdfunding Intermediary Regulatory Advocates (CIFRA), and an early leader in the field. Richard co-organized the first major national conference on crowdfunding and coordinated several educational events on the JOBS Act throughout the United States for the White House.
Xiaocheh Zhang currently serves on the CfPA Board of Directors. He is also a co-founder of the Crowdfunding China Society (CFCS). As a crowdfunding thought leader, he has advised many organizations in applying alternative finance and result-based approach in transforming their business models. He has provided services to World Bank, United Nations, TUEV SUED, Virginia Tech, Peking University and some other organizations in the past 15 years. Xiaochen has rich experience in both public and private sector in America, Africa, Asia, Latin America and Europe to incubate and scale up innovative programs and projects at all levels. He is also a recognized speaker in climate finance, green innovation and crowdfunding. Here are a few examples:
Rodney Sampson is an innovator, serial entrepreneur, angel investor, published author, and consecrated bishop. As an innovator and serial entrepreneur, Sampson co-founded Multicast Media Networks (Streamingfaith.com) in 2000 (acquired in 2010), a live and on-demand streaming platform that laid the foundation for companies like YouTube and Ustream. Not stopping there, Sampson co-founded Intellectual Currency (an integrated marketing, intellectual property, diversity & inclusion and business development advisory firm) in 2002, Intellect Inspire (a digital publishing imprint of Audible) in 2006, and Legacy Opportunity Fund in 2007 with investments in technology, consumer products, energy, cyber-security, publishing and the entrepreneurial ecosystem. He also serves on the advisory boards of Digit, a disruptive financial technology company, Mark Burnett Productions, Springboard Fund and multiple startup and early stage companies throughout the world.
Brian Korn was elected to the Board of Directors (Legal P.O.V.) of the Crowdfunding Professional Association in January 2014. Brian is a corporate and securities attorney at the law firm Manatt, Phelps & Phillips, LLP, and has had multiple appearances on Fox Business Television, Bloomberg, CCTV America and National Public Radio as an expert on the JOBS Act, including its impact on crowdfunding, peer-to-peer lending, IPOs and market trading dynamics. He has been published or quoted in Forbes, CNBC, MSNBC, New York Law Journal, Law360, Philadelphia Inquirer, Pittsburgh Post-Gazette, The Financier Worldwide and The Review of Securities & Commodities Regulation.
Thomas Lawson is vice president of private issuer services for VIA Folio, Folio’s private capital network. In his role at VIA Folio, he provides legal and regulatory guidance to business development and operations. As part of this work, he supports VIA Folio’s online transactions in unlisted securities. He joined Folio in 2015.
AdaPia D’Errico is the Chief Marketing Officer at Patch of Land, where she heads up marketing, which includes strategy, brand, communications, partnerships and client services. Prior to joining Patch of Land, AdaPia ran a consulting company that developed growth strategies for major brands at Disney and Mattel, as well as technology and new media startups. AdaPia began her career at CIBC and subsequently spent 8 years in banking and investment management with a focus on customer relationship management, investor relations, and corporate communications. AdaPia is a published writer, blogger for The Huffington Post, and is a public presenter on topics including growth strategies, entrepreneurship, crowdfunding and brand development. AdaPia holds a B.B.A from the University of British Columbia and a B.A in International Business Economics from Hogeschool Zeeland, The Netherlands.
Dara Albright is a recognized authority, thought provoker and frequent speaker on topics relating to market structure, private secondary transactions, next-gen IPOs, P2P, FinTech and crowdfinance. Albright has held a distinguished 23 year career in IPO execution, investment banking, corporate communications, financial marketing as well as institutional and retail sales.