Although we have already discussed the Jumpstart Our Business Startups (JOBS) Act, it’s important to realize the effects of these legislative changes when they do take effect.
More importantly, the hype surrounding crowdfunding laws has already sparked the creation of multiple crowdfunding scams.
First, we will take a look at some specific details of the JOBS Act and how they affect us before we look at some crowdfunding best practices that can keep you from dumping money into a fake project.
Changes coming next week
Part of the JOBS Act lifts an 80 year ban that has prohibited companies from publicly advertising fundraising campaigns in the hopes of picking up new investment opportunities. This part of the legislation is scheduled to go into effect on Monday Sept 23rd, 2013.
This is great news for many business startups that may not have “connections” within the investing world. Especially in terms of technology based startups, there typically are only a handful of accredited investors willing to fund new projects.
These tech businesses end up handing over large percentages of the company’s stake to these venture capitalists. Of course, that is if the business owners can even find anyone willing to invest.
Allowing for public advertisement of fundraising campaigns could draw in new investors that might otherwise be outside the proverbial circle.
On the surface, this is great news and it certainly helps some businesses. However, these fundraising campaigns are currently, still only open to accredited investors. Accredited investors, which make up a very small percentage of the population, have been deemed by the SEC as having a net worth over $1 million (not including primary residence) or an annual income of $200,000 over the last two years ($300,000 per couple).
Although there is pressure to change this form of the law, the changes being made this week don’t impact the accredited requirement.
There are a few loopholes to this, which we discussed in the July issue of Resilient Strategies.
Policymakers have once again let the bureaucratic arm of government delay legislation that could have already improved our economic situation both locally and nationally.
Basically, if you are a non-accredited investor, you will not see any new opportunities to participate in local crowdfunding projects anytime soon. Sure, the changes will ultimately come but it seems we have kind of lost the “jumpstart” element that the JOBS Act is based on.
Even though crowdfunding laws are delayed, fraudsters have already started taking advantage of the hype surrounding changes to the crowdfunding legislation. More fake crowdfunding projects have been reported in recent months than we have ever seen.
Let’s look at a couple of examples that will hopefully serve as a reminder in due diligence any time you consider participating in a new project you find on Kickstarter or other crowdfunding websites.
A common scam is for criminals to replicate a legitimate crowdfunding project on a different website. ShopBot Tool’s new “smart power tool,” the Handibot, recently ran a successful Kickstarter campaign – more than doubling its original $125,000 goal.
With only a few weeks left in the campaign, it was discovered that a nearly identical campaign was being hosted on Indiegogo. Graphics and text were literally copied from the Kickstarter campaign and reposted as a legitimate project on Indiegogo.
Obviously, once the scam was reported Indiegogo quickly suspended these campaigns. The worst part is that Indiegogo uses a different payment model that other sites like Kickstarter.
A Kickstarter campaign must reach its funding goal before project owners can withdraw funds. This means that if a project does not get fully funded, all of the funds are returned to supporters and the project creators never get their hands on it.
Indiegogo actually let’s project creators withdraw funds to PayPal as they are received. This means that a project could raise thousands of dollars fraudulently and withdraw them to a bogus PayPal account.
When these scams are uncovered, the funds that have been withdrawn are already gone and it is up to Indiegogo to refund customers (at this time Indiegogo has not made it clear whether they intend to refund defrauded customers or not).
But just because Kickstarter uses a more conservative payment model does not mean scams do not exist on this platform. Recently, the “Kobe Red” campaign attempted to raise thousands of dollars to create a new beef jerky product.
As it turns out, the Kobe Red project was a complete scam and it was suspended by Kickstarter literally minutes before the project creators made $120,000 from supporters. Had the scam gone on for another hour before being detected, these scam artists would have walked away with thousands of dollars.
Finding Legitimate Opportunities
Looking local is the best place to start. Makerspaces are popping up in cities across the world. If you are looking to invest in local start-ups to improve resiliency, you need to rub elbows with the folks making the innovations.
You’ll find them at the Makerspaces, shared office facilities, at farmer’s markets.
The first litmus test to use…if the company spends more time on social media than they do on their own project, pass. That’s why the best places to find them are through classic, in-person networking.
Local venture capital groups will get busier with the changes coming in the JOBS Act.
Finally, over time, we spoke with some experts who see this as a dramatic shift in the independent brokers and publishers. With more relaxed laws from the SEC, these groups can now review and discuss private deals more openly.
Right now, it’s a wide open market. Could YOU become the expert? It’s ripe with opportunity and will have a significant impact on the local community.
If you remain on the buying side, diligence is the only true protection from bad crowdfunding opportunities.
The good news is that as these legislative changes finally begin to take place, we will see a major migration to local crowdfunding initiatives aimed at strengthening our local communities.
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