When we think of crowdfunding, most people think of innovative new products or gimmicky “as seen on TV” type products. Other than physical products, one might also associate crowdfunding with the endless pleas from random people from high school beseeching you on Facebook to subsidize their new indie film project (read – unemployment), or mission trip (read – free vacation). However, one form of crowdfunding that often does not get attention are new forms of investment where entrepreneurs have broken down the traditional barriers to entry to allow a new generation of Internet users to invest in real estate, startups, even lawsuits. This article details a few of the real estate platforms available.

While researching the topic at hand, I came across an article that I found to be both interesting and helpful. The article outlines some creative scams that entrepreneurs are falling prey to these days. I particularly found the article interesting because it not only provides a detailed analysis of each specific scam, but it also offers, at the end of each section, a more concise Smart Tip to help entrepreneurs identify each scam before it becomes a burden on their business. It seems that while there is a general understanding that entrepreneurs must be cautious when making certain decisions, they are not immune to suffering setbacks from scams (especially since the scams are becoming more elaborate and creative). Therefore, an article such as this one, even though it is simple in nature, can still go a long way in giving entrepreneurs a “heads-up” on the possible scams that they may soon encounter.

This article explains how someone can avoid falling into crowd sourcing scams. As many have already pointed out, crowdfunding sites like kickstarter’s are filled with scammers.Other times, genuine companies engaged in crowdfunding may be unable to put their product to market due to practical concerns. In either situation, investors are left out to dry. This article tells potential investors what they should look out for when dealing with crowdsourcing. For example, complex ideas are often hard to bring to market. Investors should also research the people who run the company. People who are confident in their inventions usually provide some degree of personal information, and if you cannot figure anything out about the person asking for money, it should throw up a red flag. One should also check into the creator’s background, to make sure they are competent in the field. Investors should also check comment sections to see if the company is involved in fraud. Last, investors should consistently be checking in with the company, as silence is often a bad sign.

 

While startups are essential to innovation, there is a darker side. Fraudulent startups range from investors who give a startup a term sheet with no capital behind him, to an entrepreneur who builds a team, signs contracts and sometimes raises millions of dollars with nothing but air.

This article identifies patterns that indicate that the start is fraudulent: the entrepreneur or investor spends a lot of time talking about himself and his astronomical accomplishments; unrealistic promises; non-stop sales; compulsive name dropping; money, or lack thereof; and illogical excuses.

https://www.entrepreneur.com/article/295304

Recently, CEO of Tech Startup WrkRiot was convicted of Fraud. Founder, Isaac Choi, displayed many of the above patterns. He lied about his name, falsified his educational and professional history and personal wealth, and scammed at least a dozen employees before being caught by authorities.

http://www.sfweekly.com/news/ceo-of-tech-startup-wrkriot-convicted-of-fraud/

This article lists out a number of kickstarter frauds that occurred before 2014.  This ties a bit into my last post of who really is to blame here when crowdfunding goes bad, should the investors be expected to know better or should companies be more heavily vetted (and if this is the case who is going to do the vetting).  To me these frauds seem to be part of the acceptable losses of crowdfunding.  If one were to require the amount of vetting needed to weed out the frauds then the system is starting to look more like traditional banking where you have a centralized authority deciding who gets to play and who doesn’t.  One final interesting piece about the article is that in addition to fraudulent companies, it also talks about an individual who defrauded legitimate campaigns as an investor by receiving the advertised benefits for investing and then contesting the fees on his credit card after he’d already received the benefits.  Just goes to show that the issues can occur in all areas of startup funding.

This article discusses the different issues/pitfalls that companies and investors should look out for when engaging in crowdfunding.  It lists seven potential problems which are:  trust; choosing the right platform; realistic targets and deadlines; building interest; fulfillment; copyright issues; and, managing compliance and accounting issues.  I found this article interesting because it mixes issues that are clearly directed to the start-up like building interest, copyright issues, and accounting issues, with issues that are more relevant to investors like trust (i.e. doing your homework on the company), and making sure there are realistic targets and deadlines.  This raises the question of whether you feel it more the company’s job to make sure everything is on the up and up, or whether it’s more of the investors jobs to do their research and if they lose money on a scam that’s their own fault.

This article discusses some of the challenges and benefits that crowdfunding presents for Smalll Businesses. On the one hand, they can accept funding approved by the SEC that they would otherwise not be able to accept. But on the other hand, challenges such as potentially not being able to accept institutional investment in the future, limit the net benefit that crowdfunding can offer.

This article discusses two interesting concepts. First, it talks about the trend of “impact investing.” Impact investing regards the willingness of people to invest in projects and business that aim to promote social development, rather than just focusing on profits. But the article talks about how difficult it can be to pick up the specific investments that can truly “make a difference.”

Crowdfunding seems to be one option, as it may be a channel to funnel money to small entrepreneurs in a more democratic way. The article, then, talks about an initiative promoted by ImpactUs that, instead of being just a platform for crowdfunding, works as a broker, that assess different business and which type of social difference they aim to achieves.

According to ImpactUS website, the company was acquired by MissionPoint, a broker dealer that claims to provide the same type of service.

Because “crowdfunding” is a relatively new term in my lexicon, I found this article to brush up on the basics of crowdfunding and why it seems to be such an essential influence in the paths of many entrepreneurs. In the article, Wharton professor Valentina Assenova describes the facets of  crowdfunding, and, in particular, who it is affecting. Assenova began by noting that venture capital, the traditional source of funding for entrepreneurs, is very concentrated in the US (specifically, in Cambridge and Silicon Valley). With the outbreak of crowdfunding, though, geographies around the US that have not traditionally attracted capital have had upticks in investment. As Assenova describes, “All of that is to say that crowdfunding appears to be democratizing access to capital among a larger pool of innovators who are coming up with innovative ideas around the U.S.”

According to Assenova, the implications of this finding are numerous. Entrepreneurs no longer have to move to Silicon Valley in order to acquire funding. This may mean that an impressive business degree is also no longer necessary. Additionally, crowdfunding can be a great way to not just attract money from the “crowd,” but can eventually attract venture capitalists, as well.

To me, this all sounds like a wonderful way for non-traditional entrepreneurs to obtain necessary capital for their ideas. My only question would be whether it gives hope to too many ideas and entrepreneurs, who, perhaps, could use more iteration before receiving money to put these ideas into action.

Speaking of the growing connection between the law and the advent of new tech, there are a ton of CLEs offered at SXSW. I was lucky enough to be able to attend a few this year, and they are incredibly interesting. I highly recommend everyone keeping in mind SXSW for Continued Legal Education in the future.