Crowdfund and You Buy Into Some Dangers

By Neal Frankle

NEW YORK (AdviceIQ) -- What is crowdfunding? This is a question you might ask if you own a small business needing cash or an investor needing a decent return. Is it a great investment opportunity or just another Internet investment scam? Let's find out.

With crowdfunding, middlemen through their websites put people with money together with people who need money. Crowdfunding funds small businesses. That differs from "social lending"" which mostly funds individuals.

There are some benefits to crowdfunding. First, if you need money for your entrepreneurial idea, this could be an important source of capital. Many small businesses have a tough time getting bank loans or other traditional forms of capital. Crowdfunding might solve that problem.

And if you are an investor, this could be an attractive alternative investment to the low interest rates banks offer.

The disadvantages and dangers of crowdfunding, though, are considerable. To tap into crowdfunding, business owners use online intermediary sites to complete the necessary paperwork. The sites market your offering to potential investors. That costs these business owners money, and there is no guarantee that any money will be raised. Unless 100% of a deal is funded, a business gets nothing.

For investors, crowdfunding looks like a disaster waiting to happen. Remember, the people trying to raise money online have unproven business ideas that nobody else is willing to capitalize. Owners enlist their friends and family to fund most small businesses. If even the family and friends won't take a chance on the company, why should you?

Also, the regulatory oversight is paper-thin. Under a law passed in April, a company can raise up to $1 million online every year. The registration process to do this is minimal. They only have to provide a few financial statements and a list of the officers of the company.

The ease of Securities and Exchange Commission registration for crowdfunding scares me. To make matters worse, companies using the crowdfunding apparatus don't even need to go through a broker-dealer. That means even less scrutiny and no oversight with respect to suitability. Yikes!

Get ready for these "once in a lifetime, too good to be true" offers to deluge your email inbox. That's because it's so easy for scam artists to use crowdfunding to separate you from your money.

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