Crowdfunding – Is It A Good Deal Or A Scam?

Photo of author
Written By Hossein Soltani

Crowdfunding is either the best investment opportunity ever or a haven for lost causes and scammers, depending on your point of view.

The fact is crowdfunding is really nothing new.

Any group of investors who have pooled their money to buy shares in a company are crowdfunders.

What is new is investment platforms have taken up the baton and run with crowdfunding as a way for ordinary people to stake their money in ideas and projects they like.

The problem with crowdfunding is sorting the wheat from the chaff.

Dubious Crowdfunding Pitches

Undoubtedly, entrepreneurs are out there with good products and services that deserve a chance to see the light of day.

Equally, some dubious pitches are in the wind for the unwary as well.

News site Crowdfunder Insider suggests some tips for vetting crowdfunding deals.

Writer Ben Miller is urging investors to put their emotions to one side and look long and hard at the business and whether the numbers stack up.

“Worry about what can go wrong, don’t take someone else’s assumptions and statements for granted and take steps to underwrite the deal before making any promises or handing over any cash,” he said.

Underwriting tips

That means taking at least five steps, when look at Crowdfunding, he says:

  • Look into the backgrounds of key personnel – LexisNexis is a good place to start and property crowdfunders seem to have some of the worst reputations
  • Seek bad boy guarantees – this is a personal guarantee from the entrepreneur that if the company is involved in fraud, negligence or other criminal misbehaviour, then you get your money back
  • Talk to lawyers – Tie up all the loose ends and do not leave anything to chance even if the entrepreneurs are chasing to speed up the deal
  • Insist on title insurance – In property deals, protect yourself from someone else’s claim by insisting on this cover
  • Share what you know – Tell other investors about what you find, good or bad, and ask them to do the same for you

Miller explained his underwriting guide is mostly aimed at crowdfunded property deals.

Don’t forget it is your investment money that is at risk and spending some extra cash to ensure you are protected is a sensible way to protect your investment and reputation.

If a deal doesn’t look right or the numbers don’t stack up, then walk away.