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Investment Crowdfunding – The Perfect Arena For Educated Scams
I want it to succeed. I really do. The inspirational crowdsourcing stories that continue to spread around the web virally is a romance I would like to see in my favourite investment vehicle. But what I am observing is that the players in the market are slowly moving in a direction that can cause the whole concept to implode.
In case you are new to real estate crowdfunding, the concept is not new. Investors have been stacking up their funds on top of each other to buy into investments for decades. It’s just that now, with public solicitation being legalized, the floodgates have cranked right open for almost anyone to get involved. And thus the term “real estate crowdfunding” is born.
Wouldn’t it be great if you are given a million dollars to invest in something and don’t have to be held accountable for the possible failure of losing everything? And that lack of accountability is supposed to be a legally binding specific term made known to the investors via a fine print? And what if you do not even have to have any expertise or qualification to pitch your investment ideas to people looking for investment opportunities? It’s already here. It’s called crowdfunding.
This is not the first time I’m talking about crowdfunding whether it is for real estate or general investments. Sure there are happily-ever-after stories floating around all the time on how great crowdsourcing is. But it is also a perfect playground for con-artists who are just out for a quick buck. And the rewards reaped from crowd funds is usually towards the project starters. Not investors or pledgers.
But first, let’s not confuse crowd funding with crowd sourcing. In layman terms, the former is one where funders expect a return. While the later describes “free” money. This article is about the former type.
The reason why I feel there is a need to revisit this subject is that when I see developers advertising their developments as project starters, I see a misrepresentation. I see it as a sales pitch being put out on the pretense of crowdfunding. There is nothing wrong with advertising developments for sale. But when you place your sales pitch in crowdfunding portals, people can misinterpret the nature of funding involved. For example, a charity organisation running a sale can give people the impression that proceeds go towards caring needs of people in need. This might not be the case.
Funding platforms are starting to blur the line between crowdfunding and others activities like group buy or discounts on real estate sales.
A group buy is when individuals buy 1 item each and get a discount when a number of individuals come together to make their individual purchases. Each person will own their own item Crowdfunding is putting funds together to finance ONE purchase. And because “group buy” has become such an acceptable word these days that imply a deal in place (thanks to Groupon), crowdfunding platforms are starting to use this term to promote their deals.
There are even property agencies creating networks within some supposedly crowd-fund portals. You cannot help but think that these agencies are pushing real estate that they are selling. This totally defeats the purpose and goals of how crowdsourcing started. If portal operators don’t start setting strict criteria for project starters, this goldmine of a concept will go up in flames. But these are not where the potential for scams reside.
The spanner that is thrown into the works in crowdfunding is that investors are expected to be sophisticated investors just because they have a certain amount of net worth. The reasoning is that these demographic of people will have a better comprehension of what they are getting into. The layman interpretation is that they have the money to burn should investments turn out to be complete failures. Does that catch your attention?
Do you see the various elements that make crowdfunding such a potential monster for scams and fraud? Here is more.
You will find a flurry of disclaimers on every portal talking about the possibilities of complete failures and the inability to hit profit goals. Yes, even though every investment comes with disclaimers on returns, it does not make it right to promise a high return just so the project starters can legitimately fall behind profit projections citing terms and conditions. This is surely not the road we want to take when this concept is still in it’s inception stage.
This also makes you wonder – Why get involved in it anyway?
Real estate crowdfunding will allow you to own a piece of property asset without the actual ins and outs of a conventional real estate investor or landlord. This makes it no different than many other forms of investing. The primary difference is just the channel when equity is being raised and the primary asset is real estate.
You can buy your way into investments without any hands-on requirements through stocks, mutual funds, REITs, treasury bonds, etc.
Let’s put all together.
– A market with a bottomless pit of consumers with high networth.
– An investment that have income disclaimers all over the place.
– Investors are expected to embrace the fact that failure is part and parcel of investing activities.
– No need for qualifications for project starters to pitch a project.
– Online platforms where investors may never see or meet key promoters.
– Unclear objectives of project starters from realtors and developers.
– Real estate possibly located in a place where investors will never see in real life.
– A setup that allows key promoters to base operations from territories where law takes on a different meaning to what you are accustomed to.
I see that as a perfect arena for scams to thrive.
If you don’t already know there are already many well publicised crowdsourcing scams that went about unnoticed in even the biggest names in the industry. People just take the money and disappear. Some even take the money to pay their own mega salaries and let their projects fail. And in the new world where the internet has made it so easy to reach out to unexpecting victims by the click of a button, everything just seem to fall into place. With glossy graphics and videos shot with a green screen, even the shrewdest person with a bad intention can look legitimate in the monitor.
Be careful what you are investing in.