Crowdfunding is a legitimate way in which people and businesses (including start-ups) can try to raise money from the public, to support a business, project, campaign or individual. However rather than asking a few people to make a large investment, Crowdfunding uses the internet to contact thousands if not millions of people to invest in smaller amounts.
The method will usually involve those sourcing the funding to set up websites and use modern social media techniques alongside traditional networking such as family and friends to reach out to investors.
The NFIB’s proactive intelligence team has said that this type of investment is growing rapidly in popularity, and being primarily internet based, will be exploited by “boiler rooms” looking for new ways to target well meaning investors.
There are 3 types of crowdfunding:
- Donation or reward crowdfunding – People want to donate because they want to support the organisation or cause. Rewards can be offered such as free gifts or concert tickets but “donors” often expect nothing back.
- Debt crowdfunding or peer-to-peer lending – This enables investors to lend money to good causes whilst bypassing the banking system. Investors can expect their money to be returned with interest.
- Equity crowdfunding – This is an investment in exchange for equity such as shares or a small stake in a business or project.
The Financial Conduct Authority (FCA) offers advice in relation to crowdfunding and they make it clear that whilst they do regulate peer to peer and equity based schemes, they consider them to be “high risk”. The FCA does not regulate any donation or reward crowdfunding. For more information about crowdfunding and the potential risks please see the information on FCA website.
The NFIB’s proactive intelligence team spoke to convicted fraudster and they said: “Commission or charges of 80% for crowd funding and peer to peer will be the next biggest fraud boiler rooms will utilise as it’s difficult to regulate. Fraudsters are likely to return to the UK from the rooms abroad for crowd funding opportunities. This will be the next biggest scam for boiler rooms”.
Protect yourself against investment fraud
- If you’re considering any type of investment, always remember: if it seems too good to be true, then it probably is. High returns can only be achieved with high risk.
- If you get a call out of the blue, be wary; if in doubt don’t be polite, just hang up.
- Take the time to seek independent legal or financial advice before making a decision.
- Always check the credentials of the company you’re dealing with. Check for known fraudulent organisations at the FCA.