Crowdfunding platforms are exploding in popularity and are becoming an increasingly mainstream finance option for many individuals, small businesses and entrepreneurs. Yet, where there is money on the internet, a fraudster is rarely very far behind…
What is crowdfunding?
It’s basically a legitimate way of raising funding online to support a business, project, campaign or idea. In 2014 crowdfunding sites raised over $16.2bn (£10.9 billion) and market giants like Kickstarter and Crowdcube are fast becoming household names.
How does it work?
Instead of seeking sizeable funds from a small number of investors the contributions are made by a large number of people investing smaller amounts. The individual seeking the funding must pledge the exact amount they require and are only entitled to the money if the all of the funds pledged are raised. Investors can choose which campaigns they want to support and are able to donate as much or as little as they like.
There are 3 types of crowdfunding:
Donation/reward crowdfunding – people donate money to support an organisation or cause, expecting nothing in return or except a small gift or discount.
Debt crowdfunding or peer-to-peer lending – investors lend money for a cause, project or start-up over a fixed term with interest on return payments.
Equity crowdfunding – investor receives shares or a stake in the business in exchange for the money invested.
So what’s the scam?
However before you hotfoot it over to one of these sites be warned; the National Fraud Intelligence Bureau (NFIB) has reported they’ve become aware of scammers are now setting their sights on exploiting the popularity of crowdfunding to facilitate ‘boiler room’ scams.
Traditionally a boiler room scam involves a fraudster cold-calling investors and pressuring them in to handing over their money in return for worthless or non-existent shares.
This new version sees criminals setting up websites and crowdfunding platforms to deliberately mislead investors into financially backing their product or campaign which is essentially a bogus start-up. The fraudster then takes the money and runs while anyone who pledged money is then left to eventually find out they were conned.
How to protect yourself:
When used properly by honest folks, crowdfunding websites can be an excellent service and it’s important to remember that while fraudsters are out there trying to con you out of your cash the majority of campaigns will be what they say they are. As ever, one of the biggest ways to avoid becoming a victim is to stay wary and trust your instincts if something doesn’t feel right.
Action Fraud, the UK’s national internet crime and fraud reporting centre, have a few more points to help you stay safe from this kind of fraud:
- As with any type of investment if it’s too good to be true, it most probably is. With high returns comes high risk.
- Receive a random investment call? Always be cautious
- Research, research, research. Check the FCA’s database of unauthorised firms to avoid.
For more information on crowdfunding and the potential risks please visit the FCA website.
Fraud is continually growing at an alarming rate with identity fraud being the single biggest threat. Recent data by CIFAs reports a 25% increase in fraud last year with 41% of all fraud recorded as identity fraud. If this is something you are concerned about and would like help monitoring your identity online, check out Noddle Identity Protection for more information.