Wednesday, 8 July 2015
Various scams for would be entrepreneurs wishing to use equity crowdfunding
What are the ways that equity crowdfuding as practised by Crowdcube could allow pitchers to scam investors?
The key to a successful raise is to have at least 35% of your money in by the time you are half way through your allotted window. Research shows that this will very often lead to a completion and then overfunding will get you considerably more cash very quickly. 'Investors' like to see an active pitch - one where the pitch is constantly being bounced back to the top of the pile as more investors put money in. This appeals to the herd mentality - if they all think this is good then maybe I should try it?
So what is to stop a cunning entrepreneur pre loading his pitch - its been done before on Crowdcube. The pitch opens with a very impressive large sum already invested. For example Water Babies pitched to raise £1m and opened with £800k already pledged. When asked they admitted that this money was nothing to do with Crowdcube and had been raised separately. Crowdcube continue to claim that the company raised £1m - they made their target easily. Since then they have gone bust.
If this cunning entrepreneur were to set up a whole team of 'investors' to pile in say 30% of the money at an early stage, what is to stop them? Once a pitch completes and overfunds it nearly always gets another 30-100% extra. All investors then have a cooling off period once the pitch is complete, when they can cancel their investment. So all of this entrepreneur's mates could cancel and the pitch would still be over its target and would be funded. All created by some highly dubious tactics.The business can then be 'run' and salaries taken until the cash runs out and oh dear sorry folks we are closing. Crowdcube have no way to prevent this.
We know this goes on - you just have to look at either new or older struggling pitches that get sudden large investments - hmmmmm. When we invested in a Crowdcube pitch we put in multiple small amounts to keep the pitch at the top of the pile - something Crowdcube allow. This 'action' encouraged other investors follow on. Easy money.