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That's fraud not crowdfunding. If it's a sincere attempt to start a business, crowdfunding seems like a fine idea. Though I agree, it is a lemon market and I wo

That's fraud not crowdfunding. If it's a sincere attempt to start a business, crowdfunding seems like a fine idea. Though I agree, it is a lemon market and I wouldn't participate myself. Many people will lose money doing this, but the cost of freedom is some people will make poor investments.

tptacek 10y ago
If it's practically impossible for the median consumer investor to tell the difference between a fraud and a legitimate crowdfunding opportunity, of what use is it for us to rhetorically isolate the frauds from our discussion?
- maverick_iceman 10y ago
  The point is not whether the investor can tell the difference between fraud and poor investment. It is rather whether an actual fraud was committed as determined by a court of law. Investors should do their due diligence anyway.
  - tptacek 10y ago
    But that's not how publicly traded companies work. In practice, it's difficult to go public without substantial revenue, and your numbers have to be audited and disclosed through SEC-approved processes. Combined, these two factors have the effect of keeping most outright scams out of the major markets. Equity crowdfunding eliminates both of those guardrails. So it's reasonable to ask how effective they'll be (at generating returns for retail investors) given the obvious issue of fraud (and incompetence).
ChuckMcM 10y ago
And this is exactly the ugly place where reality collides with the way we wish things were. I worked for a guy once who could put together a story so plausible that someone close to you would invest way more than they had any reason to or should, into the venture. He would not tell a single outright lie and the "truth" would be that if all the things that needed to happen, did happen, the business would in fact be a great investment. He would have a sold your parents so hard that they are probably getting their friends to come in on the deal too. And when all the money was gone and your parents were destitute, he would have an iron clad story about how it was not his fault, how your parents knew that things could go wrong, and that risk was all part of the equation. He would be untouchable as far as a fraud prosecution goes. Remember the 'startup story' we read here? [1] This CEO convinced his employees to cover payroll, you don't think he couldn't convince your mom? I hope you (or someone you care about) never experiences a really good con artist first hand because it completely shakes your belief in humanity to the core. These people will take everything you have if you let them, and they will do it without hesitation. This is how it goes; Your family member or friend calls you to tell you that they just got in on a really good deal. They are going to be rich and you can be too. They will tell you how this company their new friend is the owner/CEO/president of has discovered some new product/bitcoin/algorithm/process/material that is going to disrupt some multi-billion or multi-trillion dollar a year industry. They will have some really great story about either how the information was suppressed or some "unknown genius" that they befriended/are/know came at it from a completely new direction and the world was going to change overnight. They just need some money to get their first prototype demonstrable and bam the value of your investment will grow by 100x easy. Now you ask them about it and find a lot of things that you find suspicious so you ask them to ask questions. If the questions are too pointed the prankster will threaten them with not taking their money (and so losing out on this huge reward) and if they have bought the story they will shut up. The trick here is they think they are already rich because they are convinced it is such a sure thing. And no amount of reasoning from you will change their mind. When it finally is revealed that the money is gone and the "company" is shutting down, there will be a set of things that happened that appeared to be either extremely unlikely or extremely rare. In one story the "technical cofounder" who had all the secret sauce in their head was killed in a freak car accident in Russia while visiting their family to bring them back to the US. The crowd funding site will be set up with layer after layer of warnings that you can lose all your money, and there won't be a single shred of printed information that could prove that the people responsible didn't believe what they were saying when they convinced your loved ones to invest. Bottom line, you won't be able to prove fraud, people you care about may have had their entire life's savings taken and are now living in poverty on government benefits, and there will be nothing you can do about it. The only things that stands between these fraudsters and your grandmother are the Qualified Investor rules. [1] https://medium.com/startup-grind/i-got-scammed-by-a-silicon-valley-startup-574ced8acdff#.s6q01akcm https://medium.com/startup-grind/i-got-scammed-by-a-silicon-...
- iopq 10y ago
  > And this is exactly the ugly place where reality collides with the way we wish things were. I worked for a guy once who could put together a story so plausible that someone close to you would invest way more than they had any reason to or should, into the venture. He would not tell a single outright lie and the "truth" would be that if all the things that needed to happen, did happen, the business would in fact be a great investment. He would have a sold your parents so hard that they are probably getting their friends to come in on the deal too. And when all the money was gone and your parents were destitute, he would have an iron clad story about how it was not his fault, how your parents knew that things could go wrong, and that risk was all part of the equation. He would be untouchable as far as a fraud prosecution goes. This happens to VCs too. So? This is why investing into companies is risky.
  - Jweb_Guru 10y ago
    VCs have money to blow.
    - nostrademons 10y ago
      There is a certain irony in that most of the money ultimately comes from pension funds, which are investing the same life savings that their owners are forbidden from directly investing in startups, only with at least 2 layers of indirection (pension -> fund of funds -> VC -> startup) and associated fees. But yeah, the total percentages at risk are much lower when the pension fund does it.
    - iopq 10y ago
      Then don't invest money you can't lose?
      - Jweb_Guru 10y ago
        For a lot of people, that essentially means "don't invest at all." The problem is that if you think it's 100% a sure thing, it's not really speculation, so it doesn't matter whether you can afford to lose the money.

tptacek 10y ago

If it's practically impossible for the median consumer investor to tell the difference between a fraud and a legitimate crowdfunding opportunity, of what use is it for us to rhetorically isolate the frauds from our discussion?

maverick_iceman 10y ago
The point is not whether the investor can tell the difference between fraud and poor investment. It is rather whether an actual fraud was committed as determined by a court of law. Investors should do their due diligence anyway.
- tptacek 10y ago
  But that's not how publicly traded companies work. In practice, it's difficult to go public without substantial revenue, and your numbers have to be audited and disclosed through SEC-approved processes. Combined, these two factors have the effect of keeping most outright scams out of the major markets. Equity crowdfunding eliminates both of those guardrails. So it's reasonable to ask how effective they'll be (at generating returns for retail investors) given the obvious issue of fraud (and incompetence).

ChuckMcM 10y ago

And this is exactly the ugly place where reality collides with the way we wish things were. I worked for a guy once who could put together a story so plausible that someone close to you would invest way more than they had any reason to or should, into the venture. He would not tell a single outright lie and the "truth" would be that if all the things that needed to happen, did happen, the business would in fact be a great investment. He would have a sold your parents so hard that they are probably getting their friends to come in on the deal too. And when all the money was gone and your parents were destitute, he would have an iron clad story about how it was not his fault, how your parents knew that things could go wrong, and that risk was all part of the equation. He would be untouchable as far as a fraud prosecution goes. Remember the 'startup story' we read here? [1] This CEO convinced his employees to cover payroll, you don't think he couldn't convince your mom? I hope you (or someone you care about) never experiences a really good con artist first hand because it completely shakes your belief in humanity to the core. These people will take everything you have if you let them, and they will do it without hesitation. This is how it goes; Your family member or friend calls you to tell you that they just got in on a really good deal. They are going to be rich and you can be too. They will tell you how this company their new friend is the owner/CEO/president of has discovered some new product/bitcoin/algorithm/process/material that is going to disrupt some multi-billion or multi-trillion dollar a year industry. They will have some really great story about either how the information was suppressed or some "unknown genius" that they befriended/are/know came at it from a completely new direction and the world was going to change overnight. They just need some money to get their first prototype demonstrable and bam the value of your investment will grow by 100x easy. Now you ask them about it and find a lot of things that you find suspicious so you ask them to ask questions. If the questions are too pointed the prankster will threaten them with not taking their money (and so losing out on this huge reward) and if they have bought the story they will shut up. The trick here is they think they are already rich because they are convinced it is such a sure thing. And no amount of reasoning from you will change their mind. When it finally is revealed that the money is gone and the "company" is shutting down, there will be a set of things that happened that appeared to be either extremely unlikely or extremely rare. In one story the "technical cofounder" who had all the secret sauce in their head was killed in a freak car accident in Russia while visiting their family to bring them back to the US. The crowd funding site will be set up with layer after layer of warnings that you can lose all your money, and there won't be a single shred of printed information that could prove that the people responsible didn't believe what they were saying when they convinced your loved ones to invest. Bottom line, you won't be able to prove fraud, people you care about may have had their entire life's savings taken and are now living in poverty on government benefits, and there will be nothing you can do about it. The only things that stands between these fraudsters and your grandmother are the Qualified Investor rules. [1] https://medium.com/startup-grind/i-got-scammed-by-a-silicon-valley-startup-574ced8acdff#.s6q01akcm https://medium.com/startup-grind/i-got-scammed-by-a-silicon-...

iopq 10y ago
> And this is exactly the ugly place where reality collides with the way we wish things were. I worked for a guy once who could put together a story so plausible that someone close to you would invest way more than they had any reason to or should, into the venture. He would not tell a single outright lie and the "truth" would be that if all the things that needed to happen, did happen, the business would in fact be a great investment. He would have a sold your parents so hard that they are probably getting their friends to come in on the deal too. And when all the money was gone and your parents were destitute, he would have an iron clad story about how it was not his fault, how your parents knew that things could go wrong, and that risk was all part of the equation. He would be untouchable as far as a fraud prosecution goes. This happens to VCs too. So? This is why investing into companies is risky.
- Jweb_Guru 10y ago
  VCs have money to blow.
  - nostrademons 10y ago
    There is a certain irony in that most of the money ultimately comes from pension funds, which are investing the same life savings that their owners are forbidden from directly investing in startups, only with at least 2 layers of indirection (pension -> fund of funds -> VC -> startup) and associated fees. But yeah, the total percentages at risk are much lower when the pension fund does it.
  - iopq 10y ago
    Then don't invest money you can't lose?
    - Jweb_Guru 10y ago
      For a lot of people, that essentially means "don't invest at all." The problem is that if you think it's 100% a sure thing, it's not really speculation, so it doesn't matter whether you can afford to lose the money.