Consumer Protections for Crowdfunding

Crowdfunding harnesses the power of connections and technology to raise funds online. Online crowdfunding platforms like GoFundMe, Indiegogo, and Kickstarter make fundraising for small businesses or startups fast and easy. However, you should be informed before investing in a crowdfunding project.

Learn about the risks and how to evaluate a crowdfunding campaign to ensure the safety of your investment. If you need help, speak with a local consumer protection lawyer.

Understanding Crowdfunding and Its Risks

Entrepreneurs and small business owners turn to crowdfunding websites to fund new inventions or business ventures. They can ask for donations through social media or on crowdfunding sites.

You could be at risk if you don’t know who is behind the crowdfunding request. The project or invention may not be what it claims to be online. You could lose your entire investment. Fraudsters can lie about a product or project and its development timeline. They could also misrepresent the returns donors will get once the product is complete.

Although investments are never guaranteed, you don’t want to fall victim to a scam that has little chance to provide you with returns.

Legal Protections Under the JOBS Act

The Jumpstart Our Business Startups Act (JOBS Act) allows crowdfunding campaigns to raise venture capital and fund new business ventures using securities. In an equity crowdfunding campaign, many individual investors purchase securities. Before the JOBS Act, securities laws prohibited equity crowdfunding.

Under the JOBS Act, a small business can offer and sell securities. Anyone can invest in crowdfunding offerings from small business issuers. SEC regulations and the JOBS Act require vital disclosures. These disclosures provide some legal protections. They protect investors from early-stage ventures that may be highly risky.

The SEC’s Role in Crowdfunding

The JOBS Act allows eligible companies to offer to sell securities through crowdfunding. Following the enactment of the JOBS Act, the Securities and Exchange Commission (SEC)  provides regulatory oversight for securities sold through crowdfunding. The SEC, responsible for investor protection in the United States, adopted Regulation Crowdfunding.

Regulation Crowdfunding provides an exemption from SEC registration requirements for eligible securities-based crowdfunding. Requirements for securities issuers under Regulation Crowdfunding include the following:

• All transactions must occur online through an SEC-registered intermediary’s broker-dealer platform
• A company can raise up to $5 million through crowdfunding offerings in a 12-month period
• Disclosures of information in filings with the SEC, investors, and the intermediary facilitating the offering

Importantly, securities purchased through crowdfunding generally can’t be sold for one year.

Evaluating Crowdfunding Campaigns

You’re unlikely to recover your investment after donating to a funding goal that turns out to be a scam. So, it’s critical to evaluate crowdfunding campaigns before becoming a backer. Perform due diligence.

The best way to evaluate a crowdfunding campaign is to do the following:

• Vet the opportunity by looking up the organizer
• Search for any consumer complaints concerning the organizer
• Ask the project creator questions about other projects
• Find out whether the organizer has launched other products or businesses through crowdfunding in the past
• Inquire about the expected delivery date and what happens if the project is never completed

Crowdfunding campaigns are as diverse as the business ventures themselves. Make sure you understand the purpose of the fundraising. Understanding the purpose can help you evaluate the opportunity.

Steps To Take if a Campaign Is Fraudulent

Suppose you come across a promising crowdfunding Kickstarter project through a good friend. You performed your due diligence before using your credit card to become a backer for the Kickstarter campaign. You’ve reviewed Kickstarter’s terms. Nevertheless, you discover the campaign is fraudulent. What do you do now?

If the campaign you supported turns out to be a scam, follow these steps:

• Follow any steps the crowdfunding site outlines for reporting the scam. For example, Kickstarter has a process to report violations of its rules.
• Report the project to the Federal Trade Commission (FTC).
• Report the project to your state attorney general or state consumer protection office.
• Try to influence other would-be supporters by warning them about the creator on the crowdfunding site.

In a perfect world, we could detect and avoid crowdfunding scams altogether. However, when this isn’t possible, the steps above can help. You may also need to contact a consumer protection lawyer. They can explain whether you should take legal action under consumer protection laws or any applicable laws.

Protecting Your Investment

Many people find supporting entrepreneurship by investing in a crowdfunding campaign attractive. Protecting your crowdfunding investment is like safeguarding other investments. Asking questions before investing and conducting independent research about the company’s product or service is crucial. The SEC provides helpful information to educate investors about securities-based crowdfunding.

A Consumer Protection Lawyer Can Help

If you invested in a crowdfunding campaign and need help understanding your legal rights, speak with a local consumer protection lawyer. They will be able to explain your legal options.