Week 6: Crowdfunding: Good, Bad, and Ugly

In 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act to encourage the funding of small businesses. It turns out that small business did not fare well in the economic meltdown of 2008, and the JOBS Act aimed to loosen certain securities regulations in the United States. The act was really intended to give entrepreneurs another way to raise capital.

It is a great story, but along with the act, many worried that by removing these regulations, the occurrence of fraud would also increase. Has there been fraud? Well…yes.

First, let’s review a success story of crowdfunding: the Oculus Rift. Billed as being an immersive virtual reality headset, the Oculus Rift raised over $2M in thirty days, and was soon acquired by Facebook for $2 billion. That is perhaps the best of all possible outcomes for a crowdfunding campaign.

Other less optimal outcomes are possible.

One noteworthy example was an “artificial gills” device by Triton. The company raised nearly $900,000 to fund a rebreather device that would allow humans to swim underwater while extracting oxygen from the surrounding water. Pretty cool! But as time passed, requests for technical schematics, videos of use, and basically just evidence that the device existed went unanswered.

At last the company repaid much of that $900K and admitted: no, they did not have a device similar to artificial gills.

But the example of Triton raises a dilemma for entrepreneurs outside an ostensible warning of fraud.

Let’s say you actually do have what looks like a fairly close prototype for workable artificial gills. This sort of product has never been done before, so we really have no clear idea what the R&D costs will look like. One thing is for sure though: in all likelihood, those R&D costs likely outpace what you think they will be.

To raise more, Triton would probably have to start revealing technical details to prove to funders that the device exists and that it is functional. This opens up the company to inadvertently leaking its intellectual property to competitors. Less fortunate still, this legitimate concern can be aped to a more or less convincing degree by those who simply wish to engage in fraud.

This is the bad. Now the ugly.

Earlier in 2017, an Alabama woman started a GoFundMe asking for financial help for cancer treatments and also a family trip to Disney. Maybe that Disney trip happened after all, but the cancer? Never had it! After garnering $38,000 in donations, an investigation was launched into Jennifer Cataldo’s story, which soon resulted in charges of theft by deception.

What crowdfunding stories have you heard? Feel free to share in the comments section.

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6 thoughts on “Week 6: Crowdfunding: Good, Bad, and Ugly

  1. Nick,

    With your examples of bad and ugly stories I have always wondered if people lie about their GoFundMe pages and how do you know it’s a real thing and not a scam? There are so many scam things out there I just had a feeling that people could use GoFundMe for that and make up some sad story to get money. With the Triton one I have also thought how do people get funding from investors without having to reveal their technical details and what keeps others from stealing the idea or the intellectual property.

    Thanks,
    Mackensie

    Like

  2. Nick,
    Before crowdfunding, I considered GoFundMe a site for raising money for people who were either trying to raise funding for a procedure or someone who had passed in their family. Finding out that crowdfunding is a great source for raising capital was pretty awesome.

    Unfortunately, there will be bad in any good situation. Nevertheless, I do not think the bad should discourage those who do give. Contributors may want to do their own investigation (at least as much as possible).

    Like

  3. Hello Nick,
    Fraud with crowdfunding I was always thinking could be so bad. It is the nature of to many people to take advantage of a situation if they think they can and that is so sad. This is such a great concept for not only business but for people in need or who have a story that make people want to help now they can.
    But….Beware and check the facts.
    Mary

    Like

  4. Nick,

    My mentality about crowding funding was that it was a scam. I see it all the time on sites as facebook etc. However, I guess just like anything else…do your research and go with your instinct. After learning about the concept of crowd funding -I actually have a lot of respect for people who are able to set one up…
    Great post!

    Like

  5. Nick,
    Nice job here. I think crowdfunding can be rife with scams. However, if you’re looking for equity funding using an Regulation Crowdfunding intermediary under the JOBS Act, it would seem there would be less risk of scam. The deterrent would be that those fundraising on the intermediary sites are subject to federal security laws and might get into a lot of trouble for scamming or misrepresenting their opportunity. I recognize that won’t stop everyone, but I would think it could limit the nonsense. What do you think?

    Like

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