The Dangers of Crowdfunding

Crowdfunding allows individual investors to pledge funds—sometimes as low as $5—towards startups around the world. While this is a great opportunity for potential business ideas to become reality, Better Business Bureau serving Alaska, Oregon and Western Washington reminds backers that there can be dangers with these types investments.

A Google search for “crowdfunding” returns 10.3 million results, and it can be difficult to discern which sites are legitimate and trustworthy. The North American Securities Administrators Association and the Washington State Department of Financial Institutions have both issued similar alerts.

Many crowdfunding services are based on an all-or-nothing funding model, where entrepreneurs must abandon projects and return pledged money to investors if goals are not met by deadlines. However, meeting funding requirements does not necessarily mean that proposals will ever come to fruition; businesses will still need to obtain licenses, find commercial space, line up suppliers, hire employees and fulfill other fundamental obligations.

With this relatively new form of investing, understanding the details of different crowdfunding sites and proposals is critical. BBB encourages investors to ask questions:

• Do proposal details check out? Is there verifiable contact information?
• If projects do not reach funding goals, will money be returned? How will money be returned? What is the timeline for getting money back?
• If projects do reach funding goals, how long until startups are operational? How long until there are profits? When can investors expect to earn returns or see physical products?
• Are there contingency plans for failing projects if fund requirements are met?

Check with the U.S. Securities and Exchange Commission for federal oversight and regulations on Internet crowdfunding. Visit BBB’s News Center to stay up to date.