USA TODAY Article Highlights Some Dangers of Crowd-Funding


It will not be long before companies and individuals with no assets and no track record ? indeed anyone with a computer – can raise investment capital from ordinary folks over the internet with very limited disclosures and regulation. Crowd-funding, as the concept is known, was approved by Congress as part of the Jobs Act. The idea is to kick-start small businesses so that they will provide needed jobs. The SEC and numerous commentators expressed serious misgivings about crowd-funding and its potential for securities fraud.

Nevertheless, the SEC is required by law to create regulations within a mandated framework, and those regulations are expected to be published in January 2013. At that point, the Wild West world of crown funding will begin. (Today, crowd-funding is limited to non-securities payments or donations in exchange for products or token gifts.)

To get an idea what what we may expect when securities crowd-funding begins, USA Today related a story about a gentleman, Mr. Stark, who “invested” $150 to essentially pre-order a pair of super-cool eye-glasses that would actually record live video (not really “invested,” because he did not receive an ownership interest in the company). Thousands of other did the same, and the company that was to design and make the product, called Eyez, raised over $300,000 of start-up capital in this way.

The story from the company sounded great. Their goal was to start production in 2011, but the individual “backers” would receive their Eyez ahead of time. The tech press “gushed.” But then nothing happened. “Crowd-funding dark side: Sometimes investments go down drain,” by Matt Krantz, USA Today.

Mr. Krantz writes: “Yet even today, Eyez glasses still aren’t being produced and individual backers including Stark haven’t received a pair. Meanwhile, the entrepreneurs have curtailed providing online updates on the project and won’t answer questions from backers, Stark says. Stark figures he is out his money: $150 plus $15 for shipping to Switzerland. ‘It’s hard to find a real address and even harder to find a legit phone number,’ Stark wrote in an e-mail to USA TODAY. Carlos Becerra, who is listed as the company’s CEO, declined to comment.”

The lesson for would-be crowd-funding investors is: do not invest unless you are prepared to lose every penny you invest.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.