The concept of crowdfunding is very intriguing to me. The idea that a young company could utilize a tool such as Kickstarter to fund a new venture, thus avoiding the costly and difficult prospect of acquiring traditional venture capital, is exciting. Indeed sites that help small businesses acquire funding have started to carve out a niche in the start up and social enterprise worlds. Kickstarter is the most well known, of course, but I have run across smaller endeavors as well, such as Lucky Ant, Indiegogo, and Fundable (for a list of the top 10 crowdfunding platforms from triplepundit.com, click here).
The one concern that has stuck with me as I have watched the crowdfunding movement grow is that of the potential for fraud. I have spent a lot of time examining various securities frauds over the years, but you do not need to be an expert in the field (nor would I claim to be that) to look at the frauds perpetrated by individuals such as Bernie Madoff and Marc Dreier and understand that a lot of times, securities fraud is less about genius and complexity – and more about brazenness and confidence.
That is to say, you do not need to be a genius to pull off securities fraud. You need to be confident, charismatic, and have enough intelligence to acquire the trust of potential investors. Once that is accomplished – the money will be yours. That is not to suggest that Mr. Madoff and Mr. Dreier are not intelligent people. Obviously they are. But if you look at the infrastructure of their scams they are not complex. Bernie Madoff ran a ponzi scheme. Marc Dreier created fake promissory notes and sold them. The complexity in their operations came with the scale and longevity of the scams – but at their core – they were simple plans carried out with bravado.
So it is with a somewhat suspicious eye that I have watched the crowdfunding movement grow, all the while wondering when the first real scam would pop up. While I'm sure there have been numerous attempts at scams so far, the first that has come to my attention came via the sports website deadspin.com last week, reporting on a video game company, “Dirty Bird Sports,” that was seeking funding for a new college football video game.
Asking for $500,000 in capital funding, the collaboration with Jam Entertainment (Anderson's company) promised to deliver a challenger to EA's popular NCAA Football video game franchise. Perks for investors included dinner with “co-owner” Jamal Anderson, a chance to play-test the game, or a signed helmet from former Ohio State greats Archie Griffin, Eddie George, or Jim Tressel. The promotional copy suggested the game would be different from EA's offering, thanks to the participation of former college and pro football players, and would feature every college football team—including NAIA squads—and the highest-quality 3-D models ever seen.
That is, of course, if you believ
e the Kickstarter page, which asserts that the graphics actually come from the game. They don't. In fact, the funding campaign was canceled earlier today, shortly after we spoke with Anderson. He told us he had nothing to do with the project and no connection to Dirty Bird Sports.
The concept itself appeared quite simple. Identify a wildly popular and profitable business – EA Sports College Football Video Game – and then profit off of that popularity through the illusion that you are poised to acquire a piece of this lucrative pie by creating a legitimate competitor in the marketplace. The creators of the “Dirty Bird Sports” crowdfunding campaign stole images from 3D modeling artists (such as images of college football stadiums), aligned themselves with a former Atlanta Falcon running back in Jamal Anderson (albeit unbeknownst to Anderson), and set a target fundraising goal of $500,000.
Now, fortunately, this scam was quickly debunked when someone saw it and contacted Jamal Anderson to talk to him (it was news to him). The issue for me, however, is that this scam was able to put together a proposal and begin raising money, with little or no trouble at all. All they needed was Google and the willingness to put themselves out there – and they were able to start raising money. 13 investors had contributed $685 to this before it came unglued. Had nobody spoken to Anderson about it, who knows what may have been raised before the scam was identified. If the scamsters had been smarter and reduced the amount they were trying to raise ($500k is a lot to try and crowdfund), they may have gotten close to their funding goal, and thus close to the funds being released, without being found out.
Crowdfunding is a new and exciting platform for small businesses. Further, as the JOBS act slowly starts to take effect, more and more businesses will be drawn to the largely unregulated world of micro-financing, especially through online platforms. The SEC has been charged with oversight, but the reality is that the SEC is understaffed and overwhelmed as it is. The SEC will not be able to be the gatekeeper for online crowdfunding portals, nor should it be required to be. For this to work, the crowdfunding community will have to be vigilant. It is in their own best interest to self-regulate and ensure that crowdfunding and online microfinancing are concepts that investors feel comfortable with.
Luckily – the Dirty Bird Sports (by the way – the term “Dirty Bird” is a reference to a popular celebration dance by Atlanta Falcon's players) scam was quickly uncovered and exposed. Moving forward I will be interested to see how the crowdfunding space is regulated, and whether or not it becomes a place where online scamsters feel comfortable trying to elicit funds from unsuspecting investors.
If you have any questions about this article, or wish to discuss the contents of this article further, please feel free to contact me at any time at Eric@apexlg.com. For more information about the Apex Law Group, LLP, visit our website at www.apexlg.com. This article is informational in nature and should not be relied upon as specific legal advice. This article does not form an attorney client relationship.