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Misinformation Spread About Crowdfunding

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Misinformation Spread About Crowdfunding

By Startup Valley (678 words)
Posted in Crowdfunding on December 10, 2012

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Late last week, an article in Investment News reported the Commonwealth of Massachusetts accused two oil companies of performing fraudulent crowdfunding. While both gas companies took part in two different acts of fraud, they were not at all related to crowdfunding, thus projecting misinformation about a still unborn industry that received bipartisan support in the passing of the JOBS Act in April of this year.

It has been reported that Prodigy Oil and Gas LLC sold $464,000 in securities that were unregistered to an investor who was located in Massachusetts. As for Synergy Oil LLC, it is alleged that the Oklahoma based company sold a total of $35,000 in unregistered securities to two separate investors. It is alleged that Synergy also cold-called 21 people in attempts to sell them “working interests” in oil that still required drilling. Galvin’s securities division is responsible for sorting out the fraud charges for the two oil companies mentioned. It seems apparent that both companies took advantage of the system since security laws have recently been loosened in order to aid startups in acquiring the required amount of funds needed to launch their new business. Galvin’s office is in favor for the rules of crowdfunding which are currently being finalized by the SEC, but believes that people who violate the laws should be disqualified.

Crowdfunding is not yet legal so to call this fraudulent crowdfunding would be entirely incorrect. One huge point of crowdfunding is its namesake, the crowd. The idea of many coming together to raise funds for one goal is at the heart of this soon to be industry; thus the issue with these reports deals with but one or two individuals. The businesses must also point investors to invest in the deals through an SEC approved portal rather than by the means of what this article suggests.

StartupValley CEO, Daryl H. Bryant, explains the work of portals to educate the investor about the process:

“Once crowdfunding is legal the rules and regulations surrounding proper acts of crowdfund investing will prohibit fraud and protect investors in all aspects of the investment.  Crowdfunding portals will be responsible for providing background checks on issuers, asking for private information that will prohibit one from using a false identity (such as social security numbers, past street address verification, etc…), educating investors and making sure they understand the risks of an investment, and allowing the crowd to vet the deals together in an open platform environment.”

Bryant goes on to speak of the actions being made to prevent fraud, “This is why it’s critical that the SEC acts to finalize these rules so the crowdfunding ecosystem can develop and create a regulatory environment that is safe, secure, and lays the foundation for the proper management of all crowfunding investments.”

There are many naysayers across the country who feel this industry will be detrimental to exchanging securities. The truth is that nobody knows exactly what will happen when crowdfunding regulations are finalized. What we do know is that we have no way of seeing the results without trying it ourselves. There are numerous accounts of successful crowdfunding campaigns in the UK and Australia with not one case of fraud, which Chief Crowdfunding Evangelist of thecrowdcafe.com, Jonathan Sandlund, shares this truth through his deep research and analysis:

"The largest cases of security fraud in history have taken place in the shadows. Madoff bamboozled investors for $50 billion — from the boardroom of FINRA for goodness sakes. For perspective, this is nearly 50 times the entire global volume of crowdfunded transactions in 2011 (perk and investment). Had Madoff been forced to broadcast his deceptive words and falsifying actions to a global audience, and respond publicly to every inquiry and question directed his way, he wouldn't have stood a chance. Complete openness and transparency would have defeated him. And this complete openness and transparency is precisely why there has yet to be a single incidence of fraud across more than $200 million in security crowdfunding transactions worldwide."

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