Police are warning that crowdfunding platforms are becoming a new hunting ground for fraudsters.
Britain’s National Fraud Intelligence Bureau (NFIB) warns that intelligence reveals scammers are setting up ‘boiler room’ operations to trick victims out of cash invested in startup businesses.
Boiler rooms are run by crooks who try to persuade investors to hand over cash in return for worthless or non-existent shares.
Crowdfunding is a new investment phenomenon that allows groups of investors to pool their cash in response to an online pitch for funding from a startup business.
The NFIB explained that boiler room gangs are telling investors that limited numbers of shares in startup businesses are available when they are really sending out emails and cold calling hundreds of thousands of investors about the same startup.
Bogus start ups
One of the easiest ways to lose money in a crowdfunding investment is share dilution in a company.
If the company issues more shares, the value of any existing shares is driven down.
Detectives fear bogus startups are setting up web sites and crowdfunding platforms to attract investment.
“This is a new departure for boiler rooms,” said an NFIB spokesman. “These con men are always looking for new ways to get their hands on other people’s money and crowdfunding is booming in popularity.
Although City regulator the Financial Conduct Authority (FCA) is monitoring crowdfunding and consider the investment high risk, while issuing guidance to platforms and investors. Putting money into a startup through an online platform is not protected under the UK Financial Services Compensation Scheme that is donation or reward based.
Reporting a scam
If an investment is criminal or fails, investors have no recourse to a financial ombudsman or a compensation scheme to recover their losses.
The FCA released recent figures showing crowdfunding in the UK has mushroom by 117% in little over a year to become a £1.7 billion a year sector for investors.
Crowdfunding comes in three models –
- Donation or reward crowdfunding – Investors offer money but do not expect any return other than a small gift or discount
- Debt crowdfunding or peer-to-peer lending – Investors allow entrepreneurs to borrow money over a fixed term in return interest payments
- Equity crowdfunding – This is when an investor hands over cash in return for a stake in shares of a company
The NFIB wants anyone who suspects they have been tricked or contacted by crowdfunding scammers to tell them about the con through the Action Fraud web site.
