Get ready for a rise in crowd-funding scams

Crowd-funding is a great way for fledgeling businesses to get off the ground. But scammers will soon latch on to it as a way to make cash.

I greatly enjoyed the Olympics. Perhaps the more so because I had been one of the moaning masses who thought it would be hell on earth.

Part of our golden success was due to lottery funding. And a lottery was in the news again this week when a Suffolk couple picked up a banker bonus beating £148m winning the EuroMillions.

Journalists love to be proved right. Here's something however where I would love to be wrong. All that lottery publicity will prompt the scamsters into buying email and postal lists to tell people they have won millions on a lottery. This draw may or may not exist, and, even if it does, then the person getting this “good news” will never have bought a ticket.

The scam is that to get your “winnings” you have to send money upfront.  And of course, there are no prizes.

The fraudsters can send out 100,000 emails for just a few hundred pounds. If just one person is caught, they might be persuaded to part with many thousands. And victims tend to be vulnerable – lonely, elderly, depressed.

The scammers rely on real stories

Unlike theft involving violence to people or property, fraud works because victims believe in the tale they are spun. Scam merchants latch on to something that's real to reel in their cash. So boiler room share rackets usually refer to real shares; property swindles rely on genuine real estate transactions.

A scam that is just about to surface relies on the way banks shut the lending door to new and growing businesses and ways around that. One solution is peer-to-peer lending where an internet site brings together those with cash and those who need loans for projects.

A variant is “crowd-funding” - asking hundreds, or even thousands, of people to back your idea with anything from a tenner upwards. And these can easily pop into your inbox.

Last week, one arrived asking me for anything from £10 to £250 to get a new book off the ground. The sender said that with £50,000 he could revolutionise the world of finance. How? He would write a book on money raising via crowd-funding, and then produce a series of  YouTube videos.

So what's wrong with that, if you believe, as I do, that raising money this way can be a good idea (plus it's one in the eye for the banks)?

The trouble was that the near 2,500 word email had stacks on why crowd-funding was a good idea and told of how the author was a much published writer, but had nothing on why anyone should want to invest.

Where's the business plan?

Crowd-funding is fine but to part with cash you need to know more than just the idea, however appealing it might sound, even if you only part with £10 or £20.

There was a lot missing from this business plan. Just why did he need £50,000? I've written books for major publishing houses so I have a fair idea of how much it costs to launch a money title. And it's cheaper if you limit yourself to an eBook. There was nothing to justify the amount.

Would I get my money back if the target was missed? No idea, but the rule is that unless this is specifically promised, assume you won't. A project that needs £100,000 may not get off the ground with £20,000, leaving the promoter with a “keep it all” deal.

What reward would I get for my cash? I want to see at least plans of how the business is set to grow.

How will I get my money back? If you put money into a business, you must have an exit route. This can be a facility to cash in shares or the promise that your money will be repaid, perhaps twice over. But if there is no way out, then what is the point of putting money in?

The FSA says crowd-funding is for sophisticated investors only, but it is easy to be caught if the amount is small and the promise is big. 

As for my email, my charitable view is that it might have been written with more enthusiasm than business sense, and that somewhere there is a serious concept which needs £50,000. My cynical view is that someone raising money for a publication on crowd-funding should have put a much more convincing appeal together if he was really what he claimed to be.

More on scams:

The 'get rich from your sofa' scam

The scam that makes you feel special

The rare earth scam

This scam will leave you with nothing but overpriced hand cream

This scam is just a simple confidence trick