Prevention of Fraud in Equity Crowdfunding

FraudANDcrowdAfter 300 or so raises on the ASSOB Equity Crowdfunding platform it may be valuable to others to understand what processes are in place to prevent fraud. Since 2005 there have been zero cases of fraud. Firstly though what is Fraud? Usually any definitions of fraud include statements like …

 

  • an untrue statement of a material fact
  • representation that the person making it knows is not true
  • doesn’t have the basis to make such a statement
  • to omit to state a material fact that is necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading

Often it is difficult to tell whether it is an “honest mistake” or “reckless disregard”. Where would you place the following examples choose from … an “honest mistake” or “reckless disregard”

  • Failure to transfer intellectual property into capital raising entity
  • TM expired, patents lapsed
  • Failure to properly disclose contracts not at arms-length
  • Company or business does not exist. Founder or associate names are fake.
  • Company or business claims to be associated with reputable businesses
  • Domain names are usually not in the correct names of the capital raising company.
  • Founders Issuing equity during a capital raising in addition to those in the raise offer document.
  • Failure to observe basic corporate governance obligations – lodging share notifications, holding Stockholder Meetings, preparing audited financials
  • Failure to send stock certificates or holding statements to investors
  • Material changes / events occurring and not keeping investors updated, e.g. intellectual property expired, material contracts fallen through.
  • Undisclosed debt for equity or convertible notes transactions that exist prior to the raise

The competent operation of the crowdfunding platform or portal is essential for the prevention of fraud in equity crowdfunding. Based on my experience with the ASSOB platform we have learned that it is very unlikely that fraudsters would be bothered jumping through all the hoops a competent platform or portal places in the path of each transaction. As a guide here are just some of the steps each transaction needs to pass through or adhere to for ASSOB raises:

  1. An Intermediary exists. In most white collar fraud there is seldom a buffer between the fraudster and the victim. ASSOB has independant accredited partners to hold the hand of issuers during the raise process.
  2. Upfront Fee paid. Fraudsters often dont have the funds to pay to get a fraud started
  3. Founders and Entity Due Diligence. ASSOB has two stages of due-diligence. The first stage involves “ASSOB Legal ” checking out the capital raising entity, the founders and the IP to ensure all of this is appropriate and in the right entity for investment.
  4. Marketing Materials Due Diligence. The second due-diligence stage is to check that the material used to market the offering gives a true and fair view. Any statements that misrepresent the opportunity are communicated as not appropriate and the issuer needs to resubmit.
  5. Own Crowd feedback. Before the offering goes live the issuers own crowd has an opportunity to speak up if they done believe what is offered is legit.
  6. External Crowd feedback. Once the offering goes live there is plenty of opportunity for the world at large to report anything that doesn’t stack up.
  7. Funding Targets & Escrow. Targets and escrow mean that funds are not distributed unless special conditions are met.
  8. 10 day Cooling off period. Investors can get their money back within 10 days of a transaction not needing to give a reason.
  9. 3 Directors and Auditor. Directors and Auditors have responsibilities under the law and they will usually tend towards protecting themselves before turning a blind eye to fraud within an organisation.

All these steps, together with corporations law, provide a barrier to fraud that has yet to be breached at ASSOB. If equity crowdfunding platforms and portals take a similar responsible path then I’m certain that fraudsters will head for easier territory.

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