Caution

Angel Investing Sites | A Cautionary Tale

Angel investing sites have exploded in popularity since the JOBS Act was introduced. You may have heard of some of the bigger players, such as Republic, SeedInvest, StartEngine, Wefunder, and so on, but there are many more.

As with anything popular, knock-offs, scams, and the like start to crawl out of the woodwork.

Today’s post is going to talk about one such unfortunate incident and what you can/should do to lessen the chance that you’ll become a victim in the future. You may also want to check out a previous post I wrote about investing directly with companies.

Let’s start with the basics…

THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE SEE MY AFFILIATE DISCLOSURE FOR MORE INFORMATION.

Are Angel Investing Sites Safe?

Are Angel Investing Sites Safe?

For the most part, yes, angel investing sites are safe. That said, you’re best served to stick with crowdfunding platforms that are FINRA regulated. You can also feel pretty safe with broker dealer firms that are FINRA regulated. I recommend checking FINRA’s pages to on a regular basis to see who might have dropped off and learn of any new platforms you should check out.

Although not a rule, I would look skeptically at the smaller sites that either have stale listings (ones that are really old, with nothing new and exciting to look at) or seem to have been created to promote a single company.

At any rate, I personally won’t deal with platforms that aren’t regulated by FINRA. That’s my minimum threshold.

Now, let’s talk about your best interests…

Look Out

Do Angel Investing Sites Look Out For My Best Interests?

This is a gray area. For all intents and purposes, I’d say yes and no. There are rules they have to abide by (assuming they are FINRA regulated) and many do a minimal level of due diligence and scrutiny. In the end, these platforms make money by charging a fee for their services to companies looking to raise capital (and sometimes by charging a percentage or membership fee to the investors too). Because of this, I lean more toward no. Besides, even the best of us can be fooled from time to time. You can’t expect the platform (or yourself) to catch every one in time.

One platform that I think does good by its investors is Equifund. Their primary goal is to educate investors and I think they put more effort into their vetting of opportunities than most.

Let’s look at a recent incident that highlights why you should be cautious…

Cautionary Tale

What Is This Cautionary Tale?

A crowdfunding portal, issuer, and several individuals were charged for fraudulent offerings by the SEC.

That’s right, it wasn’t just one or more bad founders, but an issuer, and even a crowdfunding portal.

Basically, three individuals conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies. One of them even had a prior criminal conviction that he and the others hid, so as not to deter people from investing.

All in all, almost $2 million dollars was raised, which was allegedly diverted for personal use instead of for the purposes disclosed to investors.

The crowdfunding portal, which is FINRA regulated, is listed because they failed to address the red flags and otherwise failed to reduce the risk of fraud to investors.

The SEC is seeking disgorgement plus pre-judgment interest, penalties, permanent injections and office and director bars against the three individuals and the issuer. They are also seeking disgorgement plus pre-judgment interest, penalties, and permanent injunctions against the crowdfunding portal.

For more details (such as the individual’s, issuer, and crowdfunding portal’s name) see this SEC press release, dated September 20th, 2021.

WOW! So, how can you avoid falling for something like this? Let’s take a look at some ways to mitigate your risk…

Avoid

How Can I Avoid Falling For This Type Of Scam?

There’s no real 100% guaranteed way to protect yourself (short of not investing at all). Still, there are many steps you can take to help stack the odds in your favor:

Invest Through FINRA Regulated Broker Dealers And Platforms

These companies are held to standards that are meant to protect investors. It’s one more layer between you and scams.

Do Your Own Due Diligence

I can’t stress this enough… You shouldn’t be investing in companies blindly. Do the footwork. In the process, you can usually sniff out questionable opportunities.

Check Claims

Don’t just take what’s on the raise page at face value. Dig in and verify. Think of it as an interview for a coveted or high security position. Don’t just assume what’s on the page is true.

Join A Community-Based Website

You don’t have to vet opportunities on your own. That’s why I created Angel Powwow. I wanted to have a place where people can bring potential opportunities to so members can share their thoughts and opinions (a crowd due diligence, if you will). You can’t be an expert in everything, but, maybe someone else can help fill in the gaps.

These few suggestions can help protect you from all kinds of pitfalls, not just this one type of scam.

Conclusion

As I said before, scams come with popular territory. In the end, it’s up to you to protect yourself. Following some simple steps can go a long way toward that protection.

The JOBS Act and angel investing sites have opened up a world of new investment opportunities for the masses. If approached properly, many of these opportunities have the potential to bring significant profits. If you simply roll the dice, you open yourself up to a much higher risk than you need to.

Now, I’d love to hear your thoughts on this topic. Do you agree with my assessment? Were you taken advantage of by the cautionary tale above (or maybe another similar one)? Do you have suggestions on what to add to my protection recommendations? Please let me know by commenting below.

Most angel investing sites are relatively safe. Just be sure to do your homework.

Thank you,

Scott Hinkle

AngelPowwow.com

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Responses

    1. Any time. I try to share info when I learn of it. I thought this was a good example of why doing your own due diligence is so important. You can’t expect the crowdfunding sites to catch everything or, in some cases, anything…

  1. Thanks for the write up.

    What can kind of return can a new investor expect if they put money into a organization like this?

    Also, how do entrepreneurs access the money?  Is it through applications?  Then are they provided loans with reasonable terms?

    Thanks again for providing the info.  

    Is there a list of FINRA businesses that helps ID the good guys?

    Cheers!

    1. Hello,

      In this case, investing in a company like this will leave you with no return.  Generally, investing in reputable startup opportunities is a crapshoot game.  Many companies fail, some may return what you invested or maybe even less than you invested.  It’s the few the return higher multiples that make up for the losses and more.

      When using crowdfunding sites, the monies are usually held in escrow until a certain amount is raised and then it is dispersed to the company.  The funding comes from investors like us.  They can apply for traditional loans, but most are in such an early stage, that obtaining such loans is very difficult.

      Yes, you can look at the crowdfunding platforms that are FINRA regulated and broker dealer firms that are FINRA regulated.  The platforms listed here have to follow certain guidelines and whatnot.

      Thanks for taking the time to comment,

      Scott