Crowdfunding is the name for the now popular process by which people raise funds for various projects from movies and books to the development of new businesses. Unfortunately, as I have been warning you about since 2012, the potential for crowdfunding scams is tremendous. Recently, the Federal Trade Commission filed a complaint against Douglas Monahan who used his company iBackPack of Texas LLC to operate four crowdfunding scams in which he promised that funds raised would be used to develop a wide range of products including a back pack that would have battery charges and a Bluetooth speaker. According to the FTC, Monahan did not use the money raised to develop the products he promised, but rather used the money for his own personal expenses and to create further marketing and fund raising efforts.
The JOBS Act, a federal law that regulates crowdfunding was enacted in 2013, however it was only in March of 2015 that regulations were issued by the SEC to make the law effective. At that time the FTC brought its first charges of operating a crowdfunding scam against Eric Chevalier who settled the claim against him. Even with these new regulations in place, the primary burden of protecting your money in a crowd source investment falls to the individual investors. Check out the person or company online. Find out if they are legitimate or a fraud. Check with the Federal Trade Commission to see if there are complaints against them. Do a Google search in which you merely add the word “scam” to their name or the name of the company and see what comes up. Ask for detailed information from the person or company raising money through crowdfunding so you can understand the project. Read the financial disclosures required to be filed by the SEC under the new JOBS Act regulations. Never give to a project that you do not fully understand. When it comes to investing in a business, an artistic endeavor or even a charity, it is critical to do your research about the people behind the particular venture before you consider sending money. Finally, unless the particular company raising money through crowdfunding is designated as a 501(c)(3) company by the IRS, you cannot deduct your contribution on your income tax return. Also remember, that merely because a crowdfunding appeal appears on a legitimate crowdfunding website does not mean that the website vouches for its legitimacy.
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