In barely a week’s time, two crowdfunding projects have gone wrong. Investors grieved for failure to receive the promised returns and to recover their principal sums.
An investment scheme that claimed to finance a builder known as Soilwood (listed company Soilbuild Group sound-alike) has stopped paying the guaranteed 4 to 6 percent quarterly return (“Investors cry foul over builder’s crowdfunding”, Straits Times, June 11).
Another project that promised investors a generous dividend of up to 24 percent by investing in security services firm Glen Iris has been wound up last October (“Another crowdfunding scheme goes sour“, Straits Times, June 18).
Both projects are marketed by a so-called financial advisory firm Noble Consulting Group.
What puzzled me is that the victims are not the ignorant and simple-minded, but include professionals with the capital, knowledge and experience in investment. Some even come from a finance background.
Crowdfunding schemes that went belly up
Scams and defaults arising from crowdfunding investment plans are first exposed with complaints from the victims, followed by announcements of involved companies being put under MAS alert list, before finally being covered in the news.
In case you miss them in the news, below is a list of some recent cases which have been reported in local newspapers and news portals:
Why these investment schemes being offered to the general public with such incredibly high returns didn’t raise the suspicion of any party? Part of the answer can be found in my book No B.S. Guide to Property Investment:
Potential buyers will find it difficult to verify what the marketers say at the sales presentation. If anyone sounds the alarm of a possible scam in a newspaper article or an investment blog, the whistleblower might be threatened with a defamatory suit by the concerned company, claiming that their company and business have been defamed — when they should be the one to deal with legal proceedings if they fail to deliver the promised return, go out of business or runaway with the investors’ money.
If the names of swindlers are protected by the law, who is there to protect the rights of victims who risk losing all their invested money?
5 critical questions to ask before taking the plunge
Can you tell a real deal from a fake one?
If you want to avoid being the next victim, take a step back and answer five critical questions before committing to any crowdfunding project, especially when it comes to chipping in to fund overseas properties.
1. Why do they need co-funding?
If companies need to expand their business, there are many sources of financing.
For instance, you have a brilliant idea to build a state-of-the-art product with ground-breaking features in demand by customers. To fund this project, you can find interested partners, approach banks, look for angel investors or government funding.
If your business has a successful track record, you can even consider board listing. But that is provided your company can meet the listing requirements, including minimum pre-tax profit and market capitalization, operating track record of at least three years, etc.
It is only when all the above methods fail, or you can’t meet all these requirements, then you have to consider approaching the general public who are laymen of your business.
Same for ‘exclusive’ property investment opportunities. You can co-own properties with relatives, close friends or business partners. Why do you want to share such profitable deals with people you hardly know?
Allow me to quote what I have mentioned in my book No B.S. Guide to Property Investment:,
“As a property investor myself, I can tell you honestly that no savvy investor will share with other people what they are buying right now.”
2. Why do you trust them?
Some victims told the media that they trusted the company because it is registered in Singapore.
What a naive statement! Do they know that it takes only 15 minutes to register a company in Singapore? Are they aware of the fact that the minimum paid-up capital is only one Singapore dollar? And just because a firm has registered itself as a Singapore company doesn’t mean that it is a trusted firm.
Many victims revealed that they were convinced by the professional presentations delivered in the ballroom of a 5-star hotel. Above all, the speakers and persons-in-charge are in respected professions (bankers, accountants, doctors, C-level executives, celebrities, etc.) Why is our society making us ‘worship’ certain professions and company titles?
Dan Ariely disclosed the results of an experiment in his book The Honest Truth About Dishonesty: How We Lie to Everyone – Especially Ourselves,
“Who do you think cheated more, the politicians or the bankers? … the bankers cheated about twice as much.”
When actors dress up like dentists to market a toothpaste brand in an advertisement, do you really believe that they are real dentists and every day ask patients to use that toothpaste brand?
Other victims claimed that they invested because of recommendations from friends, family and relatives. And that person is well regarded in the community.
Past performances do not necessarily reflect future results. Everybody make mistakes. Even trusted and well-respected parties can be wrong too.
3. How do they guarantee high return?
A rule of thumb to follow is: If it sounds too good to be true, it probably is.
The best interest rate that you can get from the banks for a fixed deposit is 2 percent. That is what banks can guarantee you with almost no risk.
If an investment plan promises to pay you 10 times of that return at 20 percent, how do they do it? How do they do it continuously? How do they do it when market direction changes for the worse?
If they are unable to honor what is promised, you can be sure that they can only do it two ways: go bankrupt or run away.
The problem is that there are probably many hidden implications and risks that are not shared openly with investors in the first place.
Republican presidential hopeful Donald Trump once said in his book Trump: Think Like a Billionaire:
“Just because you don’t understand something doesn’t make it a good investment … the words ‘new venture’ sound to me like a loan that will never get paid back … They want your money, pure and simple, so they’ll have a chance to make money.”
Donald Trump wants your votes, pure and simple, so he’ll have a chance to be President.
And you choose to believe that he can really make America great again? Well, it may not be totally impossible. But seriously, do you really want to bet on that?
4. How are investors being protected?
Crowdfunding, unlike financial investment products, is not governed by any regulation in Singapore. It falls under a large grey area that makes investors vulnerable to scams and defaults.
If victims approach CASE (Consumers Association of Singapore) for help, they will be told that investment matters do not come under their responsibilities. Similarly, purchase of overseas properties is not under the governance of MAS (Monetary Authority of Singapore).
On June 9, MAS has finally set a new rule for all crowdfunding platforms to apply for a capital markets services licence and to set aside a capital of $500,000.
It is not difficult for any crowdfunding company to apply for a licence. And how can $500,000 settle the claims of tens of millions like the previous default cases?
5. What makes you think that it is a fortune, not a fraud?
It may sound unfair to generalize all crowdfunding projects as scams. However, in order to safeguard the interest of you as an investor, give them the benefit of the doubt. There is no harm adopting the same principle of the Singapore law to assume that all accused are guilty until proven innocent.
It is always difficult to verify the authenticity of a deal. The safest way is to take the time to gather all the facts, do your own research, calculations and analyses before making the decision.
“The best way to avoid being scammed is to focus on what’s local to you … to physically go and look at each project — to ensure that they really exist.”
– Hubert Bromme & Lisa Moren Bromma, How to Make Money in Alternative Investments