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The Crowdfunding Phenomena

By Will from Holland

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What is crowdfunding? And what does it have to do with you? Perhaps nothing, or perhaps just not yet, but we think it's important enough for you to know about.

According to Oxford Dictionaries, crowdfunding is:

The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.

Rather than using funding from regular financial institutions or venture capitalists, people might finance new projects via the internet or social networks with the help of peers, friends, family, and colleagues. Making a crowdfunding project viral generally means one can draw a bigger crowd to get more funding. It's a great way for someone (you, for instance) to find out about how and where you can invest some money in a business.

As you can see, crowdfunding can be a great way for entrepreneurs to start up a new business without having to meet the many requirements financial institutions generally mandate before loaning out money. Additionally, crowdfunding can be used to fund disaster relief projects, support of artists by fans, political campaigns or even free software development.

Crowdfunding is a rather new thing (heck, you may not have even heard about it until you started reading this article). More and more crowdfunding websites/projects are popping up and experts1 say that crowdfunding will become really big this year. Other experts2 warn that crowdfunding is going to be a really big problem this year, as well.

So, what could go wrong with crowdfunding?

Well, crowdfunding takes a different track from the pyramid or ponzi schemes that you probably have heard of. Though crowdfunding is regulated by the government, there are a couple of dangers you need to be aware of:

  1. Crowdfunding website(s) can be fake
    You invest your money and bingo, you instantly lose everything you invest without ever supporting the cause.

    Solution: do solid research on the organization and website before investing anything. This is something you should probably do anyway, right?

    Here's a checklist to help you.

  2. Advisors may be bogus
    A lot of scammers will try to get you to invest in specific ventures or products. Because a lot of crowdfunding is done on the Internet, and is sometimes brought to your attention by friends or acquaintances, it will be tough to verify whether the advisor is legitimate.

    Solution: Before trusting anyone, even the father of a friend, thoroughly check an "advisor's" credentials and abilities. If in doubt, don't even think about investing your money.

Which brings us to another big point: Investing money is complicated and can be very dangerous. Investing in startup projects or ventures is generally even riskier and very speculative. Before investing money, do lots of research into the project and don't invest any money that you can't afford to lose (acknowledge the fact that the money you invest could be gone forever).

Makes sense right?

Cheers, Will.

1North American Securities Administrators Association (NASAA)