The other day, someone approached my friend with an opportunity for a crowd funding investment.
After listening to the presentation, my friend and I had a good laugh. This was obviously a novice company (and sales person) trying to ride the crowd funding trend to sell a questionable investment.
Person X met up with us to explain to us about the crowd funding concept. He was very enthusiastic about it and well dressed. As we were familiar with the concept, we told him to get straight to the point and tell us more about his company and projects. And also to show us his material materials.
X explained that their company was just a broker, they do not receive any money and their role is just to help their clients raise money.
X came ill-equipped. There were no printed materials as everything was supposed to be in the laptop. Unfortunately, the laptop could not start up and thus we had to rely on his verbal presentation.
The current project that they were raising funds for was for a company Y in the events planning industry. Y wanted to do a series of exhibitions in the coming year and needed to raise $2 mil + from outside investors for it.
According to X, having additional capital would allow Y to better manage their working capital for their exhibitions. They have almost raised the amount and were just short of a few hundred thousand.
X showed us a copy of the agreement after we asked for it. But many other things were questionable:
- No financial projections for the exhibition were available.
- We have no access to the Y past financial statements because they were private and confidential. As we were only investing into the exhibitions and not Y, they will not grant us access to it.
- Y was registered as a sole proprietorship. X said that this was better as we could go after the personal assets of the owners of Y should they default.
- X company website is non-existent and their address is a service office. They are also newly started in Jan 2013.
- Despite only starting in Jan, X said that they had done a previous project for Y last year. X explained that they were under a previous setup but had branched out as a separate company this year. Anyway, the nature of the previous project for Y was similar. I am not convinced of the relationship between X and Y.
- But the biggest red flag is this: Y offered to pay us up to 3% a month for investing and the tenure was only for 6 months. This works out to an annualized return of almost 40%. Why would a company raise such an expensive form of capital? Could our money be used to pay for the previous project done last year? If so, this would mean that the whole setup is a ponzi.
As crowd funding becomes more and more popular, it is important not to let our greed overcome our logic and invest into opportunities that seem too good to be true.