[Advanced] Everyone Is an Investor (3)

Keeping the scams out
The intersection of crowd sourcing, money and anonymity afforded by the Internet may sound like a cesspool of financial chicanery and frauds, but site operators are sensitive to the perception.
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Kickstarter's all-or-nothing approach to money — donors aren't charged if campaigns fail to meet their financial goals — helps to minimize fraud, Strickler says.

RocketHub allows fundraisers to keep the funds even if they fall short of their goal. But the company saw no need to withhold money, because it found 75% of funds raised on its site are from someone you know or others who know people in your network. "You have a built-in safety mechanism. People who don't have social capital aren't able to fundraise online," Meece says.

But scams and never-materialized projects sometimes pop up in crowd funding. In one notable case, a video game campaign raised nearly $5,000 on Kickstarter before "the studio" was discovered by forum users at social news website Reddit to be a fraudster. The campaign was eventually canceled by its creator.

Rules and Regulations
With rulemaking still ongoing, the law lacks details on how investors will be protected. But broadly, it imposes certain rules on funding websites, including a requirement that they refrain from directly handling money or securities. They must hire an intermediary, such as a bank or broker, for such transactions. The funding sites are also prohibited from making security recommendations or promoting a particular company.

The banks and brokers are required to conduct background checks of officers or directors holding at least 20% of company shares. A crowd-funding site can also act as an intermediary — and hold funds and securities— if it registers as a broker.

Because most crowd-funded deals are small in size, large brokers could be tempted "to cut corners," Rubenstein says. Smaller intermediaries may not have enough resources to meet the requirements, he warns.

Notes and Vocabulary
cesspool n.
a large, underground hole or container that is used for collecting and storing human waste and dirty water

anonymity n.
/ˌænəˈnɪməti/
when other people do not know who you are or what your name i

chicanery n.
/ʃɪˈkeɪnəri/
dishonest but attractive talk or behavior that is used to deceive people

perception n.
/pɚˈsɛpʃən/
the way you think about something and your idea of what it is like

mechanism n.
a part of a machine, or a set of parts that work together

fraudster n.
a person who gets money by deceiving people

intermediary n.
someone who acts to arrange an agreement between people who are unwilling or unable to communicate directly

Discussion Questions
- Has something kept your dreams in check? Explain.
- When you make a donation, do you expect something in return? Explain.
- What are some of the pros and cons of crowd funding?

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