Take Action if You Believe a Crowdfund Investment Is Breaking the Law
Unfortunately, people do break laws. In the case of a startup or growing business like a crowdfund investment, you may find out that the entrepreneur or business owner is doing one of these things:
Soliciting investments on the phone or by e-mail instead of via the online funding portal
Paying an employee under the table
Cooking the books (fudging the company’s financial reports) in some other way, whether big or small
When an entrepreneur or business owner breaks the law, he puts not only himself but also your investment at risk. Therefore, you need to take action right away if you believe something illegal is happening.
Weigh the appropriate action
Depending on what exactly is happening, you may want to start off by contacting the entrepreneur or business owner directly to explain what you know. (Presumably, if you know about something illegal going on, other investors may know as well, so the sooner you act the better.)
This course of action may be best if you suspect the entrepreneur or owner is simply making a mistake or misunderstanding the law. (Maybe you overheard him explaining the investment opportunity to someone in person, for example, and you suspect he just doesn’t realize the ramifications of what he did.)
If you have bigger concerns about what’s going on, and you suspect the entrepreneur or owner knows exactly what he’s doing and chooses to do it anyway, you may need to notify the SEC, which polices the rules governing crowdfund investing.
The best way to do so likely is to contact the online funding portal, which should have a system in place for handling this type of complaint. (Funding portals will take such complaints very seriously; they don’t want to stain their own reputations.) Send an e-mail to the portal first, and then follow up within a day or two with a phone call.
The funding portal is on your side, so don’t be shy about bringing a problem to light.
Of course, there are options in the middle of these two courses of action, so seeking advice from an attorney is always a good idea. Maybe you are the one misunderstanding the law; you need to rule out that possibility before blowing the whistle publicly. But if the attorney confirms your suspicion, you have to take action of some kind; you accept that responsibility as a member of the crowd.
Make sure the crowd is informed
If you have completely confirmed that illegal activity is occurring, the funding portal should notify all investors of what’s happening. If you’ve reached out to the funding portal with a complaint, you have the right to ask how and when the portal will send this notification. As long as the funding portal does its job correctly, your work is done.
But in the worst-case scenario, if the funding portal drags its feet about notifying investors of the problem, your work isn’t done. You have a responsibility to inform the rest of the crowd of what you know.
Of course, you want to exercise extreme caution when posting a message that alleges illegal activity; you don’t want to put the company in a terrible position based on unconfirmed suspicions. Only if and when you are 100 percent certain of the facts of the situation should you take this step and share your concerns with fellow investors.
Just think how horrible it would be if you published a statement about wrongdoing, only to discover afterwards that you were wrong and the company went out of business due to your allegations.