Yet another failed crowdfunding scheme. Soilwood. Glen Iris. What’s next? Is crowdfunding another financial scam, like Sunshine Empire MLM Ponzi or the Suisse Gold buyback scheme? If so, why is MAS introducing regulation to support its growth? If it’s not a scam, what should smart investors do?
Yet another crowdfunding default
When I was away last three weeks for my reservist duties, news of another failed crowdfunding scheme emerged. This time, it was a crowdfunding loan to security firm Glen Iris, marketed by Noble Consulting Group. At least four investors said they invested $400,000 and failed to recover their principal. Barely a week ago, there was also a report on a defaulted loan to Soilwood also through Noble Consulting Group. At least eight investors said they invested $1m in Soilwood and did not get their money back.
Are crowdfunding schemes too good to be true?
The latest revelations have prompted several bloggers to question if crowdfunding schemes are too good to be true. Property Soul, a property investor and blogger, put out a table of the recent cases of investment scams and defaults.
Another blogger, Ryan Ong from The Middle Ground argues that crowdfunding has a serious scam problem.
Although I don’t fully agree with both bloggers, I urge all serious crowdfunding investors to read their posts as there are some good viewpoints to take note. For a quick summary, here are some of highlighted issues:
- Borrowers usually do not have a good track record.
- Borrowers’ so-called guaranteed returns usually do not hold water
- Investors are not protected
- It is difficult for investors to verify the authenticity of a deal
- The so-called credit ratings cannot be fully trusted. Remember Lehman?
- If a loan is approved within just 3 days, is the screening thorough enough?
Crowdfunding is not a scam, but there are some bad eggs
I don’t believe crowdfunding is a scam. I have done my homework and put my money with different crowdfunding platforms. So far, I am making about average 1.5% cash return per month, although I do have several loans in arrears.
If crowdfunding is a scam, then MAS would have simply clamp down the entire industry, instead of introducing new regulations. But there are bad eggs in crowdfunding, just like in any industry. Regulation will weed out the bad eggs, but it is not enough. Investors need to be educated and be able to talk to each other. A vibrant crowdfunding investor community will push back against the bad eggs.
Mr Lee Boon Ngiap, Assistant Managing Director, Capital Markets, MAS said, “Securities-based crowdfunding is a useful addition to our financing landscape. At the same time, SCF investments can be quite risky. The measures we are implementing seek to strike the right balance between improving access to SCF for start-ups and SMEs and protecting investor interests. The public consultation exercise has been very useful in helping us arrive at this balanced approach.” …
What should early investors do?
My approach to p2p lending is based on fundamental analysis, similar to value investing in the stock market. This basically means that I study all aspects of risks relating to my investment, including both the crowdfunding platform and the borrower. There are many steps to this; interested readers can refer to my Beginner’s Guide. CoAssets also recently put up a good article for amateur funders.
A good platform is your best friend
If there’s one final tip, it is this: choose your platform carefully. A good and responsible platform is your best friend in making money consistently. An irresponsible platform want to churn out more loans regardless of risk and earn a quick buck. It will be your worst enemy.
How to find a good platform? Stay with the well-known platforms and observe them carefully. Avoid any platform that seems dubious, even if they offer high returns. More details on how to do so can be found in my previous post on platform underwriting.
Do you think crowdfunding a scam? If yes, why do you think so? If no, what are the ways to invest safely and smartly? I’ve love to hear your views!