(Although there are lots of ways to be a crook with crowdfunding, this Part I will focus on the Big Con. That is, how do you raise as much as possible in one go, by means of a confidence game that gets investors to willingly part with their cash, rather than something technical, like a hacker attack or money-laundering scheme, which we will address in future parts. The reader will kindly indulge the use of the first-person as a literary device: our purpose is, of course, to think a step ahead of where the bad guys are likely to try and go.)
Part I: The Big Con
We can rely on a time-honored formula for con games: they all have a few elements in common, which we can identify here:
- The hook.
- The mark.
- The come-on.
- The touch.
- The cool-out.
All great cons appeal to the baser instincts of the victims: particularly, greed and pride (though the skillful con man can often recruit envy, lust, and sloth as additional tools). We do it with the backstory and the offering, or the “hook.”
The hook must appeal to a sense of greed: outsized returns. And it must stoke pride: the hook resonates with the mark’s desire to be important and “in the know;” it explains why he is going to get such great returns in terms of his own imagined merit. Mining and technological innovations are good standbys, especially if they seem easily comprehended but their supposed mechanism of action is not.
Our hook will be about a garage-based scientist who’s come up with a means to increase cut gasoline costs by 80% by using some quantum-mechanical mumbo-jumbo. It’ll be important that nobody can challenge our science, so we’ll want to monopolize the communications to the mark, or else bury any challenges beneath heaps of boilerplate disclosures.
While the old-school “long con” relies on capturing a single whale and wringing him out of as much as possible, the nature of the crowdfunding con means we need volume. Lots of minnows, or at least, say, halibut.
A good con man finds a group whose members are statistically or systematically easier than average targets. The elderly are traditional favorites, as are affinity groups (often tight-knit religious or ethnic communities, where you can exploit bonds of trust).
Another method is time-honored: lists of marks from other con men. It’s well know that you can go “back to the well” with a good mark over and over again. (We’ll want to make sure that every sucker who falls for this con makes our short list — complete with email address and financial details — for when we lather, rinse, and repeat.)
Our marks will be a bit of both: given the bait on our hook (quasi-scientific gasoline-saving), we’ll target the affinity group of environmentalists, especially “peak-oil” folks. The nature of the hook will play to these marks’ pride, confirming their prejudices about oil companies and the environment, plus, they have kindly self-identified into groups where mailing and phone lists will be easy to find.
While a legitimate crowdfunding deal requires the business that’s raising funds to reach out to its customers, fans, and community, that will be a problem with our con: after all, there’s no “there” there. (The hook is, after all, just a story, perhaps with a nice YouTube video and some fancy looking graphs to go along with it.)
For part of our job, we can get the marks themselves to help: the “true believers” will gladly evangelize the hook to their (Facebook?) friends.
But the real problem is that the Web is a terrible way to create new true believers. For that, we need to press the flesh, or at least the eardrums, and so we’ll turn to the time-honored method: the boiler room of shady phone operators.
We’ll buy a phone list of Sierra Club-types, and start dialing for dollars. The come-on certainly won’t be a straightforward pitch, though: the best come-on is that which stokes the “little larceny” in the heart of the mark.
Our operators’ story will be that they, too, are peak-oil enviros, and that we’ve been given an inside track: the Sierra Club is secretly planning to buy 2 million units for its members next year. (We might even have a PDF of the signed contract we could send you, if you give us your email address.)
The company needs money to build the first production run — the factory we’ve contracted with in China is tooled and ready, but demands payment — but the big Wall Street banks are in the pockets of Big Oil and are refusing to extend credit. This will let our marks both feel like they’re getting the best of it, while at the same time stoking a do-gooder glow in their cockles.
Getting the money — taking off the touch — is the crucial (if not quite final) element in any big con. We’ll need the help of an intermediary, a crowdfunding portal, in order to seal the deal and get paid.
It’s unlikely we’ll get an out-and-out crooked funding portal to help us directly; after all, even the shadiest pawn shop won’t actually help you to burgle. Rather, we’ll want to look for a funding portal whose operators are an nice balance of lazy and stupid. We’ll want them to have an obvious, and obviously lax, process for vetting the issuers.
Since we want to identify the suckers, we’ll want a portal that tells us exactly who invested, along with how much, and their contact info. (This will let us keep drawing from the well.) They’ll also be too slapdash to keep up with any kind of centralized list of fraudsters, or of vulnerable potential investors (e.g. elderly or disabled folks whose families put them on a no-invest list).
(It would be too much to hope for, that the funding portal would allow us, or our favored bank, to handle the money transfers (or collect checks) directly … the implications send a con man into a reverie of larceny.)
We’d love it if they are so cowed by the regulators and lawyers that they won’t take a stand on any question about the deal. In fact, they shouldn’t even allow users to chime in and share meaningful due diligence work, for fear of passing along “investment advice.”
We’ll prefer a portal that lets us keep “negative votes” hidden (or which was too lazy or stupid to allow negative voting). We want to control that communications channel, strictly.
And finally, we’d love it if the slothly dullards at our funding portal of choice turned a blind eye to how our marks arrive there. (Square businesses might be sending email solicitations to a customer list, but our boiler-room operators will be tuning in marks to type-in a redirected URL, most likely.)
For this privilege, we’d be happy to pay a hefty fee (at least the going market rate). We’d delight in the longevity of this funding portal; nothing would suit the con better than if the portal’s (self-)regulators were just as dull.
Traditionally, the cool-out required scaring or shaming the mark into taking his lumps, and not going to the cops — although a con man of great finesse will leave the mark not even realizing that he’s been conned.
The beautiful thing about the equity crowdfunding con is that the “cool-out” is already taken care of: everybody knows most startups fail. Our fake-fuel-economy device has a great built-in narrative as well: the machinations of the oil majors, or their allies on Wall Street, can always be pointed to as reasons for the failure. The real suckers we can always go back and fleece again (maybe even with the same game).
But there’s always a squeaky wheel: someone, somewhere, threatening a lawsuit. Since we’ll probably have to put forth legitimate, clean identities (with social security numbers, etc.) to run a single con, we’ll make sure that those identities are not only clean, but judgment-proof (no real assets to seize) and that the company itself dumps the cash offshore as soon as it reasonably can (perhaps that Chinese contract manufacturer gets paid in a lump sum?). The lawyers will circle over a gutted corpse of a company.
The first couple times around, we’ll use the identities of girlfriends, nephews, and low-level members of our confidence team. But those will get burnt quickly, so we’ll probably end up buying new identities from Russian hackers for each successive go-round. When those identities get sued, the trail will dry up.
Total time: perhaps 3 months from inception to cash. Team size: two key men, plus a crooked assistant or two (and a solid 15 or 20 hired guns who can work the phones for a month during the come-on phase). Portal expenses, bogus company incorporation work, and hired guns’ share will probably come to $200-250k; that gives our crooked principals a solid $375-400k a piece. Not bad for a quarter’s work.
Lather, rinse, repeat.
Later: Part II