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Crowdfrauding: Avoiding Ponzi entrepreneurs when investing in new ventures

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  • Baucus, Melissa S.
  • Mitteness, Cheryl R.

Abstract

Crowdfunding has gained substantial interest in the U.S., allowing entrepreneurs to raise startup capital in exchange for equity in their ventures. This approach to equity capital can open up new sources of venture finance to legitimate entrepreneurs, but little attention has been given to how it offers new opportunities for illegal entrepreneurs to defraud investors. We adopt a forensic approach to examine entrepreneurs who launch Ponzi ventures—businesses that continually bring in new investors in order to use their money to pay returns to earlier investors—to demonstrate the ease, creativity, and audacity with which these illegal entrepreneurs operate. The provided examples of Ponzi entrepreneurs show how easily they can circumvent the safeguards purported to protect investors: screening by ‘the crowd,’ transparency and documentation requirements, independent audit reports, and withholding of funds until the venture's financial goal has been met. In this article, we offer possible solutions to help protect investors, legitimate entrepreneurs, and business in general from the damage created by illegal entrepreneurs.

Suggested Citation

  • Baucus, Melissa S. & Mitteness, Cheryl R., 2016. "Crowdfrauding: Avoiding Ponzi entrepreneurs when investing in new ventures," Business Horizons, Elsevier, vol. 59(1), pages 37-50.
    • Handle: RePEc:eee:bushor:v:59:y:2016:i:1:p:37-50
    DOI: 10.1016/j.bushor.2015.08.003
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    References listed on IDEAS

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    Cited by:

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    6. Fanea-Ivanovici Mina & Siemionek-Ruskań Małgorzata, 2019. "A Comparative Analysis of Crowdfunding in Poland and Romania," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 13(1), pages 182-193, May.
    7. Lars Hornuf & Johannes Voshaar, 2024. "What Is an Effective Signal in Crowdfunding? Evidence from Expert Researchers and a Meta-Study," CESifo Working Paper Series 11501, CESifo.
    8. Ferreira, Valeria & Papaoikonomou, Eleni & Terceño, Antonio, 2022. "Unpeel the layers of trust! A comparative analysis of crowdfunding platforms and what they do to generate trust," Business Horizons, Elsevier, vol. 65(1), pages 7-19.
    9. Mustafa Raza Rabbani & Abu Bashar & Iqbal Thonse Hawaldar & Muneer Shaik & Mohammed Selim, 2022. "What Do We Know about Crowdfunding and P2P Lending Research? A Bibliometric Review and Meta-Analysis," JRFM, MDPI, vol. 15(10), pages 1-23, October.
    10. Clark, Daniel R. & Skousen, Bradley R., 2023. "Whistleblowing in entrepreneurial ventures," Journal of Business Venturing Insights, Elsevier, vol. 19(C).
    11. Zhu, Anding & Fu, Peihua & Zhang, Qinghe & Chen, Zhenyue, 2017. "Ponzi scheme diffusion in complex networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 479(C), pages 128-136.
    12. Evila Piva & Cristina Rossi-Lamastra, 2018. "Human capital signals and entrepreneurs’ success in equity crowdfunding," Small Business Economics, Springer, vol. 51(3), pages 667-686, October.
    13. Messeni Petruzzelli, Antonio & Natalicchio, Angelo & Panniello, Umberto & Roma, Paolo, 2019. "Understanding the crowdfunding phenomenon and its implications for sustainability," Technological Forecasting and Social Change, Elsevier, vol. 141(C), pages 138-148.
    14. Bruno Torres & Zélia Serrasqueiro & Márcio Oliveira, 2024. "Portugal’s Crowdfunding: A Systematic Literature Review," JRFM, MDPI, vol. 17(1), pages 1-32, January.
    15. David J. Scheaf & Matthew S. Wood, 2022. "Entrepreneurial Fraud: A Multidisciplinary Review and Synthesized Framework," Entrepreneurship Theory and Practice, , vol. 46(3), pages 607-642, May.
    16. Richard J. Arend, 2021. "The Nefarious Hierarchy: An Alternative New Theory of the Firm," Administrative Sciences, MDPI, vol. 11(1), pages 1-18, February.
    17. Groza, Mya Pronschinske & Groza, Mark D. & Barral, Luis Miguel, 2020. "Women backing women: The role of crowdfunding in empowering female consumer-investors and entrepreneurs," Journal of Business Research, Elsevier, vol. 117(C), pages 432-442.
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    19. Wilson, Matthew & Robson, Karen & Botha, Elsamari, 2017. "Crowdsourcing in a time of empowered stakeholders: Lessons from crowdsourcing campaigns," Business Horizons, Elsevier, vol. 60(2), pages 247-253.

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