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Proposed Qualification Exam for Crowd Investing
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Proposed Qualification Exam for Crowd Investing

Last summer I drafted a proposed survey design and questionnaire for crowd investing, which I included in an SEC comment letter (and follow-up). I like how it turned out, and my questionnaire has come up in conversation a few times recently, so I am reposting it here for broader review.  It offends my coder's sense of aesthetics to repeat something when a simple pointer is more efficient and future-proof-- but including the text  makes it easier than jumping to the PDF on the SEC site. I welcome any feedback or suggestions!

I used a "Socratic" multiple-choice approach; rather than making the incorrect choices tricky or subtle for the sake of exam difficulty, I tried to use the multiple-choice medium to express how and how not to think about the risks described. Some of these examples (noted and grouped at the end) are lifted from the SEC publication "Investor Alert: Social Media and Investing - Avoiding Fraud" (January, 2012). For consistency, the correct answers are always listed last, but in real life the multiple-choice ordering should be randomized by the server (along with the specific wording), as described in the original comment letter.

Honest Financial Loss

Most new businesses fail, no matter how hardworking or capable the people behind it are, or how good their plan is. According to the US Bureau of Labor Statistics, about 1/3 of new businesses don't last more than 3 years, and most don't survive past 6 years. Similarly, creative arts agents tell of piles of unsold manuscripts, screenplays, demo recordings, independent films, and other efforts, in contrast to the few that yield business contracts or otherwise become profitable. If you invest in a new business or other project, you will probably lose your money. The success rate may be higher if you invest in an expansion by an already healthy, existing business, but there are no guarantees.

Choose the statement below that makes the most sense:

  • If someone works hard, they are sure to succeed, especially if they are starting a new business -- that's the American way.
  • I know that most new businesses fail, but this one won't. The people behind it are too smart.
  • I want to invest in this venture and help it succeed because I believe in it. But I recognize that statistically, it probably won't. I understand that I may lose my entire investment.


Even if your investment does increase in value (it may decrease or disappear entirely), you probably won't be able to cash it in at a time of your choosing. Expect it to be locked away for a while. You should not invest any money that you may need in the foreseeable future. Unlike stock in exchange-traded companies, crowdfunding stock cannot be readily converted into cash.

Choose the statement below that makes the most sense.

  • I'll invest in this offering now, watch closely to see how it goes, and pull my money out if things seem to be going south.
  • I'll need this money for tuition in September, but until then I'll try to make it work for me by investing in this.
  • I'd like to invest in this because I'm interested in it. If it goes well, I might be able to cash out in a few years, but I'd rather just continue being a part of it.

Technical Complexity

Some offers are based on technology. The most trustworthy of these demonstrate a working prototype in a way it would be more difficult to fake than to create legitimately. With others, where an issuer promises a device or system not yet developed, they should be able to explain clearly how they will proceed, and answer relevant technical questions.

Beware any offering from someone who points to their purported credentials or past experience rather than answering technical questions directly, and beware of "technical explanations" that rely on comparisons or metaphor rather than describing the actual components of the proposed solution. Don't invest in any offering that you do not fully understand yourself, or that someone you know with relevant expertise hasn't reviewed and judged as trustworthy.

Choose the statement below that makes the most sense.

  • It says that this cutting-edge research will discover a limitless source of energy by poking a tiny hole in the fabric of the universe. This should pay back big!
  • The offeror can't divulge exactly how this wonder device will work because he's applied for several patents, but it says here that has a PhD from MIT and he used to work at NASA.
  • This project combines all of the latest hot technologies to do something super cool. I don't understand it, but I want one -- and I certainly can't be the only one!
  • This offering is described using lots of technical jargon, but I still don't get how it works. I'll ask my electrical engineer cousin Kim to check it out.

Photo and Video Manipulation

Today, photos and video can be manipulated and simulated in ways that our brains may not have caught up with. We know that verbal descriptions may sometimes be lies, but with our visual perception, "seeing is believing." Note that any photo or video that you see in a crowdfunding pitch (or elsewhere online) may have been faked. Fully trust only in what you can see in real life with your own eyes, and any offeror should be willing to demonstrate live anything that they have published photos or videos of.

Choose the statement below that makes the most sense.

  • I wouldn't have believed it was possible if I hadn't seen the video -- wow, this is going to make millions!
  • As soon as I saw the photo of it, I wanted to invest. I got it instantly, and that's all I needed.
  • The offeror lives in Syracuse and has a public demo scheduled for next Thursday eve -- I'm going to see if my friend Pat can go to that.


Exercise caution with investment offerings that are purely virtual, in that they don't have any identifiable people or verifiable physical locations associated with them. It helps to see a real person behind an offering, but some issuers may legitimately want to protect their privacy by not publishing their photo or video likeness. In either case, they should provide ways of verifying their identity through standard channels, not just through online profiles: passport numbers to check with the U.S. State Dep't, Driver License or State ID numbers to check with a state DMV, bank account numbers to check with a known bank. Similarly, the issuer should have a physical location in the U.S. where you can verify that they do business or are otherwise physically present and reachable. A good crowdfunding portal will check on these things themselves, but it's best not to rely on this.

Choose the statement below that makes the most sense.

  • This solicitation video doesn't show any actual human beings, but that soundtrack sure is exciting, and those slick-looking graphs go up, up, up! I'm going to invest!
  • This company doesn't seem to have any location, but there's a link to its owner John Smith's social network profile page. That gives me confidence-- there are probably a lot of John Smiths out there, but now I can see who it actually is.
  • This business has no address, verifiable people, or other connection to physical reality. I don't trust it.


Online identities can be stolen or hacked by criminals, who then use them to impersonate friends, family, and other people you know. If you receive or see an online investment solicitation that lists people you know as offerers, investors, recommenders, or otherwise involved, understand that it may be a scam that has nothing to do with them. Telephone them or discuss in person before investing, so you can hear their voice and verify that they are not being impersonated. Don't rely solely on online communication, since it may already be compromised. Be especially suspicious of online comments or conversations that somehow "ring false" -- are attributed to people you know, but don't seem like the way they normally communicate.

Choose the statement below that makes the most sense.

  • Wow, here's an investment that my entire first-degree network highly recommends. And in this discussion, many of them call it a "great opportunity." I'm in!
  • I haven't heard from Brad in a while, but he just contacted me to invest in his can't-fail new business. Hmm, this doesn't seem relevant to his interests, and the wording here doesn't even really sound like him-- but hey-- good for him, and I'm glad to know about this! Sure, I'll invest!
  • This solicitation lists my friend Carol as an investor, but she never said anything about it when we had lunch last week, and it's something she would have mentioned. I'll call her up to check that it's true, and if it isn't, I'll forward the solicitation to the SEC's Crowdfunding Fraud email address and call their 24-Hour Crowdfunding Fraud Hotline to alert them.

Personal Obligation

Be careful about investing in a friend or family member if you feel personal obligation around it. If you have doubts about the investment itself but want to help them out financially, it's clearer to just give or lend them some money directly, and write a simple contract that describes your agreement. Personal obligations around crowdfunding may be difficult to navigate, but you can do what you want with your own money, and you can express your thoughts and feelings for someone close to you more personally through your words, and through actions that don't require your money.

Choose the statement below that makes the most sense.

  • I'm her grandmother; I need to write her the biggest check of all, or else people won't think I love her.
  • I really don't think his singing voice is very good, but if I don't invest at least $1000 in this recording project, the whole gang will hate me and make my life miserable.
  • I love the guy, but he never follows through on anything. I’m going to talk with him about how I really can't afford this. Hopefully, the conversation will bring us closer.


People will often have a higher opinion of something because it is popular with others, but "mass hysteria" is real, and crowds do stupid things together. Some of the most successful investors look for opportunities based on doing the opposite of what everyone else does.

Choose the statement below that makes the most sense.

  • If everyone else jumps off of a bridge, I should too.
  • No one has ever lost money following an investment fad.
  • Participating in the excitement of a like-minded group is thrilling, because in means I don't have to ask questions or think critically.
  • Sometimes it's wise to be suspicious of things that are too popular.


Some people use their persuasive personalities to convince others to "invest" in questionable schemes. They emphasize the story they tell about themselves and the personal impression they make to steer people away from doing the harder and more tedious work of reviewing their work and checking their math. A charismatic personality can help enormously in entrepreneurship, but be careful of any offering that focuses on the person to the exclusion of thorough and specific detail.

Choose the statement below that makes the most sense.

  • I'm not sure how this all adds up, but I will invest because after all that this person has revealed to me, I don't want to let them down.
  • I am a good judge of character, and that's all that a successful investor needs.
  • This person has such a compelling personal story that I want to give them my money. I mean, invest in them.
  • Many successful ventures benefit from charismatic people behind them, but investors must know how to question and say "no" to such people.


The people that you interact with in your daily life are people that you hopefully know and trust. But there are also people you only recognize and know about through media, and who don't know you. It may feel like you genuinely "know" these people, but you don't, no matter how much their public personas may speak to you. If they solicit investments, they need to make their case just like anyone else who is a stranger to you.

Choose the statement below that makes the most sense.

  • I'm her number one fan, so I want to be her number one investor.
  • I trust him with my money because he always plays trustworthy characters on television.
  • He's super-famous among model railroad enthusiasts, so his model railroad venture has to be a good investment.
  • I like her in movies, but I really don't know those came to be made or how good of a businessperson she is; I need to find out more before I invest.

Physical Distance (and Other Hindrances to Visitation)

People can misrepresent themselves more easily online than they can in person. If you live close to an offeror's residence, you can check them out more effectively by meeting in person or visiting their workplace, in addition to any phone or online investigation you do. Investing in people far away may be a great way to broaden your connections, but it demands extra caution.

Choose the statement below that makes the most sense.

  • This business is far from where I live, in a place I've never heard of, and I don't know anyone who lives nearby -- but it needs my money, so I'm going to invest in it.
  • This business is close to where I live, but they're too busy to schedule an investor open house or even open the door. That's good, because they need to focus on running their business rather than spending time with people like me.
  • This business is located in another city, and on this online map, it looks like their "Suite 120" address is just at a mailboxes and packaging store. That seems suspicious, so I won't invest in them.

Contests or Lotteries

If an issuer promises to redistribute most or all of the collected investments to one or more of the investors, based on chance or any other factors, then it's likely that they are illegally running a private lottery or contest. Do not "invest" in any such offerings.

Choose the statement below that makes the most sense.

  • Bernie is running a massive Super Bowl pool on this crowdfunding site, and the prize money's over $5K already-- this will be fun!
  • The local animal shelter is holding a sweepstakes on this funding portal. They're just taking 5% and the winner gets the rest. Aww-- look at those cute kitties! How can I say no?
  • This looks like an illegal lottery; I will ask them about it, and possibly report it.

Unsolicited Offers [from SEC Investor Alert]

Investment fraud criminals look for victims on social media sites, chat rooms, and bulletin boards. If you see a new post on your wall, a tweet mentioning you, a direct message, an e-mail, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding a so-called investment opportunity, you should exercise extreme caution. An unsolicited sales pitch may be part of a fraudulent investment scheme. If you receive an unsolicited message from someone you don’t know containing a “can’t miss” investment, your best move is to pass up the “opportunity” and report it to the SEC Complaint Center. Investor Assistance (800) 732-0330

[Example multiple-choice based on SEC warning language available upon request.]

"Can't Miss" Claims [from SEC Investor Alert]

Any investment that sounds too good to be true probably is. Be extremely wary of claims on a website that an investment will make “INCREDIBLE GAINS” or is a “BREAKOUT STOCK PICK” or has “HUGE UPSIDE AND ALMOST NO RISK!” Claims like these are hallmarks of extreme risk or outright fraud. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or that the investment “can’t miss.” Don’t believe it.

[Example multiple-choice based on SEC warning language available upon request.]

Time Pressure [from SEC Investor Alert]

Don’t be pressured or rushed into buying an investment before you have a chance to think about – and investigate – the “opportunity.” Be especially skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information.

[Example multiple-choice based on SEC warning language available upon request.]

Affinity Group Mentions [from SEC Investor Alert]

Never make an investment based solely on the recommendation of a member of an organization or group to which you belong, especially if the pitch is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be an affinity fraud. Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. Even if you do know the person making the investment offer, be sure to check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention. Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.

[Example multiple-choice based on SEC warning language available upon request.]

Biased “Research Opinions,” Newsletters, and Spam Blasts [from SEC Investor Alert]

While legitimate online newsletters may contain useful information about investing, others are merely tools for fraud. Some companies pay online newsletters to “tout” or recommend their stocks. Touting isn’t illegal as long as the newsletters disclose who paid them, how much they’re getting paid, and the form of the payment, usually cash or stock. But fraudsters often lie about the payments they receive and their track records in recommending stocks. Fraudulent promoters may claim to offer independent, unbiased recommendations in newsletters when they stand to profit from convincing others to buy or sell certain stocks – often, but not always, penny stocks. The fact that these so-called “newsletters” may be advertised on legitimate websites, including on the online financial pages of news organizations, does not mean that they are not fraudulent. To learn more, read our tips for checking out newsletters.

[Example multiple-choice based on SEC warning language available upon request.]


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