Fundraising & asked to get a surety bond – is it a scam?

BamboozleA new type of scam has emerged where a potential investor will ask you for a surety bond, before proceeding to fund your business.   Evidently (and I have never been able to verify this), but in the Middle East and other foreign countries, often times an investor will ask the company to procure a surety bond, or will do so themselves to protect their investment.  While I have heard rumors this is legitimate, I have never heard of a legitimate business being funded this way.

Recently three of these “deals” have come to my attention.   The sad thing is that the principles of these companies were tied up, getting documentation and getting their hopes up for nearly 6 weeks before the scam unfolded.  That’s 6 weeks of optimism, anticipation, and of course, 6 weeks of wasted time for the entrepreneur.

This all started a few weeks after initial contact with the group was made, and they sent a congratulatory email, indicating they had discussed the opportunity and decided to fund it.   They wanted some more information to review, but the entrepreneurs were getting close to the point of getting funded.

Weeks went by, and information and calls occurred, emails went back and forth, but one thing never happened – the other group, based out of Hong Kong, never signed the NDA / Non-Compete, and therefore never saw the full business plan.    Then, after a random e-mail at 3am, sent from Korea, and not Hong Kong, I was asked to investigate whether the group was real or not, especially since in that 3am e-mail they had asked the company to secure a surety bond prior to their investment.    For roughly 6 weeks this group had got the attention of the entrepreneurs, but after I dug into the group’s website, I noticed that there were a few things that were not quite right…

  1. When I searched in their search bar up top, a different website (looked identical to this group’s except for contact information, and the URL changed) was shown
  2. Clicking on the social media icons lead strait to Facebook and Twitter, NOT a specific page within those social media sites
  3. When looking up the companies that this group had invested in the past, none of those company’s websites existed, or if they did, nothing indicated on that company’s site that this group invested in them.

These were all flags, especially given the purported size and wealth that this firm had under its control, and then I used archive.org to see what had happened with this domain name in the past, and sure enough, for a investment group that supposedly had been around for years, there was only one entry in the domain’s history, and that showed the site was a mere 2-months old.  Then, the icing on the cake came when I looked up the whois information for the company, and did a Google search on the address.   I immediately found several legal and scam complaints at the address of the registrar.  Now, all of these things could be coincidences, but taken as a whole, they were all problematic, but coupled with the surety bond request, the scam was clear.

This group requested we provide a surety bond, but they gladly offered to get us this bond themselves, and they would be more than willing to do it, we would just have to pay for the bond, and of course – it had to be up front.   The rational question to ask here is, if this company was going to invest 5 million dollars in the business, why would they need the $40,000 (I think) up front to buy this bond?   Why couldn’t they take it out of the proceeds, or bill the company later – after all, the investment group had millions of dollars to invest, what was $40,000?

The answer from that side was simple – the laws prevented that from happening in Hong Kong, and it was illegal for them to buy the bond.    I have never been able to check the validity of this, whether it is illegal or not, but this is where the conversation with the scammers stopped.

The problem with this scam is that it works.   People become desperate to get their business funded, to get their baby off the ground, only to have a con-artist crush their dreams and destroy them financially.  The bottom line is, you need legal advice, and to do a thorough due diligence on the company looking to invest in your business, and never go against your gut in this type of situation.  If something seems slightly off, the whole thing probably is, and you need to spend your limited time looking for legitimate help in a sea of sharks.

Posted by: mprictor on September 16, 2014
Posted in: Law, Startup Funding