Crowdfunding Fraud –Lessons from Elio Motors

A colleague suggested that the demise of Elio Motors would be a “teachable moment” for the crowdfunding industry. This lesson is necessary because too many people who are active in the crowdfunding arena would not know a scam if one bit them on the butt.

The lesson is that people who operate crowdfunding platforms or portals should have some background in corporate finance. The lesson is being paid for by the investors who made a $17 million investment in Elio and got nothing for it. These are losses that would have been avoided if the crowdfunding portal that listed Elio had operated correctly and refused to list it.

I raised questions about Elio when it was making its offering last spring. At the time it seemed to be a lot more hype than substance. That offering was ongoing at least until March.

By the end of September Elio was already bankrupt even if it has not formally filed the paperwork. Its balance sheet showed less than $5 million in current assets and more than $30 million in current liabilities. Elio had less than $100,000 in unrestricted cash on hand on September 30. Elio would likely have already closed its doors if it had not borrowed another $3 million at the end of last year.

Elio spent all of the money that investors put up and more in less than 6 months. That money was spent on “soft costs”, mostly administrative costs and R&D. Elio actually needs more money to get its vehicle into production now than before the offering.

Elio has been held out as one of the first great successes of the crowdfunding industry. It was one of the first offerings to file under the new Reg. A and one of the first to come to market. The offering was deemed a success because it raised $17 million from thousands of small investors.  Elio attempted to raise $25 million and raised $17 million. In the world of finance that is a failure, not a success.

Elio executives made the rounds at crowdfunding conferences last year, basking in that success and telling attendees how to raise money. Elio attracted investors the same way that Bernie Madoff did; by making promises about their future performance that they knew that they could not keep.

Elio has been taking deposits for its 3 wheeled, gas efficient vehicle and was first promising to deliver the vehicle before the end of 2014, then 2015 and then 2016.  Let’s be clear, there is no vehicle; certainly not one ready for production that could be delivered to the 65,000 people who put down a deposit to get one.  If you take someone’s money promising to deliver a product that you know you will not be able to deliver it is fraud.

Elio had also very publically promised to have its manufacturing facility in Shreveport, LA operational before the end of 2015 creating more than 1500 jobs. That promise of “we are getting ready to start production” was one way in which Elio bolstered its claim that it could deliver the vehicles. A lot of people in Shreveport were excited at the time, but those jobs never materialized. Today, a lot of people in Shreveport are very angry.

That same financial statement indicates that for the entire year of 2016, Elio spent about $1 million less than the year before on maintenance, insurance and property taxes for that Shreveport facility. Elio has been selling off manufacturing equipment at that facility to pay its bills, not gearing up to produce its vehicles. The financial report says that it still needs $300 million before it can start manufacturing. If it does not get substantial additional financing soon Elio admits that it may have to cease operations.

You can go to Elio’s website today and still put down a deposit believing that you are purchasing one of the vehicles at a reduced price. If a thousand people would each send me $100, I promise to send each of you a picture postcard from a beach in Bali. That is not much but it is more than you are likely to get from Elio.

At the time of the Reg. A offering, Elio represented that it hoped to obtain a $165 million loan from the US Department of Energy and still mentions that loan program in its recent financial statement. Elio does not qualify for that loan program, then or now.  Mentioning the program in the offering is what is known as “window dressing”; something that makes the company look more substantial or potentially successful than it is.

The fact that Elio did not qualify for the loan at the time of the offering and the fact that Elio had been taking deposits for a vehicle that it could not afford to manufacture should not have escaped the due diligence review conducted by StartEngine, the portal that listed Elio’s Reg.A offering.   The compliance director of StartEngine told me that they do not even attempt a due diligence review of Reg. A offerings based upon the mistaken belief that they are not required to do so.

Any crowdfunding portal that fails to conduct an adequate due diligence investigation does not care if investors who invest through their portal get ripped off.  I speak with start-ups that are interested in crowdfunding every month.  I only refer them to platforms or portals that follow the rules.

What will the regulators do about this? Perhaps nothing.  Regulators do not rectify every situation.

Still, as regards Elio it is not hard to imagine the conversation between someone in Shreveport who put down a deposit for a vehicle that will never be built who happens to share a duck blind with an Assistant US Attorney. As I said Elio is still taking deposits and apparently will continue to do so until some government agency stops them.

The SEC has already issued an order halting the Reg.A offering of Med-X, another offering listed on StartEngine. That case is still under investigation and it should be a lot easier for the SEC to prove that StartEngine did not act appropriately as the facts in the Med-X case are fairly clear cut.

FINRA recently expelled another portal claiming its offerings presented “impractical business plans.”  Exactly what FINRA meant by that would take another article. Suffice it to say that raising $17 million when you need $250 million and claiming most of the rest will come from a government program for which the company does not qualify is a business plan that is “impractical”.

Secondary market liquidity is an important aspect of Reg. A offerings. Companies that register their shares under Reg. A can also list those shares for trading in the OTCQX market. Investors who take a chance on these small companies have a way of selling their shares which investors in private placements cannot.

As of last Friday, the bid and asked for Elio shares was over $8 despite the fact the financial statements have been public for 2 months. Regulators might reasonably look at the liquidity and efficiency of that market as well.

Some people will tell you that crowdfunding is for start-ups most of which will fail anyway, so why bother to follow the rules and do it right? That is like saying everybody dies sometime, so why not drive around drunk.

The capital markets work because they are regulated. Regulation gives investors confidence.  If Elio turns into a well publicized scandal it is likely to scare investors away from the entire crowdfunding marketplace.

If you are operating a crowdfunding platform or portal and are too ignorant or too arrogant to follow the rules that keep scam artists out, please find another business. Neither the issuers nor investors want them around.

Stopping Elder Financial Abuse

What happens to retirees in the financial markets is a national disgrace. It was so in 2015 when I wrote a book on the subject (the one with the shark on the cover in the right margin of this blog). It is still available on and I still give the proceeds that I receive to cancer research. Little has changed since…but it could.

Retirees who have been fortunate enough to put away $500,000 or more to cover their retirement expenses know that very few of their contemporary baby-boomers will have as much.

Much of the discussion about elder fraud centers on caregivers or relatives who help themselves to a senior’s checkbook. To a lesser extent, it is about educating seniors to avoid scam artists, phony charities and telemarketers.

Very little time or money is spent focusing on how the mainstream financial industry acts to rip off seniors and retirees. I suspect this may be because many of the not-for-profit organizations that are active in this area also count banks and mainstream financial firms among their donors and advisors.

The financial services industry offers no real training for financial professionals on how to spot cognitive impairment in potential customers who are senior citizens. The general attitude of the industry towards seniors is that if they have money and want to invest then the financial services industry is here to assist them.

Most retirees (and most investors) purchase the investments that their brokers or advisors recommend. We acknowledge that financial professionals know more about the financial markets and about any particular investment that they are recommending than we do.

Post-retirement investing is not that complicated. For most people it is absolutely essential that they get it right. For everyone, it should be absolutely essential that they do not get it very wrong.The person from whom you seek financial advice is the key person who will be responsible for determining exactly how much money you will have to spend between the time that you retire and the time that you die.

Unfortunately, there is a lot of bad information about the cost of retirement living that is built into many retirement planning models. The financial services industry is the source of much of this misinformation which skews the conversation about investing retirement funds and has become imbedded in the mainstream mindset.

For example, standard retirement calculators will tell you that inflation is a big problem for anyone on a fixed income. They suggest that a retiree’s expenses will continue to grow, year after year until they die, even if they live into their 90s.

Actually, studies show that most retirees spend less each year after a certain age as they slow down. In many cases, there is no need to take on the risk to try to make the portfolio continue to grow and grow.

Whether or not you will need long-term care and for how long is much more likely to impact your retirement lifestyle and retirement finances than anything else. Many people consider long term care insurance but you will only have a conversation about it if the financial professional whom you consult has an appropriate license to sell it to you.

Retirees frequently hear a sales pitch that seems pretty benign. Retirees are told that they can get a dependable monthly or quarterly check at a rate several percentage points higher than they might get if they kept their money in a bank or if they invested their money in bonds. The risks are often minimized, if they are considered at all.

Actual portfolio construction for a retired income investor is neither difficult nor complicated. If you need to draw a check from the account every month or every quarter, any competent financial professional should be able to help you earn anywhere between 4% (with less risk) and 8% (with more risk) per year. You should be able to peg your return with a high degree of specificity.

Investments and strategies that pay a higher return to investors generally have a higher risk of loss. Investments and strategies that have a higher risk of loss generally pay higher commissions and fees to the financial professionals who sell them.

There are no secrets here. The financial services industry, its regulators and just about every stockbroker who sells them knows that two financial products in particular, private placements and variable annuities, are too risky and inappropriate for most senior investors. These two products pay among the highest commissions of any products that a stockbroker can offer.

Even traditional asset allocation ideas are suspect given that the government has artificially reduced interest rates for so long. Many retirees are sold “high yield” or junk bond funds because the interest rates and therefore the distributions are higher.

But there is a reason that they call junk bonds “junk”. It is because the risk that they will default is higher. If they do default investors lose their investment.

All bond funds are a problem when interest rates are rising as they are now. If you have bond funds in your portfolio and your advisor has not advised you to sell them and purchase higher rated individual bonds, it is because your advisor is lazy.

There is an old saying that a rising tide raises all boats. When this market turns down (and they always have in the past) many seniors will have losses that they never expected to have. It is often because they took risks that they never intended to take.

The typical retort of the financial services industry is always the same, that they did not see the downturn coming.  Actually, it is not that they do not see it coming; it is that they do not want to see it. A market down turn is bad for business and stockbrokers seem to think that something as simple as a stop loss is too difficult to apply.

The simple fix for this vexing problem is for the compliance departments at the brokerage firms to start acting like they want to fix it. People nearing retirement age should not be permitted to purchase variable annuities or private placements unless they can afford to lose the money that they are investing. That fact should be verified before the order for one of these products is processed. This is one area where a little common sense and effort will go a long way and could help a lot a seniors avoid significant financial problems.