Income Store 75 Million Ponzi Scheme? – What will this mean for the industry?
It has been a whirlwind over the last month when it comes to Income Store! I am going to go over what has happened and how it seems investors have been ripped off. Is it an old fashioned pyramid or ponzi scheme? was the moratorium on payments just a stall tactic?
UPDATE Feb 5, 2020 – With the receiver releasing the full list of sites me and my team did a deep dive reviewing the value of each. You can see the complete list and estimated value along with other interesting stats about the portfolio here. We hope this article will help website partners understand how much my website is worth.
UPDATE JAN 15, 2020 – The SEC has issued a press release alleging that Income Store operated as a PonziScheme with investor funds coming in used to pay off investor returns and personal expenses including mortgage and private school tuition.
UPDATE Jan 10, 2020 – A website for IncomeStore investors has been setup to share up to date information. http://incomestorereceivership.com/ It is not 100% clear who is behind the website but seems to have the most up to date information.
As it stands right now Income Store assets have been seized by the SEC and employees have been told not to come in.
First – If you have been ripped off by this – as I know some of you have, I feel for you! Very sorry to hear!
Second – I am not a lawyer, if you are involved in Income Store, I recommend discussing with one.
If you are new to the industry and trying to make sense of the potential scam with Income Store, here is a buying and selling websites guide covers the industry and process in great detail!
In this post I will go over…
- What is (was) Income Store
- What has happened and how did we get here
- Share the information (mostly links) that people who have been involved with Income Store should be aware of.
- What does this mean for the industry?
- My personal regret and 2 similar ticking time bombs in our industry. I don’t want to Monday Morning quarterback and not also provide some similar warnings.
The situation is scary for many and as some write “This is the kind of money that ruins a retirement or changes life plans significantly.”
The best place to go right now for breaking news is the forums and Emilia Garner’s YouTube channel who is a lawyer and a website site owner/operator.
Her combined legal and site experience along with some internet sleuthing is providing really great coverage! Thanks Emilia.
I am going to aim to provide reference links and my thoughts on what this will mean to the industry over the next 1-3 yrs.
What is (was) Income Store?
Income Store would solicit an investment from a “Site Partner” with a minimum of $100k investment, buy a website and split the proceeds 50/50 with a guaranteed return of 15%.
Their website is now offline but here is a recent video which is still live on their Vimeo page that summarizes their offering and the image below shows some of their stats:
From their Brag Sheet below they were a well established player with a lot of history of operating sites.
What Has Happened?
In the middle of December an email went out saying that no site partners would receive any money and contractors reported on forums they were not getting paid.
Here is a video from Ken (the founder, CEO) communicating that they needed to seek a moratorium on payments to site partners.
See this video https://vimeo.com/380803495/94b2cf1584
Re: Securities and Exchange Commission v. Today’s Growth Consultant, Inc (dba “The Income Store”) and Kenneth D. Courtright, III, United States District Court for the Northern District of Illinois, Civil Action No. 1:19-CV-08454
Date: January 6, 2020
Attached is a Temporary Restraining Order Freezing Assets and Imposing Other Emergency Relief and Order Appointing Receiver that have been entered in the above referenced matter.
The Court has determined that the appointment of a receiver is necessary and appropriate for the purposes of marshaling and preserving the books and records and all assets of Today’s Growth Consultant, Inc.
Within the next few days a website will be established that will provide court documents and other information regarding the case that will answer many of your questions. For additional information, you may contact the office of the Receiver at (305) 542-4410 or [email protected]
How Did We Get Here?
Reading between the lines, it seems the business model imploded and attempts to save it failed.
This is all educated speculation but it seems like this was the most likely way that things played out…
It would appear that it all started out well with great profits from the content sites – but doubling down on whatever strategy was working resulted in exposure to Google penalties- which enacted their toll in 2016.
This is a common death nail for portfolio managers when they have one set of strategies that they double down on across their entire portfolio. Leading people think they have diversified their risk but the reality is they have a single point of failure exposure with the same strategy used across all their properties.
In 2017/2018 they went full throttle on ECommerce sites (specifically Shopify) building up 422 of them and at the start of the year Facebook paid traffic changes resulted in a significant negative impact on that business.
It is not clear in the end if they were still buying sites or taking peoples investment and then “building” a site and using that difference to continue the 15% guaranteed payments.
Ultimately as the number of investments where they had to dip into the profits of other recently acquired businesses grew, they needed to keep raising money at a faster rate to bring on more sites/capital. Although based on the number of employees and knowing they were active in buying sites I may not go as far as calling it a ponzi scheme (although I am not convinced)- it had a similar failure mechanism. Once the money flowing in to acquire new sites was not enough to cover operating costs and payback investors their guaranteed 15% the model collapsed.
Again the majority of the section above is pieced together speculation.
Reference and Resource Information
Here are other links sourced from Emilia’s YouTube videos (seriously make sure you subscribe to get some really great coverage!)
What Does this Mean for the Industry?
Income Store is just a single operator in the wider online business world but a failure of this size in the industry is going to cast a long shadow!
The impact will be tough to identify on its own- but there are a couple of predictions to take away…
- Investors will be more cautious of any passive operator model
- Additional fear may reduce the risk people are willing to take when it comes to debt financing and reduce multiples on businesses especially in the $200k+ range
My Personal Regret:
Although I never endorsed Income Store, I would privately share my reservations about a guaranteed 15%. The business model would look like a graph with the limit converging to zero as it scaled, but I was hesitant to share it more publicly or strongly. I regret this now and apologize to anyone who might have read a post on my thoughts and made a different decision.
To that end I will be sharing a few thoughts I have been sharing with people more privately but not being outspoken enough on them.
First though how will this impact the industry for buying and selling websites.
Operators (similar but smaller to Income Store):
The current operator model has some similar but smaller risks. Although there aren’t players as big as Income Store there are some risks I have shared privately but will do so here as well.
First let me show you what a typical website operator agreement looks like…
Typical Operator Agreement:
- Give an operator $50k-$1,000k+ (for the purposes of this example lets say $100k)
- They buy a $100k website making $2.8k/month in profit
- They manage the website taking $1,000/month in management fees and 50% of any upside
- If the business stays flat and operating costs in growth efforts are lean at $800/month you receive $1k/month (or a 12% return)
Problems with This Model: (can’t let the losers be losers)
Internet businesses are volatile, some will go down! When an operator has a portfolio of businesses all with different owners they are unable to cut their losses on the losers.
This hurts both the losers and the winning sites.
How does this hurt you if you have a loser?
If you have a site that is down- then the operator is a long way from seeing a return on their upside. So their incentive(whether they act on it or not) is to operate as efficiently as possible, ensuring they do just enough to not get fired. As a result, the squeaky wheel gets the grease analogy becomes applicable and time/resources are allocated to appeasing the site owners who have assets that are down and complain the most.
How does this hurt you if you have a winner?
If you have a winner the operator will be distracted by dealing with the portion of the portfolio that is down which will reduce the total upside you would otherwise be able to capitalize on with your winner.
Either way the operator is limited in their ability to maximize the value of the sites they are managing. This is a problem that will only get worse with both time and the number of sites limiting the total scale that any operator is able to achieve without resorting to tactics that allowed Income Store to grow as big as it did and fail as dramatically as it has.
SBA Loans or any other Personally Guaranteed debt is almost always mistake:
Taking on debt to finance the purchase of an online business can generate some phenomenal returns! Borrowing at 8% and generating a 30% return works out to some very incredible numbers.
The appeal is very strong! If you have that same $100k mentioned above, you get an SBA loan to cover 80% of the purchase price you can end up buying an asset with earnings of $160k/yr! (before covering the interest costs).
If this works out, the results are amazing, for $100k you can have an income replacing, financial freedom achieving online business!
However, online businesses are volatile and SBA loans are personally guaranteed. This risk is real and the dangers of SBA loans to buy online businesses is only now starting to be felt. With the increase in SBA loans over the last 1-2 years the first people who have bought an online that had a decline are only now getting impacted.
There are already some stories of people who have had a site decline and as a result lost their house/financial security for their family.
I am fiscally conservative- so others will have a different view- but I do not see a scenario where I would take on debt that was personally guaranteed and risk my families financial security in a high risk attempt to achieve financial freedom.
Talking with others in this space who also manage a portfolio or a single successful income producing website they agreed. 100% of the 5 people I asked all making over 10k/month from their portfolio and have been doing so for years(they know what they are doing) would not take on personally secured debt to buy a site if it meant risking their families financial security.
Many people will wonder why I would write this article throwing some shade at the industry I am heavily involved in with MotionInvest.com among other projects like ContentRefined.com etc.
Part of the reason is guilt that I didn’t speak up more publicly about my reservations with Income Store.
But more importantly, is the realization that I will certainly be in this industry for the next decade and ensuring an efficient marketplace with minimal booms/busts by trying to be a voice that brings euphoria or fear back to reality- seems like it won’t be a waste of time.
Hopefully the largest implosion of the decade in this industry is now behind us only 0.19% of the way into it.
If you have any other thoughts on anything I shared please leave a comment below.