As we approach the third anniversary of the 2022 venture capital peak, Latin American founders are navigating one of the most challenging fundraising environments in recent history. This scarcity has created fertile ground for sophisticated investment scams targeting vulnerable entrepreneurs.
A particularly insidious scheme known as the “Investment Security Bond” (ISB) scam is spreading rapidly throughout the region, ensnaring founders desperate to secure funding before their runway expires.
The Current State of LatAm Venture Capital
The Latin American venture capital landscape has experienced significant contraction since its 2021 peak of $16 billion. Total investment reached just $3.6 billion in 2024, marking one of the lowest levels in five years. This represents a dramatic reduction from the pandemic-era funding boom. While Q4 2024 showed positive momentum with $1.23 billion in funding (the highest quarterly volume in over two years), the overall environment remains challenging
These conditions have created perfect hunting grounds for scammers who recognize that many founders in Latin America are running dangerously low on cash and increasingly desperate to close deals.
How the Investment Security Bond Scam Works
The “investment security bond” scam typically follows a predictable pattern designed to exploit founders’ vulnerability and eagerness:
The Setup
The scheme begins with a message from what appears to be a legitimate international investment fund, often claiming to be based overseas, often in Asia. The firm presents a professional facade with a convincing online presence. They express interest in investing in your startup – typically offering to invest upwards of US$1 million, a lifeline for many cash-strapped companies.
The initial communications seem legitimate, and the scammers may even provide a term sheet. Though the terms might seem unusual, many founders rationalize this as cultural or regional differences in investment approaches, and because the term sheet is often governed under the laws of some Asian countries, sometimes founders don’t reach out to their local or US lawyers and negotiate directly.
The Trap
As investment negotiations progress and the founder becomes emotionally invested in the deal, the scam reveals itself. The investor then notes that “Before releasing funds, the “investors” require the company to purchase an “Investment Security Bond” (ISB) or similarly named insurance product. Here’s an example of how they might phrase it:
“The investment committee of our fund Global Capital Partners requires your company to obtain an Investment Security Guarantee (ISG) certificate. This certificate provides insurance coverage to protect our investment against potential losses.”
The sophistication of this language can make even experienced entrepreneurs pause and consider complying. After all, what’s a small insurance payment compared to securing US$1 million in funding?
The reality? Once the founder wires money for this “insurance policy,” the so-called investors vanish completely. No funding ever materializes.
Red Flags to Watch For
As venture capital remains scarce in Latin America, founders must be increasingly vigilant. Here are key warning signs that an investment opportunity might be fraudulent:
- Unsolicited investment offers from unknown entities, particularly those claiming to be based in Asia or far-off lands;
- Offers that seem too good to be true in terms of valuation or investment amount;
- Unusual requests for upfront payments of any kind before funding arrives;
- Term sheets that deviate significantly from standard venture practices;
- Pressure to move quickly and avoid involving your legal counsel;
- Professional-looking websites that contain links to legitimate businesses to appear credible;
- Promises of government protection or guarantees for your investment.
How to Protect Yourself and Your Startup
The first rule is absolute: legitimate investors will never ask you to send money as a condition to receive funding. Additionally:
- Always conduct thorough due diligence on potential investors, including verifying their portfolio companies;
- Leverage your network to validate investor credentials;
- Consult with experienced legal counsel before signing any investment documents;
- Take your time – pressure to rush is often a manipulation tactic;
- When something feels off, trust your instincts and investigate further;
- Use trusted accelerators and advisors to help vet potential investors.
A Safer Path Forward: Meet Grow by PAG Law
Recognizing the heightened risks facing Latin American founders in this challenging fundraising environment, PAG Law developed Grow a founder-first platform specifically designed to help entrepreneurs including Latin founders navigate fundraising securely and efficiently.
As the Latin American venture ecosystem continues to navigate these challenging times, fraudsters will undoubtedly continue developing sophisticated schemes targeting vulnerable founders. Staying vigilant, leveraging trusted networks, and utilizing platforms like Grow can help protect your startup from becoming the next victim.
