Maine officials recently issued an advisory warning investors to approach crowdfunding investment opportunities with caution, but for several local entrepreneurs such alternative funding has been a lifeline.

“Scam artists like to reside on the Internet,” said Judith Shaw, securities administrator with the Maine Office of Securities. “It’s not just a small classified ad in the back of the paper like in the past. Social media and the Internet have made scams more prevalent and more sophisticated.”

“Crowdfunding” describes what happens when businesses solicit small amounts of financing from nontraditional lenders. It’s frequently done by smaller businesses appealing to a loyal fan base, or if the business can’t get traditional financing from a bank or investment firm.

“With crowdfunding, you’re dealing with very small businesses, and 50 percent of small businesses fail within the first five years. It’s a risk,” Shaw said. “The Office of Securities encourages business development and investment opportunities, but because the potential for fraud with crowdfunding is significant, investors must be extremely cautious.”

Still, several local businesses have benefited from crowdfunding and swear by the system.

Recent successful fundraising ventures include Union Bagel, of Portland, Gelato Fiasco, of Brunswick and Portland, and Shift, a news website dedicated to gay, lesbian, bi-sexual and transgender issues.

The fraud warning was prompted by a recent change in federal law regarding Internet fundraising. Instead of just being donors, those investors will be partial owners of the business they fund.

“Crowdfunding has been around for years — the local coffee shop reaching out to patrons to help fund an expansion. But they haven’t been giving anyone a share of the business before. That’s a different approach,” Shaw said.

The Maine Office of Securities gets about 80 to 100 complaints a year about securities-related scams, she said. The North American Securities Administrators Association, of which Maine’s Office of Securities is a member, has created a new task force to focus on Internet fraud to monitor crowdfunding and other Internet offerings.

Despite the state’s caution on crowdfunding, local fundraising efforts continue to percolate.

Union Bagel and Shift used the Internet site Kickstarter, one of several crowdfunding websites that allow people to pitch a project, to set a fundraising goal and a deadline for accumulating the money. If the project fails to reach its fundraising goal by deadline, the money is returned to the backers.

Kickstarter currently features more than 100 projects in Maine, from Portland to Bar Harbor.

Projects range include “In Flux,” an art installation dedicated to the Androscoggin River, which exceeded its funding goal of $1,800; to Roost House of Juice, a juice-and-smoothie bar that aims to open in Portland with the help of an $8,500 funding goal. Jitterbug Millie’s, a 1920s-and-’30s-inspired jazz cafe in southern Maine, is looking to raise $23,000.

Kickstarter said 44 percent of pitches on its site reach their goals. Overall, the site has raised more than $250 million pledged to support more than 24,000 projects.

“The nice thing about Kickstarter is you can get a niche product off the ground. You don’t need to attract a Milton Bradley or someone huge. You can find people willing to take a chance on a small, niche product,” said Houlton resident Amy Gramour, who developed a dice game called Tin, which combines a word game with the periodic table. Gramour is 9 percent towards her goal of raising $3,320 to develop and sell the game.

Brunswick-based Gelato Fiasco recently benefited from a national crowdfunding campaign. The company tried — and failed — to get traditional bank funding when it was trying to expand into Portland. Gelato Fiasco then turned to Coastal Enterprises Inc., which provides financing and support for job-creating small businesses and industries.

Coastal Enterprises loaned Gelato Fiasco $50,000, half of which came from a crowd-sourcing program created by Starbucks and the Opportunity Finance Network. Under that program, which has expanded from Starbucks to other companies such as Google Inc. and Gap Inc., customers donate money and get red, white and blue bracelets if they give $5.

“Create Jobs for USA is making it possible for Americans who have $5 to share help people who don’t have $5 to spare by creating and retaining jobs in their communities,” said Mark Pinsky, President and Chief Executive of Opportunity Finance Network.

“The whole focus is to create jobs in small businesses,” said Grace Cleaves, senior vice president if Coastal Enterprises. “Gelato Fiasco had a good plan for expansion. The target of our lending services are small and mid-sized businesses with the ability to grow and repay.”

Josh Davis, co-founder of Gelato Fiasco, said the loan helped them expand into Portland and hire six employees, who have health insurance and paid vacations.

“We’re big believers in crowdfunding, but people need to be savvy on where they put their money,” Davis said. “Crowdfunding is inherently risky. There’s a high likelihood of failure, statistically. It’s not to say that any other investment couldn’t go bad as well, but people need to be savvy and do research.”

“One of the cool things about doing business locally is you can check out the business and do some research,” Davis said.

NUGGET

What are the coming changes in Internet fundraising? The JOBS Act directs the Securities and Exchange Commission to create rules that exempt crowdfunding from the securities registration laws. That means the world of crowdfunding could change, because the restrictions would be removed on start-up companies seeking investors over the Internet.

Once the SEC issues the rules, a small business could use the Internet to raise up to $1 million a year without having to do a public offering. The backers are no longer just donors; they technically become equity investors or partial owners, according to Judith Shaw, administrator with the Maine Office of Securities. Investors may have limited legal ability to take action if the investment does not perform as expected, Shaw said.