crowdfunding red flags

Crowdfund or Crowdfraud? Five Red Flags

By Amanda Osorio

Recently there has been a major boom in crowdfunding across the internet, both for causes and for products. Kickstarter, for example, is a site where anyone can “invest” on a product that is being developed, which usually results in that person receiving the product at a discount once it is fully funded and produced. GoFundMe is less commercial and is typically used for causes, such as medical bills for someone who cannot afford them, or to fund artistic or other projects.

The Dark Side

Crowdfunding was developed for noble reasons, like providing investment for startups and charitable funds. However, there are always people who take advantage of the system. The biggest issue for a crowdfunding site is that there is not much consumer protection and no real way to thoroughly vet every project/fund creator. That is not to say the site owners don’t attempt to regulate the integrity of the projects on their sites. Algorithms and other tools are used in order to identify suspicious activity. Crowdfunding is built on trust, with one person asking for money for a project or cause and another agreeing to send money over the internet with the hopes of helping someone or receiving a product in the future.

Is Every Failure a Fraud?

Crowdfunding campaigns often fail. Sometimes, they don’t get enough attention to be successful, and other times the product just isn’t as interesting as the creator thinks it is. However, when someone raises $500,000 and then calls the project off, how can a person tell whether they’re automatically a fraud or simply a failure? Here are five red flags that have been developed to help protect backers:

  1. Does the creator have a working prototype of the product they’re funding? If there isn’t a working prototype, it’s more likely that the project will fail or the release date will be consistently pushed back.
  2. Are the creators actual creators? It is always a better campaign if the person who is marketing the project actually has experience in manufacturing or developing products. This is information that requires researching the creator and their skillsets.
  3. Look for “seals of approval.” A project that has gotten brand endorsements or investments by reputable people is always more promising than one with no credentials. Look for Dragon Certification of crowdfunding projects for the best “seal of approval.”
  4. Look at the descriptions and write-ups by the creators. Spelling errors, inconsistencies, or other issues with their descriptions can indicate sloppiness in the project, too.
  5. Finally, is it too good to be true? Some products marketed on crowdfunding sites can sound really innovative and ambitious, but there is a line between fantasy and reality. If a product just seems too good to be true, it probably is.

Famous Scampaigns

The number of scammers on crowdfunding sites is consistently growing, but that is the natural effect of the open marketplace. Some people have scammed more than you might believe. The creators of Kreyos Meteor Smartwatch marketed their voice-activated smartwatch and ran off with $1.5 million raised on Indiegogo. LUCI, a project that marketed a product for induced lucid dreaming, was abruptly cancelled after raising $330,000. While these are all despicable acts of fraud, some people have pushed the bar even lower. An Iowa woman raised thousands of dollars for her daughter’s cancer treatments, but in reality her daughter was healthy.

Do we Need Government Action?

In June 2015 the Federal Trade Commission went after its first fraudulent crowdfunding project. The Doom That Came to Atlantic City, a board game, raised over $122,000 and the game was never created. It turned out that the manufacturer of the game kept the money and spent it on himself in the form of rent, personal equipment, and other licenses. In the end the FTC required the manufacturer to pay back over $111,000. After the settlement, the FTC took to Twitter in an effort to show the anger over such fraud. The FTC usually doesn’t get out of bed for such a low dollar figure, usually only getting involved when cases are in the multimillions, but it used this case to make a statement that there will be crackdown on future crowdfunding frauds.

Conclusion

While it can be disheartening to hear that people are taking advantage of this new fundraising system, it’s not a new problem. This is not the first time charitable causes have been found to be fraudulent. Now that this issue is more prevalent, both the government and individual consumers are beginning to pay more attention to the possibility of dishonesty in fundraising.

For more information about the crowdfunding scams contact Revision Legal’s team of experienced internet attorneys through our contact form or by calling 855-473-8474.

Image courtesy of Flickr user Bull3t Hughes

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