Crowdfunding Fraud: The Risk is Real and Growing

Crowdfunding, the practice of funding a project or venture by raising many small amounts of money from a large number of people typically via the Internet, is no longer a novelty. Since their beginnings in the early 2000s, crowdfunding portals have exponentially proliferated across the web. The more successful platforms have become household names, like Kickstarter and IndieGoGo, facilitating thousands of fundraising initiatives. Given the ease of raising money and the digital anonymity that crowdfunding enables, it was only a matter of time before fraudsters began taking advantage of the platforms.

The Federal Trade Commission (FTC) settled its first crowdfunding case in 2015 against a crowdfunder who raised over $100,000 to develop a board game. He never actually created the board game not keep his process of sending specific “rewards” to people who donated to his project of creating a board game. The FTC’s complaint accused him of deceptive promises due to never sending promised collector game pieces donors and never issuing promised refunds once he abruptly cancelled the project. In fact, the crowdfunder spent most of the money on unrelated personal expenses including rent, personal equipment, and moving himself to Oregon.

With the recent rise of equity crowdfunding, there are growing opportunities for fraudsters to attempt to swindle investors online. The Uniform Law Commission is researching crowdfunding misuse and is expected to issue model legislation to combat such fraud. In the meantime, crowdfund donors and investors would be wise to follow these three tips form Consumer Reports,

  • Check the creator’s credentials. Many crowdfunding sites verify that the person has a Facebook page, but anyone can make a Facebook page. Analyze the page: Are the friends real or just “filler?” Are there real-time comments? Does the person have just one social media site or are they listed on other sites? A short timeline might indicate that the page was created just before asking for funding.
  • Dig into the creator’s business background. Has he or she launched other projects successfully or supported other projects? Is there a professional online profile that demonstrates expertise in this area?
  • Be suspicious. Is the person trying to fund the same project on multiple crowdsourcing sites? That could show an attempt to raise as much money from as many people as possible.