6 tips to avoid crowdfunding scams
By Allie Johnson
October 9, 2015
Crowdfunding can be a great way to raise money to help victims of tragedy, small nonprofits or entrepreneurs who lack cash to make their ideas reality. But it's also an easy way for con artists to line their own pockets.
A method of raising money for personal causes, civic projects and business ventures by collecting many small (and maybe a few large) donations from individuals, crowdfunding is typically done online through proprietary websites. Users can set up campaigns on sites such as Kickstarter, Indiegogo, Crowdfunder, RocketHub and others, where they can get the word out and collect cash for their causes.
These websites make it easy for people to donate via credit or debit card. And they're raising billions.
In 2014, crowdfunding platforms worldwide raised $16.2 billion, a 167 percent increase over the $6.1 billion raised in 2013, according to research firm massolution's 2015 Crowdfunding Industry Report. North America leads with crowdfunding volumes at $9.46 billion, an increase of 145 percent from 2013.
But be careful. While crowdfunding makes it easy to assist others, it also is easy for fraudsters to help themselves to your cash, crowdfunding experts and regulators say.
Cracking down on crowdfunding scams
State and federal regulators are starting to tackle crowdfunding abuses.
Earlier this year, for example, a Texas judge ordered a woman to pay back the money she raised through the crowdfunding platform GoFundMe.com, claiming the funds would help a man whose wife had died after giving birth to a baby girl.
The widower, Moses Perez, told reporters he was at first touched by the kindness of the stranger who set up the campaign. But after the fund reached $4,600, the woman who set up the account disappeared, along with the money.
In June, the Federal Trade Commission filed its first crowdfunding case against a man who raised more than $100,000 on Kickstarter to create a board game. Instead, he spent most of the cash on himself, according to the FTC.
It's not always about scams. Sometimes it's people who don't have the skills or expertise to deliver a product.”
— Elena Mikhaylova,
CEO at Crowdfund Productions
But “it's not always about scams,” says Elena Mikhaylova, CEO at Crowdfund Productions, a crowdfunding consulting company. “Sometimes it's people who don't have the skills or expertise to deliver a product.”
And when creating a new product or service, delays and failures are common, says Mikhaylova.
For example, a failed campaign on Indiegogo.com to create a goofy shark suit, like the ones worn by performers with pop star Katy Perry during the 2015 Super Bowl halftime show, left a bunch of angry backers in its wake. With more than $90,000 raised, the shark suit never materialized and some backers are still waiting for refunds.
When things go wrong in a crowdfunding campaign, an individual donor isn't likely to be out a huge amount of money, says Art Taylor, president and CEO of the BBB Wise Giving Alliance, which helps donors make informed giving decisions. The average amount donated by individuals to crowdfunding campaigns is $66, according to fundraising platform MobileCause.
The average amount raised by a crowdfunding campaign is around $7,000, Taylor says. “We're not talking huge amounts of money,” he says.
However, some campaigns raise much more. For example, one GoFundMe effort has raised more than $130,000 for the family of a baby who was born with a brain malformation, and another raised over $170,000 to try to overturn a California law that mandates vaccines for children in schools.
But even if you're donating only $5 or $10, it's important to do your due diligence so you're not taken in by a heart-tugging story or what sounds like the next million-dollar idea, Taylor says.
If you do fall victim to a scam, and you made your donation with a credit card or debit card, you can file a dispute with your credit card issuer or bank, says credit expert John Ulzheimer.
Crowdfunding is a really creative, interesting way of supporting causes and people.”
— Art Taylor,
president and CEO
of the BBB Wise Giving Alliance
For credit cards, you can dispute the charge online. Or, you can file a dispute by mail, using the address for “billing inquiries,” according to the FTC. To make your case stronger, submit supporting documentation, such as a news story about the fraud.
After you file a dispute, the card issuer will typically give you a temporary credit on your account and then investigate the situation.
But if your credit card company decides the charge was valid, they'll reinstate it and you'll owe, Ulzheimer says.
How to be a savvy crowdfunding donor
Want to make sure you don't fall pretty to a crowdfunding scam? Here are six tips for donors:
- Give to those you know. The golden rule of crowdfunding: Donate to people you know, especially if the campaign is for a personal cause such as paying funeral expenses or medical bills. If you don't know the recipient, at least make sure someone you know and trust can vouch for the legitimacy of the cause, Mikhaylova says.
- Do your own homework. If you want to give to the personal cause of a stranger you saw on the news or a new business venture that sounds cool, do some investigating first, Mikhaylova says. Check out the campaign organizer's social media platforms. Also ask questions of the campaign organizer, and expect timely, clear and detailed answers, she says. Finally, don't assume a story is legitimate just because it's been covered in the news, Taylor says.
- Watch for red flags. When you're considering donating to a crowdfunding campaign, read the plea for donations carefully and look for warning signs, Mikhaylova writes on the crowdfunding blog CrowdCrux.com. Warning signs include: lack of detail in the description of the campaign and huge pledges made at the beginning or end of a campaign, she says. And, in entrepreneurial crowdfunding campaigns, it's normal to offer rewards to donors, so watch out for perks or promises that seem too good to be true, Mikhaylova warns.
- Be wary after a disaster. In the aftermath of a disaster, fraudsters try to prey on public sympathy, Taylor says. In the wake of a crisis, it's best to donate to an organization with a disaster relief track record rather than directly to an individual or family, Taylor says. Consider GlobalGiving.org, a crowdfunding platform that allows you to give to projects led by vetted nonprofits, he says. One example: With the Syrian refugee crisis flooding the news, many want to help, and GlobalGiving.org allows donors to fund various projects benefitting Syrian refugees. One nonprofit, for example, is providing clothing, building houses and digging wells in Jordan and Lebanon for Syrian refugees.
- Look at the crowdfunding platform. Each crowdfunding platform has different policies and fees, Taylor says. Before pulling out your credit card, it's a good idea to read the fine print for the platform that's hosting the campaign to which you're considering donating, he says. “Not all of these sites operate the same way,” he says. One question to ask: If the project doesn't meet its fundraising goal, will your donation be returned to you?
- Follow the campaign. Don't just give and go away. Keep tabs on what happens with the campaign. “Stay involved,” Mikhaylova says. Pay attention to delays, a sudden lack of communication or a campaign creator who just disappears, she says. Some platforms will allow you to cancel your pledge, she says. With Kickstarter, your card isn't charged until the project reaches its goal amount, and you can cancel your pledge before that happens. If a campaign starts to look fishy, you shouldn't hesitate to back out, she says.
Consumers shouldn't turn away from crowdfunding just because of news stories about scams, Taylor says. “Crowdfunding is a really creative, interesting way of supporting causes and people,” he says.
Just be careful, experts say. Use your head before donating from your heart.