Crowdfunding Fraud: Think You're Donating to a Good Cause?
Make sure before you fork over money on sites like Kickstarter and GoFundMe
Thinking about donating to a hot new startup or a relief effort for refugee families? Crowdfunding sites make it easy. Sometimes too easy.
In June, the Federal Trade Commission (FTC) took legal action against an entrepreneur who raised $122,000 from 1,246 people on Kickstarter to develop a new board game. Instead, he spent most of it on personal expenses and other projects, failed to deliver promised rewards to his supporters and never refunded the money.
How can you tell a legitimate, worthy project from a potential scam? Here are six ways to make sure your generosity is well spent.
Don't give impulsively. Before clicking the “donate” button, give yourself a time out. “Crowdfunding sites sometimes have a sort of ticking counter that tells you when the campaign ends,” says John Breyault, vice president of public policy, telecommunications and fraud at the National Consumers League. “It's trying to get you to invest without thinking something though.”
Find out what you get in return. Pay attention to what, if anything, the campaign's creator promises you for giving them money. Most crowdfunding campaigns fall into either the “reward” or “donation” category.
In a reward campaign, you're supposed to receive something in return as a thanks for your support. This could be anything from an early version of a new product to a credit as a “producer” in a movie production. Typical reward sites include Kickstarter an Indiegogo. The FTC's case is an example of a reward campaign gone wrong.
In a donation campaign, you're not expecting to receive anything for sending money to a charitable or nonprofit project (except maybe a receipt for tax purposes). Your reward is the knowledge that you've helped someone in need.
When it comes to donation campaigns, the wrong people sometimes take advantage of the public's sense of compassion. In May, four children died in a house fire in Trenton, Missouri. Within hours, scam artists had posted several phony appeals on the donation site GoFundMe, pretending to raise money for the family.
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Research the creators. The creator of a crowdfunding project should have a record of past dealings, according to the Better Business Bureau. Search online for a history of lawsuits, bankruptcies or other negative court actions.
“The more money you're going to invest in one of these campaigns, the more you should do your due diligence,” says Breyault. “Find out who is behind that flashy video.”
Potential donors can also ask the National Crowdfunding Association if they have received any complaints. “I have heard in some cases that campaigns that were legitimate were copied and ripped off by a fraudster, which posted the same campaign on other crowdfunding sites,” says Lauren Leibowitz, the association's membership manager.
Scrutinize the crowdfunding site. Not all sites vet the project or creator before approving a campaign, according to the New York State Attorney General. Look for complaint procedures and conditions under which they would issue a refund.
“By and large, most crowdfunding platforms are as ethical as they can be,” says Breyault. “Find the guidelines that the platform sets and if they are being enforced. If I were a fraudster, I'd look for a platform that's not enforcing the rules.”
Related: How to Avoid a Reverse-Mortgage Scam
Use social media to your advantage. Crowdfunding isn't just a donation platform. It's also a social network where thousands of users share information. Start with the crowdfunding site, which may have an internal discussion forum. “See if there is feedback from other users, if they received what the creator offered to give them,” says Breyault.
However, he cautions against relying only on site forums. “User comments can be gamed by project owners setting up shill accounts or getting friends to post positive comments when a project might actually have significant problems.” He advises also searching for relevant comments on outside social media sites like Twitter.
Fight back. If you feel you’ve been scammed and want to turn in a bad guy, flag the campaign with the site owners and ask them to take it down.
If they refuse, file a complaint online with the FTC or call 1-877-FTC-HELP. You can also get in touch with your state Attorney General. “It's a really powerful step that consumers can take because the more complaints they receive, the higher it goes up on their priority list,” says Breyault.