Crowdfunding is the duct tape of the fundraising universe: it can be used for (almost) everything!
From disaster relief to television series reboots, crowdfunding was perhaps the most popular fundraising model of 2015, grossing an estimated $34.4 billion, and is projected to surpass traditional venture capital funding in 2016. And while crowdfunding has been mostly used to make the world a happier, more efficient place to live, this multi-billion-dollar industry has also regrettably been used for selfish reasons in the form of bogus crowdfunding campaigns.
Take for example a case from mid-2015, in which the FTC sued the owner of a Kickstarter campaign for not only not delivering rewards he promised investors who funded his board game idea, but for also pocketing over $120,000 in capital, spending the money on activities wholly unrelated to his campaign. Another case involved a Texas woman setting up a false GoFundMe campaign claiming to raise funds for a family whose mother died in childbirth. After raising over $4,000, the woman cashed out her account and fled the state.
With hundreds of new crowdfunding campaigns launching every day, it can be very easy for a bogus campaign to slip through the cracks. In fact, the Better Business Bureau states in its Wise Giving Guide 2013 that "if there is motive and opportunity, fraud can occur no matter what the medium . . . While the vast majority of fund raising for charitable causes is honest and forthcoming about the intended use of collected funds, there will be some who seek to take advantage of American generosity."
And while some of the top crowdfunding sites in the industry maintain that they have security protocols, anti-fraud algorithms, and other measures in place to deter fraud, the BBB cautions that "those gatekeeper requirements alone will not prevent all fraud from taking place." And despite these measures, companies continue to remind investors to use their best judgment when donating.
So how do you know if a crowdfunding campaign is legit or not? Are there any telltale signs? Although spotting a fraudulent campaign is not a perfect science, there are a number of important indicators you should look for before donating your money to any campaign - fake or not:
One of the most important steps you can take in ensuring a campaign's legitimacy is investigating the campaign organizer. Many companies urge investors to only donate funds towards campaigns organized by people they know personally. But what if you come across a campaign that is sponsored by a company or individual you're not familiar with? How do you proceed?
One way to determine the legitimacy of the organizer is to survey its social media footprint. Does the individual or organization have active social media accounts? Are the posts, information, videos, etc. consistent with the campaign? How old are the accounts? If you find that a person's Facebook account is the same age as his crowdfunding campaign, that should be an immediate red flag. Also, don't be fooled by the number of social media followers. Just because a company Facebook or Twitter account has a lot of followers, doesn't mean they're real. A few freelancer sites like Fiverr will allow you to purchase thousands of fake social media followers for only a few dollars.
In addition to the organizer, it's also important to check out the other donors to the campaign. You might notice that most crowdfunding sites will highlight their trending campaigns, meaning campaigns that are receiving a lot of attention, traction, and funding. While most of these campaigns are legitimate, some organizers have found a way to manipulate the site's algorithm to give their campaigns such preferential treatment, often in the form of fake investors. This tactic works similar to a restaurant or business posting fake reviews about itself online. When potential investors perceive a lot of buzz about a certain campaign, they're more likely to donate themselves.
Before you invest, take a closer look at who is allegedly funding the project. If all of the donors are anonymous, or fail the same inspection you give the organizer, you probably shouldn't donate.
The next step is to evaluate the transparency of the campaign. Transparency in crowdfunding is the single-most important factor in building trust between the organizer and the investors. As a potential investor, you need to do all you can to keep your giving standards high; it's not enough for the organizer to simply show you a picture or a mockup of what or who exactly your money is funding.
Some crowdfunding sites, like Tilt, will verify certain campaigns that are launched in behalf of someone else, which helps take out some of the guesswork. When a campaign has been verified by the site, investors can rest assured that funds will go directly to their intended recipient - and not through the organizer first. For example, one Tilt organizer successfully raised over $4,000 for a man who dismantled his own pickup truck to rescue a kitten lodged inside the frame. Another way to determine the campaign's transparency is to look for periodic updates on how the money is being spent. In another example from Tilt, the Jamaican bobsled team needed help getting to the 2014 Olympics in Sochi. The organizer posted periodic updates and links on the progress of the campaign.
It's true, in some cases you may just need to take the organizer's word for it; but having verifiable updates on the campaign is a great sign that you're not being scammed.
Obviously, some projects require vast amounts of funding, while others do not. If you want to see Super Troopers 2 come to life, you can expect to pay a lot more than you would for Gary's 20th birthday party. But that's beauty of crowdfunding. Set the correct minimum payment on your campaign and it will succeed; set it too low or too high, and you'll likely never make your goal. These are things to keep in mind both as an organizer and as an investor. As you survey a particular campaign, ask yourself if the minimum required payment fits; is it an appropriate amount to ask for given the expectations of the campaign?
Generally, if the organizer has set the minimum amount a little high, he or she will provide some kind of incentive for investors who pay that amount - either a t-shirt, some rudimentary version of the product, or even equity in/part-ownership of the company! Whatever the rewards, make sure they are 1) worth your initial investment and 2) realistic for the amount of money you are contributing.
Remember, financial investment of any kind carries with it a degree of risk. In crowdfunding, there is always the risk that the campaign will fail, or worse, is a fraud. Be sure to set limits for yourself for how much risk you want to take on. Only donate to verified campaigns that you believe in, and be sure to alert site administrators if you suspect foul play.