Kickstarter.com, a popular crowdfunding website, almost gave $120,000 to a fake start-up business last week. Fortunately, the site pulled the plug on the project, “Kobe Red – 100% Japanese Beer Fed Kobe Beef Jerky,” a few days before it released the cash. But the incident has raised concerns about crowdfunding, a new way of raising money from a large group of people online.
Crowdfunding isn’t an investment in the traditional sense. Unless it is specifically stated, you don’t own a piece of the business, invention or project. Consider your funds a donation. Crowdfunding billed as “investments” are under scrutiny and, in some cases, may be illegal. The Financial Industry Regulatory Authority is working on additional protections for investors. There are also risks for creators, as ideas posted online can easily be copied.
Kickstarter.com may be the most famous crowdfunding site, but dozens of others have sprung up in the past few years. Here’s Forbes’ list of the top ten sites.
How the Scam Works:
A friend sends you a link to an interesting project or charitable cause on a crowdfunding site. You’d like to donate, so you read the profile and everything looks OK. There are photos, videos and a project discription. You pledge $25. According to the site, your donation earns you a project t-shirt, which will be shipped in two months. Months pass, and you receive a vague project update, but your t-shirt never arrives. Were you scammed?
Crowdfunding is still the Wild West of fundraising. As a donor, it can be hard to distinguish fraud from an entrepreneur who simply promised something he/she couldn’t deliver. When you don’t receive your shirt, it may be because the project leader took the money and ran. But more likely, it’s simply that the project ran into logistical problems — just like traditionally-funded businesses do.
With dozen of new projects popping up each day, crowdfunding sites depend on their users to identify and report fraud. So be sure to do your homework before giving.
I Want to Give to a Crowdfunded Project. What Should I Consider?
- Investigate before you give. Look beyond the project profile page to learn about the entrepreneur, artist, charity etc. Are they on Facebook or other social media? Do they provide links for further verification?
- Don’t hesitate to request more information. You can always reach out before pledging.
- No matter what, only give money that you can afford to lose. The best way to avoid stress is to set a budget for yourself and have fun.
- When giving to a crowdfunded charitable cause, keep in mind that contributions are usually considered gifts to the recipients and are not tax deductible unless the group receiving the funds is a 501(c)(3) organization as designated by the Internal Revenue Service.
- Report suspicious accounts. On Kickstarter, you can hit the”Report this project” button at the bottom of the project page. Then provide as much detail as you can (links to the page with the concern, links to an account, details of the problem, etc.)