Don’t let crowdfunding become crowdscamming

posted Jan 6, 2014, 9:59 AM by Unknown user
You don’t need to necessarily be the next Facebook or Twitter to have your idea funded. The entrepreneurial spirit and independent investing are alive and well in the world of crowdfunding.

Crowdfunding allows budding start-up owners, artists and philanthropists to reach beyond their networks of friends and family and raise money for their projects, usually via online portals. One of the largest crowdfunding sites, Kickstarter, says that, since its launch in 2009, 5 million people have pledged $831 million, funding 50,000 creative projects.

Indeed, crowdfunding is become so significant that MarketWatch is offering comprehensive data and pricing on crowd-financed projects .

The crowdfunding most of us are familiar with is donation-based. All types of projects have asked for funding using this model, from a food start-up looking to develop a new line of hot sauces to a children’s choir that wants to travel and perform in New York City. Enlarge Image
A brave and sometimes dicey new world.
With a donation-based approach, donors don’t own a piece of the project, but often there are rewards for different donation levels. For example: Donate $5 and get a shout-out on the project’s Facebook page; donate $50 and get a hot-sauce sample; or donate $1,000 and have dinner with the product’s creators.

Keep in mind that when you donate to a crowdfunded project, it isn’t necessarily a tax-deductible donation. Only donating to organizations that are registered as 501(c)(3) nonprofits, or to people raising money for a 501(c)(3), may give you the eligibility for a tax write-off.

Sixteen-year-old Paloma Palmer of the San Francisco Bay Area recently spent two weeks in a remote village in Fiji through Rustic Pathways, a nonprofit, which in part helps to build schools throughout the world. After returning home, Palmer wanted to continue helping, and thus the Nasivikoso Village School Project was born

Palmer turned to Indiegogo, one of the largest crowdfunding sites. “I used Indiegogo as my platform to get my message out there and help raise much-needed money,” says Palmer. “I know these funds are secure and safe and will get put into the right hands.” Palmer’s goal is $3,000, which will enable Rustic Pathways to provide 30 desks and chairs to the Fijian village.

With this model, you are not donating for personal gain. The incentives are fun or helping a cause, such as, in Palmer’s case, providing a desk to a student thousands of miles away. You donate because it is a cause you believe in or involves people you like — or maybe a hot sauce you want to try.

Potential profit and greater risk

Newer to the scene is investment-based crowdfunding, where entrepreneurs launch broader, for-profit business ideas that you may want to invest in. Under a law passed in 2012, the Securities and Exchange Commission is developing rules that will make it easier for small companies to sell shares via crowdfunding.

DATA: More crowdfunding information and screening tools.

There is also a recent trend of crowdfunding college costs or student loans. On websites like Upstart, backers can donate to someone’s education in exchange for a percentage of that person’s income after graduation.

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The thing to remember is that just about anyone can create a project on these crowdfunding sites, so you have to be selective and vigilant. Some of these ventures bring in thousands or even millions of dollars. Anytime there is that much money on the table, rest assured there are skilled scammers who will go out of their way to make their illegitimate projects and profiles look legit.

In fact, earlier this year, one large crowdfunding site almost handed over $120,000 to a fake Kobe-beef-jerky start-up. Fortunately, the company’s fraudulence was discovered before the funds were released, and the backers did not lose their money.

In the event fraud occurs, sites like Indiegogo suspend the campaign and refund all contributions. Confirming that a crowdfunding site offers this protection is smart, specially if you are contributing money to a project you are not familiar with. But fraud is rare, according to Rose Levy, an Indiegogo spokeswoman, who adds that “Indiegogo has a vested interest in preventing fraud.”

Due diligence

Most crowdfunding pages will have a profile of the creator. Read the bio page and look for details that can be confirmed. Some will link you to personal websites or pages on social-media platforms like Facebook or LinkedIn. These details will help to confirm that people are actually who they say they are. You can even check with the Better Business Bureau to see if any reports have been made against the company you are considering investing in.

Many crowdfunding sites release funds only if a threshold is met. So if an organization says it wants to raise $10,000, it doesn’t get any money until $10,000 or more is pledged.

But don't think an organization is legit simply because other people have donated. For example, in the beef-jerky case there were more than 3,000 backers. In other words, the campaign convinced 3,000 people that the business was legitimate and had a great product to offer.

That said, don’t let potential negatives outweigh the positives. Crowdfunding can be an excellent way for people to help finance a good idea or cause and possibly make some money in the process. Plus, you are keeping the American dream of entrepreneurship alive and well. 

Emmy Award-winning broadcast journalist, documentarian and author Jeanette Pavini covers consumer and investigative news for numerous publications, radio and television. Jeanette is based in the San Francisco Bay Area.

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