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The Federal Trade Commission (FTC) recently reported winning a lawsuit against a crowdfunding scammer.
The scammer raised $800,000 for the development of a product that was never completed. A large proportion of that money was not even spent on product development. Most of it went straight into the scammers own pocket.
Crowdfunding projects rely on trust. There is no guarantee that a crowdfunding scheme will succeed. That makes it a prime target for scammers to exploit.
How did someone raise $80,000 from a fake crowdfunding scheme? Are crowdfunding scams common? How can you spot a fake crowdfunding project?
Here’s everything you need to know about crowdfunding scams. Read this before you put your faith in a crowdfunded project.
What is Crowdfunding?
Crowding is a means for entrepreneurs and inventors to fund their projects. They raise funds online on platforms such as Kickstarter, Indiegogo, and GoFundMe. Crowdfunding is also used for charitable projects and appeals.
Businesses usually raise funds by selling shares in the company. Investors invest money in return for a share of future profits in the company. Most start-up companies will have a few large investors. Those investors will own equity in the business.
Crowdfunding relies on many small investors investing small amounts of money. The return for the investors might be the product, or it could be a gift of some kind. Sometimes, the return is knowing that you have supported a worthy project.
Crowdfunding is trust based. It is not regulated and there are no guarantees.
When you pledge to a crowdfunding campaign, you must trust that the creator is telling the truth. You are also trusting that the creator can achieve what they claim they can.
Example Crowdfunding Scam – iBackPack
The crowdfunding scam we mentioned above related to a product called iBackPack. The man behind the project was Douglas Monahan.
Monahan raised funds through Indiegogo. He claimed the funds were needed to develop the iBackpack. This was to be a backpack that had batteries for charging mobile devices, and a Bluetooth speaker.
That first scheme raised $720,000. But, the iBackPack never saw the light of the day. The investors in the project never received anything in return.
Despite this, Monahan launched a second scheme for the same product and raised a further $76,000. He also launched several other schemes, which raised more money.
In fact, none of the promised products ever came to market. The money was not spent on product development; Monahan spent it on himself.
How Common are Crowdfunding Scams?
There have been several well-publicized cases of large-scale crowdfunding fraud. These have included a smart-watch scheme that raised $1.5m. And, a woman who raised funds for cancer treatment for a child who did not have cancer.
It is impossible to say how many fraudulent crowdfunding schemes there have been. In some cases, the creator had no intention of fulfilling their promises. In most cases, though, if a creator “tried their best” and failed, there is no comeback at all.
Most crowdfunding schemes are honest and legitimate Even if many do fail. That’s no consolation, though, if you get caught out by a crowdfunding scam.
How to Avoid Crowdfunding Scams
Crowdfunding scams can be very sophisticated. The crowdfunding page may look legit. It may contain lots of impressive looking statistics and information.
There may be a fake website to back up the crowdfunding page. If it’s a personal appeal, there may be heart-breaking images to gain your sympathy.
How do you tell if a crowdfunding scheme is legit or a scam? Here are some tips to bear in mind before you pledge any money:
1. Research the Creator
The first thing you need to do is do some background checks on the creator.
If the creator says they have experience in a field, can you find proof of that experience anywhere else?
Has the creator run any other crowdfunding schemes? Were they a success?
2. Check on Social Media
Check on social media for any mention of the creator or the project.
No social media presence at all should set the alarm bells ringing. So too should any mention of scams in respect of the creator or the project.
3. How Realistic is the Project?
Are the claims of the creator realistic? Some things are not possible in the real world.
Apply your common sense and watch out for anything that looks too good to be true.
4. Is the Project Unique?
If it’s a project to fund the launch of a new, innovative product, make sure that the product is viable.
Is the product unique? Or, are there thousands of other competing products already on the market?
5. Is the Creator Answering Questions?
Is the creator responding to questions from potential investors? If they are not, or they are giving vague answers, they may have something to hide.
6. Are There Campaign Updates?
If the campaign is legitimate, the creator will provide regular project updates. They will answer questions promptly and they will provide product development updates.
7. Don’t Jump in Too Fast
You won’t want to miss out on the early-bird special deals. But sometimes it is better to wait before you pledge to a crowdfunding scheme.
It’s not unknown for crowdfunding platforms to shut down a campaign because it was a scam.
8. Charitable Appeals – Don’t Let Your Heart Rule Your Head
There are people who will set up crowdfunding appeals that play on people’s good nature. They will claim that they need money to pay for a sick child’s treatment, for example.
You still need to do background checks on charitable appeals. See if you can find 3rd party proof that the money is for the purpose stated before you pledge.
Many thanks for reading our post about crowdfunding scams. We hope that you found it interesting. If you did, please share it on your social media accounts. If people know what to look for, they will be able to avoid getting caught out by scams like these.
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