Crowdfrauding – A Crime that’s Finally Beginning to be Treated as Such

September 17, 2015

In the past several years, web sites like Kickstarter, IndieGoGo, and GoFundMe have revolutionized the fundraising capabilities of organizations worldwide, from solo acts to small start-ups and large corporations. Never before has it been easier for the masses to support projects they believe in; likewise, never before has it been easier for snake oil salesmen to receive colossal investments and then disappear.
For the uninitiated, these sites operate on a simple premise: anyone can publish a campaign on the site that describes a product, service, or event that they would like to launch. People that wish to support the cause can donate, usually in exchange for a special benefit – imagine a start-up that wants to develop a new board game, and promises that donators will each receive a special signed copy when the game ships. While Kickstarter is specifically geared towards creative development, IndieGoGo allows campaigns in a multitude of other categories, including raising funds for personal medical costs and tuition.
Since their inception, these sites have certainly benefited content creators, personal donators, and arguably the global community at large. A much anticipated space simulation computer game, Star Citizen, currently holds the Guiness World Record for “largest single amount ever raised via crowdsourcing.” At the time of the record, the number was $39 million, but as of this writing, it is over $89 million. Pebble, one of the first “smartwatches” which now has both Samsung and Apple as competitors, was developed on Kickstarter. The film Veronica Mars was funded through Kickstarter. The Solar Roadways concept was made into a reality through IndieGoGo – you may remember seeing a viral video about it on Facebook and Twitter entitled “Solar Freakin’ Roadways”. In short, there are some incredible projects happening because of crowdfunding.
Sadly, there is something else mixed among the legions of great ideas and truly wonderful campaigns: scams. The potential for fraud in crowdfunding is understandable.

How hard could it be to think up a compelling project, fudge some pictures and progress documents, and then disappear into the night with the proceeds? As it turns out, it isn’t hard at all

– a company floated a proposal to import Japanese Kobe beef and make it into a new jerky, which sounded like a solid plan at first. The problem was that all of the promotional materials were faked, the company lied about several taste-test events it had set up, and Kickstarter barely got the campaign suspended before it ended, pulling the plug only a few hours before the deadline.
Part of the problem is that there is very little oversight from the crowdfunding company (Kickstarter, IndieGogo) during the development of the project. Ostensibly, it is the community’s responsibility to police projects and report suspicious activity to the web site. However, without access to very personal information like bank statements, it’s impossible for donators to truly know how their money is being spent, like in one case where a creator used donated funds to move across the country and start a completely different project, all the while telling his backers that everything was going well. Then, he canceled the project completely. The FTC eventually got involved and issued an order forcing the creator to issue refunds, but the money was long gone.
There is good news, however: the state of Washington has just litigated and won the first “crowdfrauding” case in the U.S. The courts have finally shown some teeth on this issue and state attorneys general have shown they are not afraid to litigate these claims. There is a small hitch in the litigation process though, as it appears that each state can only go after a fraudulent creator for the fraud committed on their state’s residents. “Affected consumers from other states are encouraged to file a complaint with their state attorney general to seek restitution.” There’s also no guarantee that the money will be paid back. As with the board game company, the money is probably already gone. The judgment from the court will be only a moral victory for defrauded donators if the offender is bankrupt and cannot pay the money back. Hopefully, in the near future, the federal courts will become more involved in this process and be able to act quickly and decisively to prevent these bittersweet outcomes.
These cases are more or less cut-and-dry; there is clear evidence of fraud being committed. However, you may remember a particularly strange Kickstarter campaign from last year where a hungry individual posted for donations so he could make potato salad. What started as (mostly) a joke spun out of control quickly, with nearly 7,000 backers donating over $55,000 to the cause – orders of magnitude over the $10 that was asked for initially. To be clear, this was not a scam; not only did the guy make his potato salad, but he successfully launched a potato salad festival and he’s now authoring a potato salad cookbook. The big problem was that initially, the creator had no idea what to do with all of the money. Though he attempted to give most of it to charity, his efforts were stonewalled by a provision in Kickstarter’s terms of use which prevents direct transfer of proceeds to charity. He was also met with backlash from some of his supporters, who did not want their money given to charity – they wanted it used for the original project of making potato salad, however impractical it may have been to make $55,000 worth of the stuff.
However noble his cause may have been, he did still have to follow the rules – and hopefully, if the rules are working against him, they’ll work just as well against fraudsters and criminals that try to take advantage of the crowdsourcing system. People should feel secure in their donations, that every project will proceed with good-faith intentions to deliver, even if the concept does eventually fail – no matter if the project is an $80 million video game, or a bowl of potato salad.