Crowdfunding – A Modern Day Investment Scam?

Crowdfunding has exploded onto the financial scene. Since the “qualified investor” requirement for funding small businesses was modified in 2013 we are all allowed (or pretend) to become venture capitalist or angel investors via crowdfunding.

crowdfunding names

It’s easy to find lists of over 100 sites that crowdfund everything from cutting edge new businesses to credit card refinancing.

I periodically end up on one or two of the crowdfunding sites. Checking out a friend’s GoFundMe campaign or funding the initial building of a revolutionary standing desk for grade schoolers are a couple I’ve visited recently. I also participate as a lender at Lending Club and by adding my two cents to the occasional political fundraiser I believe in.

But, I’m always careful to delay making any financial commitments until further research – both of the site and the offer – can be completed. That’s because crowdfunding is a scam artist’s newest way to separate a fool and his money. Even well established sites like Kickstarter, Indigogo and GoFundMe can unknowingly host scammers.

They even tell you so, as Kickstarter clearly states on its website:

“Kickstarter does not guarantee projects or investigate a creator’s ability to complete their project. On Kickstarter, backers (you!) ultimately decide the validity and worthiness of a project by whether they decide to fund it.”

So, why not join the party (as a lender or funder)? IF you use discretionary spending money and don’t think of it as a traditional investment; well, go for it. But use some common sense. crowdfunding piggybank

Apply these criteria when considering a crowdfunding opportunity:

You can’t expect the crowdfunding platforms to protect your “investment”

As we noted above, the platforms that make money from connecting start-up businesses, proposed books and software applications. They explicitly state they cannot be relied on to protect you from fraudulent offers or funders who fail to deliver on their promises.

They TRY, because their reputations are tarnished by fraud and failures but they come with NO guarantees.

In most cases, it’s a donation – NOT an investment.

Unless you are offered an ownership interest, don’t expect a return outside the “gift” in the listing. Peer-to-Peer lending is an exception. You act as a lender, not as a donor, and your losses (defaulted loans) offset earnings.

Also, almost none of the businesses looking for crowdfunding are legal non-profits so you won’t be getting a tax deduction either. But, if you believe in the cause or product, and your donation helps bring it to market, you can pat yourself on the back!

Many crowdfunding campaigns fail – and that doesn’t guarantee the donors will get their money back.

This policy varies by platform. Kickstarter refunds the money, Indigogo doesn’t. So, read the fine print for both the campaign and the platform before you give.

Vendors often over promise (and under deliver). A few are outright scams.

A guy gets an idea, his buddies tell him it’s great, and he decides to get crowdfunding and make it into a business – what could possibly go wrong??

You must do some due diligence (investigation). Click here for a good article from CrowdCrux.com on how to look into a campaign to see if it’s A) legit and B) worth your money.

One way is to use social media to leverage other people’s knowledge via a platform like Reddit (here’s the Kickstarter subreddit link).

And, I’ll echo the CrowdCrux.com the call to report scams. It’s a quick way to shut down scammers and clean up the crowdfunding space (and makes you a good web citizen). The list of scam reporting sites includes:

It sounds scary but I find spending a little time perusing (and donating a few dollars) inspiring. Seeing all the great ideas for products that can improve our lives gives me a little lift! Just don’t bet your lifesavings (or the rent money) on any one of them changing the world!

Live long and prosper, Leah the MoneyDiva.com

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