When Crowdfunding Goes Bust: Fraud and Consequences
Crowdfunding sites like Kickstarter are increasingly being used for great things. They help bright entrepreneurs raise funds to create what they wouldn’t have been able to through traditional money funding methods. Currently, most of the Kickstarter campaigns that successfully meet their fundraising goals reward the investors with a finished project; however, some projects fail due to overpromising or simply fraud.
Overpromising- Sometimes people dream too big. In fact, only 25% of successfully funded Kickstarter campaigns finish on time (although 75% finish within eight months of their projected finish date). Most run of the mill coders are not going to be the next Blizzard (the Company that owns World of Warcraft, an insanely popular online subscription game) overnight. In fact, many creative people, while good at creating, have no business acumen to help them reach the goals they’ve set. One example of this overreach is Erik Chevalier, would-be creator of a board game entitled “The Doom That Came to Atlantic City.” His kickstarter campaign was wildly successful, and despite only asking for $35,000 he received over $122,000 from investors. Unfortunately, he underestimated the time, cost, legal issues, and myriad other complications that come with designing and selling a game, and he terminated the project after spending most of the money. He has posted updates on his Kickstarter page, explaining to his backers that he intends on refunding all of the money per the Kickstarter Terms of Service, but does he really have an obligation to do so?
Fraud- Sometimes people dream too big, and sometimes people are thieves from the get go. Kickstarter works because of the implicit trust between the parties involved. If you donate this small amount of money, I will give you this small reward in return. Undermining this whole community funding idea however, are the fraudsters and thieves that are out to make a quick dollar. Not much information is available as to how many fraudulent Kickstarter campaigns have been created because Kickstarter does not keep or publish that information; however, Forbes reports that no fraudulent campaigns have successfully been funded thus far. There are some notable examples of fraudulent accounts, including what could have been a $120,000 free-range beef scam that was brought to light by the social networking site Reddit mere minutes before being successfully funded. Several other fraudulent accounts have been made, including a copycat scam where the scammers re-launched a legitimate but failed kickstarter campaign for blue-tooth enabled controllers in order to make their scam look authentic. A third type of scam that has surfaced on Kickstarter combined the two methods from above: copying/stealing artwork from a legitimate company to add authenticity to a video game called Mythic that was never going to be created. Fortunately, none of these scams were ever successfully funded, and the investors did not lose their money but if for some reason, the fraud is not discovered in time, backers can do little to get their money back thanks in part to Kickstarter’s laissez-faire approach to settling disputes.
Kickstarter Terms of Service and Uncovering Fraud by Self-Regulation- With the growing opportunities for abuse in the Kickstarter community, one would think that Kickstarter would protect the interests of those providing the money for the campaigns (Kickstarter takes a generous commission before turning over the funds). In fact, the opposite is true. On Kickstarter’s Accountability page, it references its Terms of Service for those that start campaigns. The Terms of Service include a clause that states:
“If your project is successfully funded, you are required to fulfill all rewards or refund any backer whose reward you do not or cannot fulfill. A failure to do so could result in damage to your reputation or even legal action on behalf of your backers.”
“All dealings are solely between Users. Kickstarter is under no obligation to become involved in disputes between any Users, or between Users and any third party. This includes, but is not limited to, delivery of goods and services, and any other terms, conditions, warranties, or representations associated with campaigns on the Site. Kickstarter does not oversee the performance or punctuality of projects.”
“Kickstarter does not offer refunds. A Project Creator is not required to grant a Backer’s request for a refund unless the Project Creator is unable or unwilling to fulfill the reward.”
Essentially, Kickstarter passes the buck onto the investors to self-regulate and make sure that they are spending money on legitimate projects, because Kickstarter won’t step in and mediate if there is any sort of dispute. The Accountability page clearly places the onus on the backer to decide the worthiness and validity of a project; a sort of caveat emptor approach. Kickstarter further distances itself from the relations between its users by using a third party payment processing company, Amazon Payments, which holds all information on both parties that could be used to hold the project creators accountable. As things stand now, if a fraudulent project were to be successfully funded and Kickstarter turned over the funds to the scammer, there would be very little recourse for the buyer. Sure, you could sue the project creator, but you would have to figure out who that person is and decide whether it is worth the attorney’s fees to sue someone for such a small amount of money. Kickstarter sure isn’t willing to help.
As crowdfunding becomes a larger part of how companies and individuals fund their projects, consumer protections are going to need to be implemented. Kickstarter should not be allowed to sit back and watch as users of its site get scammed because it doesn’t even employ workers to check the validity of a new project. These protections will be hard to implement however, because drawing a distinction between someone that legitimately used the money for a project but failed and a person that took the money and ran is not something easily defined. We do not want to penalize those with the entrepreneurial spirit who simply could not make their dream a reality. We only want to penalize those that would abuse the system that up until now has worked quite well. It looks like this is a bridge that we quickly need to cross.