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posted Nov 17, 2014, 11:44 PM by J Shaw   [ updated Nov 17, 2014, 11:44 PM ]

The question, via email:

Hi, I'm trying to collect some information for a research paper I'm working on. I'm not certain if this is relevant to your area of expertise, but any help would be appreciated. How will I know if the project creator is trustworthy and my rewards will be delivered as promised? What steps are being done to minimize the possibilities of fraud or false marketing on crowdfunding platforms? Your column seems very interesting. If you tackled my question there it would be great as well.

The answer:

This is a complicated topic so I’ll take the easy part of your question first: How can I trust my rewards will be delivered as promised?

You can’t. Do you love the idea or product? If so, your job is to make sure all of your questions are answered about the project you are considering funding. But remember that even though backers should perform their due diligence, when you fund a project, you are not buying a product, service, or idea; you are investing in the project because you believe in it and the creator and want to be a part of seeing it become a reality. There is no certainty in investing.

The more general question about trustworthiness is tougher, made more so by the fact that crowdfunding is still in its infancy. So not only are we learning as we go, but you can rest assured that those who live to game systems are busily testing waters. Some have already done damage.

One early example was the Kobe Red campaign, which raised over $120,000 before it was yanked. I think the cool thing about this campaign is that two filmmakers who were researching (and crowdfunding) a film about crowdfunding stumbled upon it, smelled a rat, pursued their concerns, and ultimately saved a lot of people some money.

From that experience here are a few things that could raise red flags:

  • Does the project creator list his or her name and bio?
  • Does he post his location?
  • Is the story poorly written?
  • Do the video or the testimonials seem generic or vague?
  • Does the project creator seem nonresponsive or defensive to probing questions?
  • Does the project have a website?
  • Does it have social media profiles?
  • Does it have a digital footprint that is traceable?

These are just a few questions to ask yourselves before considering laying down your cash. (As always, if anyone has personal experiences and would like to add to it, please share in the comments section.)
How can platforms help to minimize risk?

When fraud is uncovered, or even a whiff of it is suspected, there are many schools of thought on who’s responsible for reparations and why.

Many people rightfully feel unsupported by the platforms that take their percentage but abandon them when trouble emerges.

One point the libertarians among the groups like to say is that crowdfunding rose out of a recognition that gatekeepers to be removed. If you start laying down onerous rules, they say, you may as well just admit that the banks won and trudge back to the bank to try to get a loan. Good luck with that.

Is the crowd capable of monitoring itself?

Those who want to keep crowdfunding in its purest form (also rightfully) acknowledge that, as was proved by Kobe Red (and others), the crowd is very good at sussing out the fraudsters. A must-read book that anyone who is either researching crowdfunding and fraud, or wants to learn how understand personally what it takes to harness crowd wisdom, is called The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations.

More recently, other helpful sites have emerged to help the average citizen research campaigns.

Kickended, which archives campaigns that came and went without attracted a single shekel, is one. If you study these failed campaigns, you will no doubt learn a lot about what doesn’t work and you’ll avoid those blunders like the plague.

ShittyKickstarters is a Reddit community devoted to calling out hair-brained crowdfunding projects. It’s fun and can be informative. But it lists the Potato Salad project, which may have started as a goof but has proved to be a crowdfunding gamechanger, so you never know.

Fraudsterism swings both ways

It’s worth acknowledging that it’s not just project creators shirking their responsibilities and threatening to taint the industry as a whole. Last year we first heard about a guy named Encik Farhan who abused the system by working within the system.

According to one report at the time, this guy (who had several aliases) backed over 100 campaigns, at large dollar amounts, only to dispute the charge once the reward shipped. He did it using a perfectly standard “chargeback,” whereby Amazon will refund a customer’s money if there is a problem with the product. So he got a free reward.

The loss of the planned income plus the cost of the reward plus shipping proved to be disastrous for many project creator, not to mention that the chargeback can also put the funding total below the funding goal which, on a fixed funding campaign means many campaigns that thought they were a success were done for.

Another scammy pattern that emerged is backers who take back their pledge minutes before the campaign closes. Kickstarter recently updated their terms of use to address the issue. You can read it in full here.

But here’s what it has to say this topic:

You can change or cancel your pledge at any time before the project’s funding deadline (with one exception). You can increase, decrease, or cancel your pledge at any time during the campaign, with one exception. During the last 24 hours of the campaign, you can’t decrease or cancel your pledge without contacting customer support first — if that action would drop the project below its funding goal. Once the project has been funded, you can only cancel or change your pledge by making special arrangements directly with the creator.

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