Why you should donate to crowdfunding campaigns with caution

dangers-of-crowdfunding

You log on to social media and see that yet another one of your friends has started or shared a crowdfunding campaign. These campaigns, through Kickstarter, GoFundMe, YouCaring and other sites, crop up when someone is dealing with an unexpected expense or even trying to fund a vacation.

But how safe is it to grab your card and donate to these campaigns, and how safe is it to set up a fund drive yourself?

In 2016 alone, Kickstarter launched 57,515 projects, but of those, only 9,235 were successfully funded. Its top competitor, Indiegogo, does not have Kickstarter's stipulation that the projects be creative in some way, and had more than 2 million backers from 230 countries in 2016.

As the Kickstarter and Indiegogo statistics show, there's a huge risk to crowdfunding projects for both backers and project managers, and the outcomes are not always good.

Many complaints of ‘scampaigns'
At sites such as Kickscammed and GoFraudMe you'll see countless reports of crowdfunding initiatives that turned out to be frauds. These "scampaigns" generally take one of two forms.

In the first scenario, which generally happens with Kickstarter or Indiegogo, the donor backs a project and the product or reward fulfillments are instantly hit with endless delays. Eventually, the project coordinator stops communicating with the backers. Then, the project coordinator has your money, and you have nothing to show for it.

The second scenario typically happens with GoFundMe campaigns, in which donors can fund events like a prom, personal vacation or treatment for a terminal illness. In this case, the person sponsoring the fundraiser does not put the funds toward their intended use.

The case of Ashley Lively is a textbook example. The 20-year-old from Tennessee set up a GoFundMe page for treatment of her stage 4 pancreatic cancer in April 2016. She raised $8,000 and used more than $1,000 of it before it was discovered she didn't have pancreatic cancer.

So how can you avoid getting entwined in these common scams? Fortunately, there are a few red flags to watch out for.

‘Scampaign' warning signs
Many fake campaigns have obvious signs, such as the use of stock photography, or a description that is short on specifics or the details are inconsistent, or the product's premise seems scientifically impossible.

If you suspect the campaign is a scam, there are several things you can do, including investigating the project manager's legitimacy.

"Companies or individuals who have a very sparse social media profile or no social media presence prior to the campaign are an instant red flag," says Craig Asano, founder and executive director of the National Crowdfunding Association of Canada (NCFA).

Similarly, he says, if there are no supporting links or documentation associated with the product outside of the campaign, that's a huge warning sign.

There are simpler ways to spot a scam, too. For instance, if the claims of a company seem overly ambitious for the product they are trying to launch, then you probably shouldn't get involved in funding it.

If it's an individual looking for donations to fight an illness, GoFraudMe recommends doing a reverse image search.

"If you're on Chrome or Firefox, it's as simple as opening up a Google Images tab in your browser, then click and drag the photo you want to check into the search box," the website states. "If you perform a reverse image search, and pictures used on the GoFundMe page show up on multiple other websites, it's pretty safe to say you have a scammer on your hands."

Campaign starters are not immune to risks
Backers aren't the only ones whose funds are at risk when it comes to crowdfunding; project managers could end up losing money, too.

In 2013, a backer calling himself Erick Farhan donated more than $1,000 to more than 100 different campaigns. He then waited for the goods to ship, and once he received them, he pulled his donation by initiating a chargeback with his credit card company.

Not only did he receive a refund (and keep the goods), but the project managers were stuck paying the transaction and chargeback fees. Plus, since Farhan's donations often made up a significant portion of a campaign's funding goal, a project often would go from "funded" to "not funded" as soon as he disputed the charge.

"The crowdfunding industry, credit card companies and payment providers like PayPal started looking at this issue a lot more closely because there was an increasing volume of chargeback fraud," says Asano. "So, they created safeguards, and now the chargeback issue is something the community is aware of and the large payment providers are able to stop it."

In June 2016, PayPal updated its user agreement to reflect that payments to crowdfunding sites are no longer eligible for reimbursement under its purchase protection agreement.

"This is consistent with the risks and uncertainties associated with contributing to crowdfunding campaigns, which do not guarantee a return on investment," PayPal told CNBC at the time.

Getting a refund from a scam
Just because PayPal doesn't offer your money back, doesn't mean you've lost out entirely if you've funded a "scampaign."

GoFundMe has a money-back guarantee up to $1,000 if the donor believes the campaign description was a misrepresentation of the campaign, the money never went to the intended beneficiary or the project manager is charged with a crime related to the campaign. If you are a beneficiary and you failed to receive funds you were entitled to, GoFundMe will reimburse you up to $2,000.  

Kickstarter does not offer refunds; it expects project managers to do that. However, it will suspend a project if enough members of the community report it or if it violates Kickstarter's Terms of Use.

If you pay for a campaign donation with your credit card and it turns out to be a fraud, you can still launch a chargeback with your card issuer.

Though there are many risks with crowdfunding, donors and beneficiaries are much more educated than they once were, and there are more safeguards in place now. This is reflected in Kickstarter reporting chargebacks on only 0.03 per cent of its projects.

For his part, Asano remains optimistic about crowdfunding's future.

"These are just growing pains, but overall the future of crowdfunding as a mechanism for investment is stronger than ever," he says.

See related: Is there privacy in a cashless society?, How to avoid grey charges on your credit card
Published March 30, 2017

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