Crowdfunding Scam – What Is It and How to Avoid Falling Prey

Crowdfunding has been around for quite some time now, and has allowed many excellent products and solutions to flourish. Today, it is a full-fledged industry with an estimated $1.41bn market volume in 2023 alone, and allows investors to achieve significant profits while contributing to advancements in various fields.

As with any investment market, crowdfunding is not without its risks and drawbacks. These, unfortunately, include various online swindlers and hustlers looking to make a quick buck on your expense.

See the remainder of our article to learn more about this lucrative field, and how to avoid falling into the pitfall of crowdfunding scam.

What is Crowdfunding?

It is a modern way of securing investments for various types of projects. Unlike relying on traditional methods like bank loans or financing ventures, crowdfunding works by pooling relatively small contributions from a large number of people.

If that’s too much to wrap your head around, imagine a community fundraiser, for instance. Crowdfunding functions much in the same way, yet it’s different in the sense that it almost exclusively works via dedicated online platforms, which, in turn, charge a fee.

Most Popular Crowdfunding Platforms

No matter whether you’re looking for project funding or a prolific investment opportunity, you should familiarize yourself with several different platforms. Each of these comes with different pros and cons, making them shine suitable for a different project niche:

• Indiegogo – The best overall platform for crowdfunding investment, this site boasts the best track record. Since 2004, helped fund more than 800,000 success stories.
• Mightycause – Certainly the best site for nonprofits to raise funds. Founded in 2006, this platform charges a very low processing fee of 1,2%.
• StartEngine – One of the new arrivals to the scene, this firm is best for equity investing. Still, it boasts more than a million users and over 500 successfully funded companies.
• GoFundMe – This company helps fund the average Joe and nearly any project. With a 0% platform fee and 24/7 support, it is your go-to platform for personal fundraising.
• Patreon – Many creative professionals use this service for long-term funding. One of the major pros, subscription-based funding, unfortunately, comes at a high cost ranging from 5% to 12%.

Definition of a Crowdfunding Scam

Basically speaking, crowdfunding fraud is any type of fraudulent activity that happens on crowdfunding platforms. While relatively easy to define, these sorts of con schemes are difficult to spot without prior research.

Take a look at these most common fraudulent strategies before you decide to invest:

• Fake projects – These projects exist solely with the purpose of defrauding investors. The most insidious of these are Impact Guru scam schemes, where swindlers pose as patients in need of funds for expensive medical treatment.
• Crowdfunding pyramid scheme – This age old strategy has found its way into crowdfunding as well. It takes the form of unrealistically profitable projects that offer extremely large returns for relatively small pledges. The tricksters behind the scheme may actively encourage victims to find further victims, promising bonuses.
• Misuse of funds – The scheme revolves around abusing the raised funds for personal expenses rather than for the intended purpose of development or delivery of the final product.
• Non-delivery – Unlike failed projects, these schemes purposely deny the backers their share of profits. Many GoGetFunding scam operations function this way.
• Deceptive campaigns – Scammers are known to overstate the performance or profitability of their company or product in order to attract backers for crowdfunding, and pocket the funds before disappearing.
• Unlicensed enterprises – Some companies intentionally omit proper registration or licensing by the relevant regulators or hide the involvement of patented material.
• Pseudo platforms – In this scenario swindlers create lookalikes of popular platforms, or assume the identity of a known creator in order to bait investors.

Risks Related to Participating in Crowdfunding Projects

Not all risks related to this form of investment are related to crowd funding fraud. Without well-developed regulation or auditing mechanisms of the traditional financing channels, these democratized financing projects cannot guarantee success.

Failure to secure sufficient funding or an error in estimating costs can spell doom for any project. Many projects are reward-based, and backers do not receive a stake in the company even if the idea turns out to be a success.

Low liquidity causes additional risk, meaning you can’t easily transfer your investment if you need to. Projects can also be impacted by external factors such as economic downturns, unexpected competition, changes in consumer interest, or varying industry trends.

Examples of Real-Life Crowdfunding Scams

Sometimes, it’s difficult to recognize the true fraudsters among the sea of various failed projects. This is exactly the ploy the con artists are going for, with the uncertainty and hesitation giving them more time to disappear.

There are numerous confirmed fraudulent projects, however, that have managed to steal an incredible amount of money. Let’s have a look at some of the biggest crowdfunding scams:

• Lily Drone – The company used deceptive advertising to raise as much as $34 million before filing for bankruptcy, prompting the Superior Court of California to file a lawsuit.
• Skarp Laser Razor – Violating KickStarter policies to raise $4 million and promote a futuristic laser shaver that never dulls. The idea was presented through computer-generated imagery without a functioning prototype.
• iBackpack 2.0 – This one should be easy enough to make – a backpack that charges your phone and features a bunch of tech gizmos like WiFi. The project secured nearly $800,000 on multiple platforms before collapsing without a single delivered product.
• Fontus Self-Filling Water Bottle – Allegedly being able to condensate water from thin air into a refillable bottle, this physics-defying project stole over $340,000 before the company filed for bankruptcy.
• Pluck n’ File – This easy to achieve crowdfunding project saw its own creator becoming a victim of identity theft after a copycat funding campaign was launched on another platform.

How to Protect Yourself?

Crowdfunding frauds are difficult to pinpoint because most of them either promise the development of emerging technologies or provide solutions to niche, little-known problems.

Projects that have no functional prototypes should raise some concerns, and so should those that are vastly superior to the competition without a discernible reason. If you’re not sure if some idea would work in reality, seek an opinion from an unaffiliated expert.

As with any business, transparency is key. Companies that avoid disclosing the names of their founders, or the personnel involved with development of their projects is a red flag, as are the charities that do not list their beneficiaries. Finally – be sure that you’re dealing with the actual creator and platform, and not an impostor.

What to Do If You Fall Victim to an Investment Fraud?

Various swindlers will try their hardest to avoid returning their ill-gotten money. There are means by which you can get your investment back, though.

Contact our legal team via the live chat for more information. We are available 24/7 via the live chat, and our first consultation is absolutely free of charge.