Beware of crowdfunding opportunities

Created date

July 26th, 2019
A sign features the words Scam Alert

Crowdfunding sites are popular these days. Just about anyone in need of money, be it for charity or for a business venture, can set up an account on websites like GoFundMe, Kickstarter, or Indiegogo.

If all goes as planned, the money will start pouring in. Most campaigns raise about $7,000, but some campaigns have raised millions. 

Typically, business venture campaigns will offer some sort of premium to people who invest at a certain level. For example, a recent campaign on Kickstarter was seeking funds to launch a new line of waterproof shoes made from hemp called DopeKicks. If you donate $89, they will send you a pair of shoes when the product is ready for the marketplace. 

It might be a great deal because the company says it plans to sell the shoes for $160. However, what happens if they don’t succeed? 

As the kickstarted website clearly says, “Kickstarter does not guarantee projects or investigate a creator’s ability to complete their project. It is the responsibility of the project creator to complete their project as promised, and the claims of this project are theirs alone.”

In other words, if the project doesn’t succeed, you won’t get your hemp shoes and you won’t get your $89 back. 

How funds should be used

However, if a company initiates a crowdfunding campaign under the premise that the money will be put toward a particular project, they can’t use those funds for other things, like paying off the CEO’s credit card debt or buying Bitcoin with it as the Federal Trade Commission (FTC) alleges happened in the case of iBackPack. 

The FTC recently filed a lawsuit against iBackPack and its CEO, Daniel Monahan, alleging that the crowdfunding campaigns initiated on multiple platforms to develop a high-tech backpack were, in fact, scams.

According to the FTC, most of the $800,000 raised on crowdfunding sites went toward the CEO’s personal expenses and marketing efforts to try to raise additional funds. 

The last update posted on the Kickstarter page blames the delay on battery issues. While that may be true, it does not entitle Monahan or his company to use the funds for anything but the iBackPack project.

Angry investors, who were strung along over several years, complained to the crowdfunding sites about the project. No one had received any of the promised premiums. Some even reported being threatened when they contacted Monahan directly. 

“If you raise money by crowdfunding, you don’t have to guarantee that your idea will work,” says Andrew Smith, director of the FTC’s Bureau of Consumer Protection. “But you do have to use the money to work on your idea—or expect to hear from the FTC.”

If you feel you have been the victim of a crowdfunding scam, file a complaint with the FTC at ftccomplaintassistant.gov.

You should also contact your state attorney general and share your experience in the comments section of the campaign’s crowdfunding page to warn others who may be considering making an investment. 

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