Crowdfunding is a great way to raise capital from friends, family, and investors. In today’s world, there are more avenues than ever for reaching people and soliciting their financial support. Unfortunately, that also means there are more scams than ever. Crowdfunding fraud not only victimizes the individuals who are ripped off, but it also discourages investment in honest business ventures and thereby stifles the development of valuable goods and services.
If you have evidence of crowdfunding fraud, you can put an end to it by becoming a whistleblower. Whistleblowers who submit valuable leads to oversight agencies stand to receive a substantial reward for speaking up. Newman & Shapiro can help you put together a valid claim and negotiate a fair reward. Let us work with you to build the best case possible.
What Is Crowdfunding?
Raising capital for a business idea – a new product or service – once required several complex, time-consuming steps: creating a business plan, conducting extensive market research, building a prototype, and locating potential investors. The number of people who might give you an audience for your idea was relatively small. Banks, venture capital firms, and similar institutions who would be willing to listen to you are few and far between.
Crowdfunding dramatically upended these rules. Instead of seeking large capital infusions from a small number of investors, crowdfunding allows entrepreneurs to raise small amounts of money from a large pool of interested individuals. Reaching these investors is easier than ever, with social media and dedicated crowdfunding sites serving as useful tools to connect with people from all walks of life. On top of that, these investors have their networks of family, friends, and like-minded people. Crowdfunding has the potential to reach individuals and entities across the country or even on the other side of the world.
Creators – the entrepreneurs who start crowdfunding projects – sometimes offer rewards to their investors, or to investors who contribute over a certain amount. An example might be an exclusive update about the product, or the chance to be among its first users. Creators often post updates about meeting their funding thresholds, the progress of the project itself, or other news and information. This direct and ongoing communication with investors helps build trust and encourages others to get involved.
Equity-based crowdfunding is another form. Those who contribute capital to a crowdfunding project get to own a share of the company in return. This allows early investors to get in on the ground floor of unique ideas.
Crowdfunding platforms also cut down on the amount of work and time an entrepreneur has to invest in his or her business idea. No longer is it essential to develop the sort of detailed market research and product pitch that start-ups of yesterday relied upon to get their ideas off the ground. With crowdfunding, you can reach an endless supply of investors much earlier in the development phase of your product. New business ideas are sometimes just that – ideas – by the time someone opens a crowdfunding channel to reach people. Therein lies the risk, however, of fraud.
Types Of Crowdfunding Fraud
Although crowdfunding is useful for launching an innovative business idea, it also attracts dishonest individuals. Crowdfunding fraud happens in several different ways:
Campaign fraud. This occurs when a crowdfunding campaign solicits and accepts donations by misleading investors about the nature of the project or its expected outcome. Typically, the creator fails to deliver a product at all or delivers one that doesn’t match the details that were initially provided through the campaign.
Investor fraud. Here, backers of the project commit to investing in it to reverse their transactions later. In other words, they donate with the foreknowledge that they will be taking their own money back, or reversing the donation if an insufficient number of other investors step up. This leaves the project underfunded and usually means it won’t come to fruition.
Backer-creator fraud. In this scheme, the creator of the crowdfunding project donates to his or her campaign, either directly or through multiple false identities. This gives the impression of widespread support that is designed to encourage other backers to contribute. It’s difficult to detect this sort of abuse, although suspicious donor patterns and timing of the donations can suggest fraud.
Intermediary fraud. This happens when an intermediary website, like a broker, fails to complete a transaction. This fraud may aid either the creator or the investor side of the scheme but ultimately results in the money not arriving at its intended source. Working with an unreliable or unknown intermediary should raise a red flag to an innocent party.
Platform fraud. The crowdfunding site itself may be suspect. There are a number of legitimate, reputable crowdfunding platforms out there. Some entrepreneurs also use established social media sites to raise money for their projects. An unfamiliar or recently created platform should invite more scrutiny, but not all donors take the time to investigate the site.
Misuse of funds. Some scams are just modern-day variations of age-old ripoffs, like using the money for personal expenses rather than for the project. Investors don’t see a return and start wondering what happened to their donations. The project isn’t completed, and demands for refunds are not answered. Donating to strangers online will always carry at least this risk of fraud.
Equity-based crowdfunding fraud. As mentioned above, one way that creators lure investors to a campaign is with the promise of equity, or ownership shares, in the company that’s behind the project. In turn, donors may be guaranteed a share of future profits. But donors who give, thinking they will get a piece of the company or its returns, may find that all they’ve received is an empty promise or “investment” in a worthless or non-existent company.
Examples Of Crowdfunding Fraud
Crowdfunding is a relatively new and still developing method of raising capital. That means new scams are constantly popping up as regulators and others try to put a stop to the fraud. If you’re a potential whistleblower, it’s important to know what crowdfunding fraud looks like. Some examples of actual schemes include:
Erik Chevalier/board game. This was the Federal Trade Commission’s first complaint against a crowdfunding scam. Creator Erik Chevalier, who was also doing business as The Forking Path Co., solicited donations to produce a board game called “The Doom That Came to Atlantic City.” Using the crowdfunding site Kickstarter, Chevalier sought to raise $35,000 in capital. He promised backers a number of rewards, such as a copy of the game or specially designed pewter game figurines. Over 1200 backers contributed approximately $122,000. Some paid over $75 in hopes of securing one of the highly prized figurines.
Chevalier regularly posted updates about the project, but it was never completed. After 14 months, he announced he would be canceling the campaign and refunding donors. However, he did not refund the donors, nor did he deliver on the promised rewards. Chevalier used most of the money on personal expenses that had nothing to do with the project, such as rent. He even used some of the money to fund an unrelated project.
As a result of the FTC investigation, Chevalier reached a settlement agreement that prohibits making any future crowdfunding misrepresentations and requires him to make good on any refund policies. A nearly $112,000 judgment was also imposed.
Ed Nash/card game. This was Washington State’s first consumer protection lawsuit targeting a fraudulent crowdfunding operation. Creator Ed Nash and his Tennessee-based company, Altius Management, raised over $25,000 from 810 backers to create a card game. This was well over the stated fundraising goal of $15,000, meaning that he was required to deliver the game to backers. The estimated delivery date was December 2012, but that deadline came and went.
Months went by, and angry donors demanded to know what was going on. A lawsuit alleged that Nash and his company failed to communicate with investors after July 2013. The Washington State Attorney General’s Office has sought restitution of up to $2,000 per violation, along with civil penalties and attorney’s fees.
Ryan Grepper/Coolest Cooler. In Oregon, a project to develop coolers ran into trouble when the creator, known as Coolest Cooler, failed to deliver its product to 20,000 waiting customers. Ryan Grepper started the project in July 2014 and quickly surpassed the $50,000 fundraising goal. The company beat Kickstarter’s fundraising record by reaching over $13 million by August 2014. Shipment of the coolers was to begin in February 2015.
But as the date approached, it became clear this goal would not be met. Grepper continued to promise the coolers would be shipped. He then announced a “phased rollout” that was delayed by strikes and other production problems. By the spring, there were more delays, manufacturing costs exceeded the initial projections, and the company asked donors for more money. The product began appearing for sale on Amazon although many backers never received their coolers.
In September 2016, the Oregon Justice Department started investigating the project. In 2017, Coolest Cooler settled with Oregon. It was required to deliver the coolers to over 800 customers still waiting.
Douglas Monahan/iBackPack. This Texas project raised money on the promise of high-tech backpacks and related items. Douglas Monahan and his company, iBackPack of Texas, LLC, used four crowdfunding campaigns to raise over $800,000. The money was committed to developing a number of products, including a backpack used for charging laptops and phones.
The project missed delivery dates but continued raising money through subsequent crowdfunding campaigns. Throughout the various fundraising efforts, iBackPack promised it was using the money to develop the product. It constantly updated consumers with information that turned out to be false. This included news about deliveries that were never completed.
The FTC determined that most of the money was used for personal expenses and additional marketing efforts for the products. Monahan reportedly even threatened his buyers when they complained. The FTC, along with the State of Texas, filed suit over the campaign.
Warning Signs Of Crowdfunding Fraud
Based on the above scams, and others, there are several warning signs that would-be investors should be on the lookout for when they are asked to donate to a crowdfunding campaign. Potential whistleblowers should also be aware of these so they can know when to take action:
Vague promises. Assurances such as “we’ll be delivering the product soon” or “production is on track” are difficult or impossible to verify. They provide no real benchmarks of progress and are often designed to delay the inevitable failure of the project.
Excuses. Production delays happen, but repeated excuses for why a good or service isn’t being completed should set off an alarm. Unscrupulous creators often bring up personal reasons such as “emergencies” or illnesses that may simply be made up.
Refusal to honor refund requests. After an unreasonable delay, some investors will start to demand their money back. Creators may ignore these requests or promise to return the money and never do. The campaign may even change its policy altogether, which is a sign of trouble.
Negative reviews. Dissatisfied investors and customers often complain first to the particular crowdfunding platform being used to perpetuate the fraud, rather than to the government. When these complaints and bad online reviews start showing up, it becomes clear something is going wrong.
Requests for more money. It’s not unusual for production costs to exceed projections. But requests for additional capital, especially when promises are being broken and products are not being delivered, should be considered suspect. Be wary of projects that ask for significantly more money or repeatedly solicit additional donations when benchmarks are not being met.
Why Whistleblowers Are So Important
Legitimate crowdfunding projects may take an extended amount of time to complete. Developing a new good or service isn’t easy or fast, and there can be manufacturing delays, unexpected costs, problems with testing the product, and much more. However, this expansive development timeline also offers plenty of room for fraud. Unscrupulous creators have a great deal of time to misuse funds and continue defrauding investors.
Also, it’s difficult to verify the information being presented by the creator. Updates may sound good, but how do you know a project is coming to fruition? After all, investors are dealing with strangers on the internet based on little more than a promise of something innovative. Tracking the money that’s donated is basically impossible, so you don’t really know how much is devoted to development.
By the time the government catches up with a crowdfunding scam, it may be too late. If the money has already been spent, there’s little chance the government will get it back. For example, the nearly $122,000 judgment penalty imposed in the Chevalier board game case was suspended due to Chevalier’s inability to pay. Whether the defrauded investors will ever get their money back is uncertain at best.
Whistleblowers have a chance to stop these scams long before they reach this point. As with any fraud, the longer it’s allowed to continue, the less likely investors and donors will be made whole. But those with inside information about a dishonest creator or company can put an end to it. There’s even the possibility of getting all or most of the defrauded funds back if the scheme is identified and stopped quickly. That’s where having a dedicated whistleblower attorney is so important.
Contact Our Crowdfunding Fraud Whistleblower Attorney Today
If you have evidence of a company or individual engaged in a fraudulent crowdfunding campaign, we want to hear from you. Jeffrey Newman has dedicated his firm’s practice to helping whistleblowers expose and stop several scams. It starts with getting the attention of the FTC, Securities and Exchange Commission (SEC), and other responsible regulatory agencies. Remember, these governmental bodies are busy investigating other matters and they have limited resources to devote to stopping fraud. So to make a successful whistleblower claim, you need to put together a case that gets the government’s attention.
Working with Newman & Shapiro, we can identify and produce the evidence needed to support your complaint. We understand what the FTC, SEC, and other agencies are looking for when it comes to exposing fraud. You may be eligible for a whistleblower reward if your claim leads to enforcement action against the wrongful party. But the law rewards those whistleblowers who report the activity first, so time is of the essence when pursuing a claim.
Our team understands how to negotiate the maximum whistleblower reward available under law. The government considers many factors when it comes to issuing rewards, which is usually some percentage of the money recovered. We can also help protect you from being punished by your employer by taking legal action to enforce any applicable anti-retaliation laws.
Honest crowdfunding campaigns help the economy and contribute to the marketplace of goods and services. But fraud destroys the trust necessary to raise capital for these projects. Help combat this growing problem by becoming a whistleblower. Call Newman & Shapiro today to learn more.