The most common forms of crowdfunding today are based on donations and rewards. Many folks are raising funds over the Internet by just asking for charity donations or by promising some kind of reward, including priority shipment of a new product, in exchange for money.
Compared to equity crowdfunding (which typically involves the sale of securities), donation/rewards crowdfunding is relatively unregulated. [Donation/rewards crowdfunding is also known as "project" crowdfunding.]
Remedies for Fraud
Nevertheless, people raising money through donations/rewards crowdfunding can still be subject to review by government regulators. Example regulators are the Federal Trade Commission and state attorneys general, who investigate and punish fraudsters, particularly people who prey on the general public.*
Also, the people who contribute money to a crowdfunding project can sue to get their money back (plus maybe attorneys fees) if the project is fraudulent. The injured people might unite into a class action lawsuit against the people running the project.
Full Disclosure
Thus, people leading crowdfunding projects want to give themselves margin for error. They want to go to pains to ensure there can be no claim that the money contributors were tricked or cheated.
A key to avoiding any allegation of fraud is full disclosure of the facts, including facts that might turn off contributors.
Being Upfront about Negative Facts
Naturally, project leaders want to create compelling pitches – with videos or slideshows – that explain why a contributor should support the project.
But they should also be candid about negative facts, such as administrative fees that will be charged or risks that technical or logistical problems may delay or prevent delivery of a promised product.
Video Makes Good Evidence
On the Internet, video can be a very effective medium for making key points clear to common people. This video is an example of what could appear on a web page promoting a crowdfunding project:
I am not saying that crowdfund project leaders should put all disclosures in video. Text and FAQs are often adequate.
But select disclosures in video can be strong evidence that the project leaders were candid and honest.
–Benjamin Wright
Compared to equity crowdfunding (which typically involves the sale of securities), donation/rewards crowdfunding is relatively unregulated. [Donation/rewards crowdfunding is also known as "project" crowdfunding.]
Remedies for Fraud
Nevertheless, people raising money through donations/rewards crowdfunding can still be subject to review by government regulators. Example regulators are the Federal Trade Commission and state attorneys general, who investigate and punish fraudsters, particularly people who prey on the general public.*
Also, the people who contribute money to a crowdfunding project can sue to get their money back (plus maybe attorneys fees) if the project is fraudulent. The injured people might unite into a class action lawsuit against the people running the project.
Full Disclosure
Thus, people leading crowdfunding projects want to give themselves margin for error. They want to go to pains to ensure there can be no claim that the money contributors were tricked or cheated.
A key to avoiding any allegation of fraud is full disclosure of the facts, including facts that might turn off contributors.
Being Upfront about Negative Facts
Naturally, project leaders want to create compelling pitches – with videos or slideshows – that explain why a contributor should support the project.
But they should also be candid about negative facts, such as administrative fees that will be charged or risks that technical or logistical problems may delay or prevent delivery of a promised product.
Video Makes Good Evidence
On the Internet, video can be a very effective medium for making key points clear to common people. This video is an example of what could appear on a web page promoting a crowdfunding project:
I am not saying that crowdfund project leaders should put all disclosures in video. Text and FAQs are often adequate.
But select disclosures in video can be strong evidence that the project leaders were candid and honest.
–Benjamin Wright
*The Texas Attorney General essentially shut down the Texas Highway Patrol Museum because it misspent donated funds on liquor, cigars and fancy trips. Nathan Koppel, "Texas Museum Reaches the End of the Road," Wall Street Journal, Aug. 30, 2012.
Update: Inexperienced entrepreneur who raised $35K, but could not deliver, meets legal disaster.
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