Online crowdfunding is a relatively new phenomenon, but the leading websites have quickly gained wide name recognition and become common tools for raising and donating money online.Still, there are some potential pitfalls. The platforms have faced little regulation and few legal challenges to strengthen consumer protection.Here’s what you need to know before contributing to sites like Kickstarter, GoFundMe and Indiegogo.Consumers beware. Crowdfunding websites dispute the notion that anyone can easily launch a scam on their platforms. GoFundMe says it has “a zero-tolerance policy for fraudulent behavior,” claiming that less than one-tenth of 1 percent of all campaigns fall into that category. According to a study commissioned by Kickstarter, more than 90 percent of project creators follow through on their promises. A spokesman for Indiegogo said fraud is rare but did not provide specific data. Nevertheless, state and federal authorities have taken several people to court, alleging they misled consumers on crowdfunding platforms. Douglas Cumming, a professor at Florida Atlantic University who reviewed campaigns on Kickstarter and Indiegogo between 2010 and 2015, identified 207 cases of possible fraud out of more than 100,000 projects.
Look for red flags. Cumming said potential donors should be leery if a project creator has no prior crowdfunding activity, doesn’t have a presence on social media and has typos, confusing language or poor wording in written descriptions. Ira Rheingold, executive director of the National Association of Consumer Advocates, encourages people to research before donating to any causes or projects. “Just because it’s up on a platform that you may have heard of does not mean that those (using the platforms to raise money) are legitimate,” Rheingold warned. “Be wary of promises that sound too good to be true, and make sure that you do your own independent investigations.”When will your credit card be charged? That depends on the platform and the type of crowdfunding. Kickstarter, for example, allows users to raise money only through an “all-or-nothing” model, meaning creators have to set a fundraising goal, and they only get to keep the money if that threshold is met. A donor’s credit card is charged only if the project is fully funded after a one-month fundraising period. On Indiegogo, however, charges are put through right away. Creators can use the “all-or-nothing” method, or they can opt to keep the money even if they don’t meet their goal. As a result, charges on Indiegogo are refunded only if an “all-or-nothing” campaign is not successful. Kickstarter and Indiegogo impose fees on creators based on the total money raised; GoFundMe does not.It’s unlikely you’ll get a refund. Refund policies vary by platform, but in general, they are issued only in rare circumstances, if at all. Kickstarter does not offer refunds if a project has been fully funded, though it allows creators to approve them. In 2016, GoFundMe rolled out a refund policy that applies in limited cases, including if a campaign organizer or beneficiary is criminally charged in connection with the fundraiser. On Indiegogo, contributors can request a refund only if the fundraising period is still ongoing, a “reward” for giving was not delivered and the money has not been sent to the creator. Creators also can authorize a refund if they already have received the money.Alert proper authorities if you suspect fraud. Consumer advocates suggest that people report potentially fraudulent activity on crowdfunding websites to their state attorney general or the Federal Trade Commission. The FTC and the attorneys general in Washington and Oregon have initiated legal action against creators on behalf of consumers. The Illinois attorney general’s office also collects complaints and typically will help consumers by mediating the dispute out of court, according to a spokeswoman.