One of the most commonly asked questions about crowd funding relates to the safety of the pledges made. “What stops the campaign owner simply running away with the funds, and not delivering the rewards?”. The simple answer until now has been “Nothing…….Other than the long arm of the law”. The world of crowd funding has always been built on an idealistic and trusting platform of community spirit, but a number of recent cases have added comfort to all potential backers by showing that most governments will not tolerate crowd funding theft.
Crowd funding is conducted on a medium that has perhaps the best memory of all things – the internet. Given that most of those who indulging in either raising or pledging funds to campaigns are somewhat tech-savvy, the internet is a great place to research campaign owners, and to get feedback about the campaign and its proponents. The more responsible intermediaries (crowd funding platforms) will have in place some form of probity so that the money trail can be tracked, and the individuals who conduct campaigns will have to prove some form or legitimacy as to their identity, if not their bank account and location.
The very essence of crowd funding also has its own built in protection mechanism. The success of crowd funding is based on a campaign typically receiving its initial validation and support from those known to the campaign owner. It is his “first tier” that legitimises the campaign, and creates a touch point to a broader community who may not know the campaign owner themselves, but through the actions of the first tier, the “second tier” or “friends of friends” become involved. From there, it is the broader community (“third tier”) that buy in once sufficient momentum and validation have been established.
But just as there will always be methods for protecting backers, there will always be the exceptional few who try and circumvent and rort the system. It is in such cases that legislators around the world are now showing the strength to pursue offenders and send a message to the industry that fraudsters will not be tolerated. Recently, the Washington State Attorney General’s office ordered monies to be repaid by the Asylum Playing Cards campaign on Kickstarter. Whilst the verdict went virtually undetected by media outlets, it was the first case of its kind to be resolved under the Consumer Protection Act. This comes just one month after the Federal Trade Commission settlement of its first crowdfunding fraud case in which they ordered Erik Chevalier to repay the $122,000 he received from 1,246 Kickstarter backers to launch a board game that was never produced.
Even before iPledg launched in 2012, founders of the platform engaged with the regulators – The Australian Securities and Investments Commission (ASIC), The Australian Competition and Consumer Commission (ACCC), and the Department of Fair Trading – to see what was permissible and required under law. Whilst, at the time, crowd funding was pretty much unknown and the laws around what could and could not be done were yet to be clearly defined, the emphasis was always on upholding the utmost in probity in protecting all concerned, especially the backers or those pledging support to campaigns.
Crowd funding is not a perfect system, and not without risk. However, by virtue of the community nature under which it operates, given its conduct is carried out on the internet with users that are relatively tech savvy, and recognising the way in which the regulators in most countries are treating any breach of consumer law, crowd funding continues to be one of the safest forms of commercial activity on the planet. Statistically, the incidence of fraud is rare given the volume of transactions, and you are more likely to be defrauded by traditional retailers or door knockers than by crowd funding campaigns.