How Not to Fall into a Trap: Fraud Schemes on Crowdfunding Platforms

Crowdfunding is called the organized collection of funds on the internet, involving various users supporting a specific idea. 

This procedure has a certain time limit, meaning funds are collected over a specific period, after which the collection is closed.

To organize fundraising, it is necessary to approach special platforms or organizations that help facilitate fundraising by providing their resource or website to organize crowdfunding:

• an initial idea is needed;
• relevant documents;
• disclosure of the goal and objectives;
• calculation of project implementation stages;
• attractive advertising with a request for help.

Crowdfunding Fraud

For the collection process to be effective, it is necessary to engage in its promotion and dissemination. In most cases, independent crowdfunding is carried out via advertising on social media pages. It also doesn't hurt to use popular platforms where a large number of investors can be found. 

But do not forget that this scheme is very popular among fraudsters, who carry out fake collections by coming up with various pretexts for collecting funds. They create fake videos and photos to confirm the collection, for example:

• for treating a sick child,
• opening an animal shelter,
• providing housing assistance to a large family,
• purchasing goods for orphans and other stories.

Fake Projects

To lure victims and collect more money, fraudsters invent incredible projects, new technology, or video projects, creating incredible hype around them. Believing in the project, investors give away their money and may receive reports from the fraudster on results and work done, which are naturally fake. But in most cases, fraudsters simply close the collection and disappear with the money. It is quite difficult to regulate this process legally, and investor protection against fraud is minimal here.

Fraudsters also use other people's ideas to collect funds, supposedly for their project. They release startups that they have stolen. Scammers communicate with project creators as investors, learn a lot of useful information about it, and simply copy ideas by posting them on the platform where crowdfunding is conducted or attract private investors. 

Fake crowdfunding platforms may preliminarily request various personal information from investors, which may include:

• passport data;
• place of registration;
• phone number;
• bank card number with additional details.

They argue that such information is necessary for the transfer of funds. In fact, fraudsters use this information to access victims' accounts to steal the funds accumulated on them.

Investor Protection

For crowdfunding, it is necessary to look for verified and legal platforms, as they offer more guarantees. Here, settlements are made between the entrepreneur and the investor using special nominal accounts. The resource operators control the fulfillment of the obligations agreed upon by the parties, and they also conduct a company check before allowing it to collect funds. 

Thanks to certain investor protection laws, there is an opportunity to safeguard investments by limiting the maximum level of investments over one year, and the investor has the right to receive information about the person involved in attracting investments and their offer.

Information about the person involved may include:

• identification details;
• key characteristics of their activities;
• information about the rating on the investment platform;
• information about rights and management bodies;
• access to the annual financial report and audit opinions.

The investor also receives information about crowdfunding, which should include:

• a description of the project itself with terms and offers;
• capital attraction;
• information about experts involved in assessment and monitoring;
• the implementation of this project;
• study factors that could negatively affect project implementation;
• profit payout realization;
• complete information about possible risks.

Crowdfunding Platforms

1. Kickstarter — a good crowdfunding platform for work.
2. Patreon — a superb crowdfunding platform for project creators.
3. Indiegogo — an equally pleasant platform for investment.
4. Crowdfunder, Shopify — reliable crowdfunding applications for online stores.
5. GoFundMe — a convenient crowdfunding site for personal fundraisers.