In years past, folks who had a new idea for a product or service, but needed some startup money to get it going, might approach a bank for a loan or maybe ask friends and family members to invest in their ideas. Today’s inventors and entrepreneurs have a new method for raising startup money through online “crowdfunding” sites.
These sites take the “friends and family” investment approach to a global marketplace. Instead of getting one or two large financial backers, a “creator” can collect thousands of small investments from people all over the world. The two largest sites that offer these crowdfunding platforms are Indiegogo and Kickstarter.
In many cases, the creator offers special deals for those who contribute to his or her project – a discount or early delivery of the product once it is launched are two common benefits offered.
Because many of the sites classify the contributions as gifts and not as transactions or donations, this presents interesting challenges when it comes to enforcing the Kansas Consumer Protection Act if a good or service promised is not delivered. The wording in the agreements states the giver is voluntarily giving the project creators money. Therefore, there is no consumer transaction agreement being entered in to - a prerequisite for KCPA protection.
The sites encourage project creators to follow through on the gifts or perks, but do not necessarily obligate them to do so. The sites further state a consumer is not entitled to anything just because they have given money. The sites that host these pages remove themselves from any liability; if the fundraising goal is not met, or, the fundraiser fails to follow through, even if the goal is met, there is no enforcement ability to deliver on the promises made.
In one instance, a young man started a campaign that promised to teach people how to develop apps for smart phones. The man raised $54,000 – surpassing his original goal of a couple thousand – but never delivered.
And just this month, a startup that raised $2.4 million on Kickstarter to manufacture a sleep monitoring device announced that it is shutting down.
The Federal Trade Commission has taken action against some creators who failed to keep promises made on crowdfunding sites. However, in many cases, authorities may be unable to locate the person who created the page. Even if the person is found, the money given to support the project may be long gone.
To avoid crowdfunding scams, do as much research as you can into the project you are supporting and the person who is promoting it. Find out if the person has had other successful projects in the past and ask yourself if the potential benefits of supporting the project outweigh the risk of losing your money.
If you suspect a crowdfunding page is a scam, use the site’s features to report it. If you’ve lost money to one of these scams, you can file a complaint with our Consumer Protection Division online at www.InYourCornerKansas.org or by calling (800) 432-2310.