From independent films to funerals, crowdfunding campaigns have altered the way some entrepreneurs fund their dreams. Los Angeles is the top city in the United States for the number of projects that have been fully funded, according to The Crowd Data Center.
The City of Angels is home to creative minds of all kinds. Many of these innovators look to crowdfunding to overcome their dreams' financial constraints. But as the popularity of crowdfunding platforms soar, these websites are being exploited by skilled scammers.
"People are taking advantage of the fact that there are not a whole lot of laws," crowdfunding strategist Letitia Wright said.
"Crowdfunding is the wild wild West."
Background on crowdfunding
Crowdfunding is a type of funding where so-called "creators" solicit money from the "crowd." These "backers" give money to the project creator via crowdfunding platforms, typically found online.
A creator will build their project, launch the campaign, receive funding from backers and oftentimes send rewards or perks in exchange for different contribution amounts.
The crowdfunding industry has seen enormous growth over the last few years. Hundreds of crowdfunding platforms helped raise $2.7 billion in 2012, according to the Crowdfunding Industry Report by Massolution.
But the crowdfunding model is relatively new and the current laws and regulations may not address the issues that could emerge.
Federal Trade Commission takes action
In an attempt to curb fraud and deception on these sites, the Federal Trade Commission has taken legal action against a project creator who spent backers' money on personal expenses, according to a June press release. This case is the federal agency's first case involving crowdfunding.
Erik Chevalier, the defendant, raised more than $122,000 from 1,246 backers via a Kickstarter campaign to produce a board game in 2012. After 14 months, Chevalier announced that the game would not be produced and that the backers' money would be refunded. Only a few of the backers have received a refund, according to court documents.
The FTC's complaint against Chevalier states that he used consumers' funds for rent, personal equipment and licenses for an unrelated project. The fraudulent crowdfunding campaign resulted in a $111,793.71 judgment that "will be suspended due to Chevalier's inability to pay." Attempts to reach Chevalier for comment were unsuccessful.
"Consumers should be able to trust their money will actually be spent on the project they funded," said Jessica Rich, Director of the FTC's Bureau of Consumer Protection.
The case against Chevalier is part of the FTC's commitment to examination of issues related to financial technology (FinTech) and assessing the benefits and risks that these new technologies pose to consumers.
Crowdfunding scams are "an area that we [the FTC] continue to have interest in," Wong said.
However, the FTC would not comment on whether or not it has other cases against alleged crowdfunding con artists in the pipeline.
"We may or may not have investigations open," she added.
Avoiding crowdfunding scams
Liability is a point of contention between those who give money and the crowdfunding sites. Who should be responsible for policing scammers?
As a crowdfunding strategist, Wright teaches project creators how to raise money online, guiding clients through the process before, during and after launching a campaign.
"When you sign up to give money through any of the websites, your contract is between you and the person you gave the money to. The Kickstarter, the Indiegogos, all of those websites have a clause in there saying that they're not responsible for that," Wright said.
Like any other actor in the marketplace, crowdfunding platforms have "an obligation to act fairly and non-deceptively," said Helen Wong of the Bureau of Consumer Protection and the lead attorney on the Chevalier case.
Crowdfunding strategist Letitia Wright teaches project creators how to raise money online. Wright discusses how consumers can avoid becoming victims of online crowdfunding scams. Video link here
Bryan Sullivan, an LA-based lawyer, does not see it that way.
"I think that there really should be no obligation for the platform itself to check on this," Sullivan said. "That would be like requiring eBay to check every single person selling the product to make sure they're legitimate."
Kickstarter declined to comment by email when asked about the methods it uses or suggests for preventing fraud on its platform.
GoFundMe's Media Director Kelsea Little said the platform investigates each complaint of fraudulent activity that it receives.
"In the rare event that we do find fraudulent activity on an account, we have the power to remove the account, refund donors and ban the user from ever signing up again," Little wrote in an email.
The Indiegogo team offers an online checklist in its Help Center article titled "How to Evaluate a Campaign."
"Your funding goes to support an idea, not buy an existing product, and like anyone getting in on an early-stage project, you accept the risk that it might not come to fruition," the Indiegogo team wrote in an email.
The Better Business Bureau advises that people do their research before investing or donating their hard-earned dollars. Researching the crowdfunding site, checking legal records and doing a thorough background search online are a few ways customers can avoid becoming a scamming victim, according to the BBB.
AGENT Smartwatch on Kickstarter
What's a consumer to do when doing your homework is not enough? One Southern California man who believes he is a victim of a crowdfunding scam is Michael Wiener.
In 2013, he paid $200 to back a project claiming to deliver its supporters a "next generation smartwatch with brand-new technology," according to the project's Kickstarter page.
It is now more than two years after the campaign's start date and Wiener and the other 5,684 backers — who gave more than $1 million collectively — have yet to receive the AGENT smartwatch.
"This smartwatch will not be smart … If it comes out today, it's going to be two years behind the times," Wiener said. "Pretty useless, I would think."
To report ripoffs, scams or fraudsters and "help put the bad guys out of business," consumers can file a complaint with the FTC online or over the phone.
Wiener has filed a complaint with the FTC against Chris Walker, the project manager and campaign creator of the AGENT smartwatch.
He said that Kickstarter's Integrity team must hold creators responsible if they do not deliver what their campaign promises.
"The project creator has to have a legitimate project that they can create and Kickstarter needs to hold them to that … there needs to be some sort of recourse if they don't fulfill their obligations," Wiener said.
The crowdfunding platform encourages its creators to be honest and ethical while conducting business on the website, according to Kickstarter's Trust and Safety guidelines.
"Personally it just feels like somebody stole $200 from me. I was just scammed out of it."
Attempts to reach Walker through his Kickstarter campaign page were unsuccessful.
Wiener says his experience with the AGENT smartwatch campaign has "absolutely" made him wary of backing other Kickstarter campaigns, although he has backed other projects since AGENT.
"I have backed some others since this, but I do my due diligence. I research the company and the individual," he said.Despite the positive influence crowdfunding sites have on Los Angeles' economy, filmmakers and donors are wary that the platform's legitimacy may be weakened by scammers and fraudulent users. Video Link here
LA's crowdfunding class
Scott Kim, an independent filmmaker in LA, described his personal crowdfunding campaign experience as a "failure." Kim created an Indiegogo campaign to finance a short student film he was producing. The campaign raised a total of $100 in funding.
Despite the lack of success with his own project, he said that he thinks that LA residents benefit from being able to fund their project independently rather than being backed by a major studio.
"This was the birthplace of film. We can't see it die out," Kim said. "Anything we can do to keep the projects in LA is a good thing."
Jeffrey Wang, an LA filmmaker who was able to fund an entire film with Kickstarter, believes that federal regulation would "certainly curb" the "free, artistic spirit of filmmaking."
Although Wang is aware that fraud exists on crowdfunding sites, he still feels comfortable contributing to campaigns.
"I hope that people use the platforms correctly, and don't abuse people's money and trust … A few bad apples kind of poisons everyone's perception of it," Wang said.