2,920 crowdsourcing and crowdfunding sites
For a few weeks earlier this year, crowdfunding and the JOBS Act was a top story in the national news media that all the pundits were discussing, debating or screaming about, depending on which personality you flavor your morning coffee with.
Typically, the argument centered around the possibility for increased fraud that would follow when unaccredited investors are allowed invest in startups over the Internet. The common response from the crowdfunding community had something to do with the lack of fraud on existing crowdfunding platforms in Europe and donation-based sites like Kickstarter. The community on these platforms does and will continue to act as a self-policing force, the argument goes.
This week there's evidence that both sides could be right.
A case of apparent fraud was outed on Kickstarter when users of Reddit and other forums raised the red flag about a video game project titled "MYTHIC: The Story Of Gods And Men." Turns out that just about every aspect of the materials used to pitch the apparently imaginary project on the crowdfunding platform was lifted from somewhere else.
A long list of evidence that something was seriously amiss with MYTHIC began to circulate, and before the project had raised even $5,000 of its $80,000 goal, the owner canceled the campaign and began to remove other remnants of it from the Internet, including a Facebook page.
Perhaps most damning is the counter-campaign to name and shame MYTHIC's perpetrator, who calls himself Luke Westfell, "Creative Director of Little Monster Productions" in the pitch video. According to Alfonzo Burton of the Burton Design Group, the name of the guy in the video is actually Seth Westphal, a former employee of Burton's. Burton says Westphal stole images from the company and that the industry should be "on the look out" for him.
I've tried to contact Westphal and will update this post when I hear back.
With the project canceled, no actual funds changed hands, but the incident did further the conversation about fraud and crowdfunding. Kickstarter has enjoyed a heightened profile in recent months, with record-breaking campaigns like that of the ongoing Pebble smartwatch attracting millions of eyeballs and dollars. With the increased mainstream attention, it's likely that more scams will also pop up on the platform and others like it, just as crowdfunding naysayers have warned. MYTHIC seems to be a case in point, and the community acted as fraud enforcer just as crowdfunding proponents have long claimed.
But, as many on Reddit are still discussing, this particular bit of apparent fraud wasn't particularly sophisticated. As user pakoito put it:
The thing is, if they hadn't shown any pictures and it was only coherent text, or even if they had created their own content for some weeks just to get the money and run; we could have had some big problem. Heck, who knows which projects may have already done that.
When it comes to the JOBS Act and crowdfunding for equity, major platforms in Europe like Symbid have been operating for months fraud-free now, and when American platforms go live for the first time next year, the vetting process will be far more formal and rigorous than the community self-policing happening now on Kickstarter.( My colleague Eric Blattberg has all the details on the potential implications of the JOBS Act -- both positive and negative -- in a comprehensive piece posted here at Crowdsourcing.org)
That doesn't mean fraud will be impossible to undertake, but it will be difficult. One thing's for sure though - due diligence on the part of platforms, the crowdfunding community and investors will remain the best way to mitigate the risk, and there's still eight months to figure out exactly how those mechanisms will work in the United States.
- Eric Mack is a contributing editor for Crowdsourcing.org. He also currently contributes to CNET. In the past, his work has been featured by NPR, Wired, the New York Times and other outlets. You can contact him at email@example.com. Find him on Twitter and Google+. Also be sure to follow Crowdsourcing.org on Twitter.