The state regulators have been warning us of its coming for many months now, and finally the specter of crowdfunding fraud has reared its hideous head and it looks an awful lot like... your local neighborhood Dungeons & Dragons geek.

Google "crowdfunding fraud" and you'll find countless stories about the Pandora's box of scams that was opened when President Obama signed the JOBS Act and legalized crowdfunding in the spring. For many months, details of any actual cases of crowdfunding fraud on the existing donation-based platforms (and some equity-based platforms already operating legally in Europe) were dubiously absent from those search results.

Until now.

The state of Massuchussets has charged a Lowell man with one of the first cases of "crowdfunding fraud" that I've heard about.

But so far as I can tell, the case involves no fake names, imaginary products, shell companies or any of the other Hollywood trappings we might expect. In the case of Christopher Melville v. Massuchussets there will be no detailing the grand Madoffian conspiracy that bilked investors of millions. There will be only the image of one sad role-playing game shop owner and his ignorance of securities law.

Melville, who owns Tabletop Arena, solicited the sale of unregistered securities via Twitter, Facebook and his website. It seems the business owner asked young customers of his business and other interested parties cruising the business' social media presence to help him raise a quarter-million dollars to help move and expand the business.

It's notable that Melvile raised over $150,000 from at least 20 investors between 2010 and 2011, months before the JOBS Act was signed into law.

In fact, after reviewing the full administrative complaint on file with the Massachussets Securities Division, it seems to me that Melville's biggest mistake (of which there were clearly many) was calling his effort "crowdfunding" in the first place.

"Tabletop represented its fundraising efforts as 'Crowd-funding," reads the complaint. "Taken as a buzz word that meant only a green-light for internet fund-raising, Tabletop and Melville embraced the recently coined term without reserve."

Several things about this case are clear:

1. Christopher Melville broke the law and defaulted on illegitimate securities that he illegally solicited on social media and the web in a desperate bid to save his ailing business. Epic fails on his part.

2. Melville latched on to the enthusiasm around crowdfunding to make his pitch to his young audience, who probably were familiar with Kickstarter, but not so much with SEC regulations.

3. In turn, Massachusetts Secretary of State William F. Galvin also latched on to Melville's foolish use of the word "crowdfunding" to make an example of the guy. The day before announcing the "crowdfunding fraud" charges (I'm reasonably sure no such statute specifically citing 'crowdfunding' is actually on the books in the Bay State) against Melville, Galvin sent a letter to the SEC calling for strong rules on crowdfunding.

This is significant because Galvin is a member of the North American Securities Administrators Association (NASAA), the organization which has been the loudest opponent of crowdfunding from the beginning. In subsequent releases, NASAA has cited the Melville case as a prime example of the dangers of crowdfunding.

NASAA and Galvin are correct that crowdfunding brings with it the potential for scams and confusion. What they fail to point out is that potential exists with all investment vehicles. And unlike with the worthless fraudulent paper notes that securities scammers may have used in the past, crowdfunding as we know it and as it will take shape in the future relies on community and social media to get the word out on what's being offered.

So far, that community has been self-policing. The moment Melville called his campaign "crowdfunding" and stepped into the social media waters with it, he was as good as finished. 

I speak to the leaders of the burgeoning crowdfunding community in the largest economy on earth every day. They all echo NASAA's concerns about the risk for fraud and the need for protections, but the solutions they propose are based on consumer education and protection, not hysteria.

Is the risk that more clowns (or would it be warlocks?) like Melville will prey on the uninformed and Vitamin D-deficient worth derailing the incredible democratizing potential of equity crowdfunding?

Galvin and NASAA still seem to think so. Apparently they got spooked after staring into the face of crowdfunding evil -- a Massachusetts man sitting at a folding table with a deck of Magic: The Gathering cards and a pitch on how you can own a piece of your town's premier venue for Yu-Gi-Oh! tournaments.

 - Eric Mack is Managing Editor for Crowdsourcing.org. He means no offense to RPG fans. He's been known to roll the die himself. He has covered business, technology and politics for more than a decade for major outlets including CNET, CBS, AOL, NPR, Wired, and the New York Times.  You can contact him at eric.mack@crowdsourcing.org. Find him on Twitter and Google+. Also be sure to follow Crowdsourcing.org on Twitter.