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Cheating in Crowdfunding

question Crowdfunding, Tools
How does a crowdfunding platform know if someone who is trying to fund a project is going to use the money collected for what he said he was going to use it? How does a crowdfunding platform know that someone is trying to cheat?


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  • Seth W Seth W May 30, 2012 05:13 pm GMT

    Crowdfunding platforms vary, but typically the answer to this is good old human investigation. Delving into the history of a brand or individual is sometimes a good way to gauge their trustworthiness, and the nature of the platform means that a lot of eyes are on these people. I would imagine that many investors do their fair share of research before they fund anything.

    Additionally, many sites have a system through which donors can rate the company they invested in. The utility of such a system varies; for a brand looking to make a single big score, it may not matter at all, but for a company doing the "long con" across many platforms, it could be a backbreaker.

    The short answer, then, is that most platforms do not have a systematic approach to validating their investees. They rely mainly on the investors to provide background checks and to hold the project coordinators to their word. You personally can help by always researching an organization before you donate, and rating them after the fact to show your support (or lack thereof).

    Source: I am a blogger specializing in crowdsourcing applications

  • Enrique Estellés Enrique Estellés May 31, 2012 10:30 am GMT

    Thank you very much Seth.

    What you explain makes sense. I just was wondering if there was an explicit way to ensure the accuracy of the projects... I see that there isn't.

    Thanks again.

  • Chris Chen Chris Chen Jun 01, 2012 03:56 pm GMT

    Hi Enrique,

    Fraudsters are prevalent and sophisticated. Each crowdfunding platform must use its own experience and systems to prevent fraud. Who the platform partners with for payment processing is also critical. A strong payments partner should have proprietary algorithms to verify identities and to detect suspicious activity. Even if the fraudulent account is opened, the payment partner should have the processes in place to limit the damage and to recover as much money as quickly as possible. Because the payments partner sees so many more transactions across multiple platforms, it has the ability to apply best practices much more readily. If you're starting your own website, make sure you understand the chargeback risks you face and how your payment processor can help to minimize that risk.

    Chris Chen

  • Enrique Estellés Enrique Estellés Jun 03, 2012 10:39 pm GMT

    Thank you very much for your answer Chris!!

  • Brian Knight Brian Knight Jun 05, 2012 04:14 pm GMT

    Hi Enrique,

    As has been previously mentioned, many crowdfunding sites do not have the resources to perform sufficient due diligence to prevent fraud. With the emergence of securities-based crowdfunding in the US companies specializing in due diligence (such as mine) are working to create "right-sized" due diligence programs for platforms to provide cost-effective solutions to this problem while allowing the platform to focus on what it does best. I'm not certain if this will catch on among the donation-based sites as well, we will have to see.


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