Kickstarter fraud is a growing problem, and it's something any small business trying to raise money on crowdfunding sites should be concerned about. Kickstarter is “becoming the best way to get on Shark Tank. They’re recruiting heavily from Kickstarter and if you have a successful campaign, they want you on the show.” Those are Caleb Light's words. He's part of Power Pot, the company Mark Cuban invested in during season five. Cuban gave Power Pot $250,000 for 12% equity, plus 3% ‘advisory shares’ (shares Power Pot had already set aside), and a seat on the Board of Directors. Obviously, partnering with Mark Cuban is a big deal for any business, but without a successful Kickstarter campaign, Power Pot might never have had an opportunity to pitch in the Tank.
There are many other Shark Tank successes that originated on Kickstarter: Freaker, Urbio, Lumi, iPooch, Naja, and many more. The reason Shark Tank producers like companies with successful Kickstarter campaigns is there's already proof of concept. If a group of consumers are willing to part with their hard-earned money before a product is even made, it must have appeal. There are far more Kickstarter successes beyond those appearing on Shark Tank; it's become a viable way for businesses to raise seed capital from channels previously unavailable to them.
The JOBS Act promises to make Kickstarter and other crowdfunding sites even more viable for small businesses. Under the act, businesses would be able to sell equity in their business to individual investors. On the surface, it appears like a good law. More access to capital for small business has to be a good thing, right? If that's the case, why hasn't the equity segment of the law passed yet? The answer is an all too familiar refrain:
“We hear that the rules have been written by the staff and are just sitting in the in-box of the commissioners," says Sara Hanks, a former SEC attorney who is now chief executive of CrowdCheck, which plans to provide due diligence on companies raising money through crowdfunding. (from Bloomberg Business Week)
Washington bureaucrats sitting on policy decisions shouldn't come as a surprise to anyone, but the article in Bloomberg Business Week alleges fraud (at least securities fraud) hasn't materialized in crowdfunding platforms. That's looking at crowdfunding through rose-colored glasses. Fraud exists, but nobody seems to want to tackle the problem, including, in some cases, the crowdfunding platforms themselves. Organizations like Crowdfund Insider, a “leading news and information web site covering the emerging global industry of alternative finance including crowdfunding and peer-to-peer lending,” are actively investigating fraud, but what about businesses that are Kickstarter fraud victims?
What, besides shutting down fraudulent campaigns, can be done to protect people. There is legislation that protects backers, but does it have “teeth?” The answer is, it depends who you ask for help.
Kickstarter Fraud Victim Speaks Out, nobody listens
I had the opportunity to speak with a victim of a Kickstarter fraud. Dawn Sole, president of Creatively Convenient, LLC, created a patented, 4-in-1 multifunctional beauty tool called Pluck N' File which she sought to get crowdfunding for. A little over a year ago, Dawn submitted a campaign to Kickstarter to raise funds for Pluck N' File. Kickstarter turned down the campaign, so a year later, Dawn set up a campaign on Indie GoGo to raise funds. What happened next was a big shock.
After a business meeting, Dawn decided to Google her name and company name. She found that someone had copied her Indie GoGo campaign word for word and was successfully raising money on Kickstarter. The company in question, an unnamed UK entity, set up a five day campaign and raised a quick $25K, all with Dawn's company information! The irony is, Kickstarter allowed the fraudulent campaign after denying Dawn a year earlier.
Dawn got lawyers involved and Kickstarter pulled the campaign. In its place, they put a page with the following statements on it:
Description of copyrighted material: The photographs and copy are all owned by Creatively Convenient, LLC. The product is protected by US Patent D718497. The trademark PLUCK N FILE is owned by Creatively Convenient, LLC.
Description of infringing material: The images and copy are infringing. In addition, the product itself infringes US Patent D718497. The use of the name is unfair competition.
Pulling the campaign was the right thing to do, but Dawn feels Kickstarter and government entities created to protect people from fraud have done little more than give her lip service. Kickstarter wouldn't even acknowledge her, at least until her lawyer got involved. They never even said whether the fraudulent campaign received it's funds. “They swept it under the rug,” says Sole. “Most of the ‘little guys' out there simply back down because Kickstarter has deep pockets. You'd think a five day campaign would at least send up a red flag.”
Dawn got no satisfaction from a slew of government agencies, either. “I sent out 38 packets of information and only one person replied – a guy from FINRA was very sympathetic, but inquiries to the SEC, Florida Attorney General, the US Patent Office, and a bunch of other agencies were ignored. The thing is, Kickstarter is acting as a broker of sorts, they need to do their due diligence. If somebody at Kickstarter simply googled ‘Pluck N' File,' they'd have seen the campaign on their site was a complete fraud.”
The good news is Dawn's Indie GoGo campaign raised over $18K, but even though the fraudulent campaign was removed, Dawn feels her brand has suffered from the negativity associated with the episode. “People who find the campaign on Kickstarter and see the infringement statement think ‘what did Dawn do wrong?' It raises some negative feelings.”
Dawn's not taking this lying down, either. “These people engaged in criminal activity. They committed theft, wire fraud and possibly money laundering. I did all the right things. My product is patented and trademarked, but the people in place to protect those things aren't doing their job. This is bigger than a hijacked campaign. I want to do the right thing and stop these scammers before they do this to others.”
Dawn is not the only victim of duplicate campaigns, but she's been more vocal than most (note: NEVER piss off an Italian woman – especially one from New Jersey). Ken Lowrey and Robert Wilson IV started a Kickstarter campaign for their comic called “Like a Virus” back in 2013. Wilson found a complete duplicate on Indie GoGo a few days later. The campaign was pulled before it could raise a lot of money (it had only received $10), so the damage was minimal. Wilson found out about the fraud because he has a Google alert set for his name. Just like Sole, he found out about the fraud himself – nothing resembling due diligence on the part of the crowdfunding site occurred.
Crowdfunding is Untested Water for Criminals
Criminals, con men, and scam artists have likely existed since humans started walking upright. In the internet age, there are ample opportunities for ripping people off; crowdfunding is the new “wild west” for criminals. There are ample opportunities for fraud, as the above examples illustrate. One has to wonder how many duplicate, fraudulent campaigns have collected money and gone unnoticed.
If I put on my larcenous hat, I can imagine all sorts of ways to exploit crowdfunding sites for unsavory purposes (please don't try this at home). Besides the aforementioned fraudulent methods, suppose I wanted to launder half a million bucks from money I received illegally. I could set up a crowdfunding campaign, donate funds from fake names using pre-paid credit cards, and walk away with “clean” money. The implications of this behavior could be very broad reaching.
Criminal behavior, unfortunately, often precedes efforts to curtail it. The government may be sitting on the crowdfunding policies because they're still sorting out the details and are unsure how to enforce the new, proposed laws. Victims like Sole may push the issue to the forefront via a more direct route: the courts. She hasn't ruled out litigation at this point and perhaps getting cases like hers into the court system is a way to force some action by regulators and the crowdfunding platforms. There's nothing like a Federal case to make a company take notice. Dawn's not sure if she wants to take her case to court, but she says, “if I have to sue, I'll do it to put a fire under their butts.”