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Protecting the investor
No doubt, there’s the potential for fraud when it comes to crowdfunding. An enticing pitch could end up just lining someone’s pocket instead of supporting a cause or business venture, warns Cochrane of AAA Fair Credit Foundation. He says many people expect a return on a crowdfunding investment instead of considering the contribution a donation, so consumers need to read the fine print.
Before you crowdfund
Do your homework » The more information available about the pitch, the more legitimate the campaign is likely to be.
Check out initial funds » Friends and family typically provide the first 20 percent of funding to a campaign, so be careful with campaigns that have raised less than that in the first few days.
Look for active links » Official websites, social media presence and press coverage can be used to help validate campaigns.
Keep an eye out for updates » Has the campaign owner provided updated information about the campaign? If you see updates every one to five days, the campaign is more likely to be legitimate.
Source » Indiegogo
"It’s such a new concept. It’s basically peer-to-peer lending and anytime you invest money in something you don’t know a whole lot about, just be careful," Cochrane said.
He said in some ways, the crowdfunding model sounds a lot like affinity fraud, an issue that’s especially plagued trusting Utahns.
But TCO’s Taylor Bench argues there is safety in the crowd.
"If I put up a campaign thinking I’m going to defraud people, it doesn’t work well when I’m asking personal friends to invest. I’m not willing to risk my social capital with the people I know and love," said Bench. "The crowd is a very good policeman."
Indiegogo spokeswoman Rose Levy confirmed their site has had "virtually no fraud."
"It’s up to the crowd to determine what’s ‘legitimate,’" she said. "The social dynamics and democratic nature of crowdfunding make it much more difficult to raise funds for fraudulent campaigns."
She advised those looking to contribute to a campaign to closely examine the pitch, check to see if the campaign has active links and updates, and to follow the crowd.
"If the campaign doesn’t have at least 20 percent of their goal met [within a few days], proceed with caution," she said.
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