The days of accepting handouts and groveling for loans from affluent relatives are quickly coming to an end. If you need a lot of money in today’s world, whether it’s to help you pay a costly emergency or to support a new business concept, all you need to do is make an appeal to the massive audience that can be found on the internet and then wait for the money to start coming in.
Crowdfunding platforms such as GoFundMe, Kickstarter, and IndieGoGo are teeming with hopeful would-be entrepreneurs and those in dire need of financial assistance.
On the other hand, there are many dishonest people there.
If a cause turns out to be a scam, some platforms for crowdsourcing will return your money, but the majority of them will keep a portion of it for themselves, so you shouldn’t expect to get back every penny if you get involved in a scam.
If you do get involved in a scam, however, you should plan to get back some of your money. There is also the potential that a crowdfunding fraud would be undiscovered, allowing the con artists to continue their lavish lifestyles on the money contributed by other people.
Knowing that you have been duped is never a pleasant experience, even if your money does eventually make its way back into your wallet.
For this article, we will be looking at crowdfunding scams which you can possibly run into. You will also learn what crowdfunding is, as well as how you can prevent yourself from getting scammed.
What is Crowdfunding?
The practice of a group of individuals contributing money to an endeavor or project through the use of the internet is known as crowdfunding. Crowdfunding is one of the emerging trends in global investment that was developed as a means of assisting small businesses and entrepreneurs who are searching for investment funds to launch their firms from the ground up.
The notion of crowdsourcing has been around for quite some time. In the 18th century, authors and musicians were soliciting financial backing from a broad variety of investors in order to disseminate their works around the globe. Such tiny communities may now reach a bigger audience thanks to the contribution of the Internet, just like non-governmental groups that collect donations to establish schools or to carry out social initiatives.
One may characterize it as a contemporary take on the time-honored method of fundraising.
What are the different types of crowdfunding?
- Donation-based crowdfunding is a method of financing a project in which a large number of participants are solicited for a comparatively little financial contribution.
- In reward-based crowdfunding, there is a process process of determining incentives at various levels that correlate to varying amounts of collateral. At least three different tiers of collateral or reward are included in the usual reward campaign.
- A peer-to-peer (P2P) or debt-based crowdfunding system is one in which start-up businesses borrow money from a number of individuals online and then repay that money to those individuals after the project has been completed.
- In the lending type crowdfunding, entrepreneurs get a periodic fund in the form of loans that they would repay to lenders on a preset timetable and with a set interest rate in the
- Investors participating in the equity crowdfunding scheme purchase shares of a firm that is not yet listed on a stock market in return for equal rights in the company’s overall shareholdings.
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Some Risks in Crowdfunding
Across the course of the last several years, the practice of crowdsourcing has seen a significant uptick in popularity all over the world. Platforms that facilitate crowdsourcing are accountable for the movement of several billions of dollars each year.
The fact that crowdfunding websites also facilitate the transfer of funds makes it more probable that certain risks may be encountered. When it comes to financing via crowdsourcing models that are donation- and reward-based as well as investment-based, investors identify a number of potential risks associated with these types of models.
These risks may frequently be split down into three categories: the failure of the investment itself, fraud, and the laundering of cash.
Investment Failure
When it comes to investments made through crowdfunding, the possibility of losing money on those investments is the one that poses the greatest threat to investors. Early-stage businesses are the focus of investments made through the crowdfunding system because of the nature of the platform itself.
When compared to investments in firms that have reached a particular level of maturity, possess a specific level of cash flow data, have competent management, and have attained the right structure, early-stage company investments always carry a higher degree of risk.
According to statistics compiled from throughout the world, within the first five years of operation, fifty percent of early-stage businesses are unsuccessful. Crowdsourcing investors should be informed about the high level of this risk and their awareness should be improved. Experienced investors already have sufficient knowledge about the high level of this risk; however, crowdfunding investors do not.
Entrepreneurs who wish to contribute funds through crowdsourcing may or may not have the skills and understanding necessary to successfully manage an early-stage firm. Crowdfunding is becoming an increasingly popular method of financing new businesses. Because of this, there is a greater possibility that the investment will not be successful.
The culture of entrepreneurship need to be encouraged, and extensive educational possibilities as well as organizations that offer assistance ought to be established for business owners. All of these things ought to be done in order to cut down on the risk.
In addition, there is a possibility that this risk might be mitigated by mandating the involvement of investors who have prior expertise in the administration of the firm, as well as specialists in the domains of finance, accounting, and the law.
Fraud
In the realm of crowdfunding, instances of qualified fraud are rather uncommon; nonetheless, the most typical type of fraud is when individuals create phony platforms and collect funds for organizations that are either fraudulent or not fraudulent in nature.
In addition, there are other varieties of fraudulent financial activity that are now active, such as investment fraud, payment fraud, and embezzlement.
Money Laundering
The notions of fraud and money laundering are intricately connected to one another. Even the assertion that fraud is a fundamental crime for money laundering is not wrong to say the least. Crowdfunding sites, just like any other type of online platform for investing, run the potential of being used to launder money.
However, the electronic payment mechanisms that are utilized in crowdfunding platforms have the potential to lessen the severity of this danger to some degree.
This risk can be minimized to a significant extent if the nation in which the platforms are situated has strong anti-money laundering laws and those laws are effectively enforced.
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How to Protect Yourself from Crowdfunding Scams
Do your research.
Researching the person who started the campaign is the first step to taking part in it, regardless of whether you want to back it because of a wonderful business idea or a tragic personal tragedy. Try typing their name into Google and seeing what comes up regarding them on the internet.
Check to see whether they have previously launched any crowdfunding projects and search up their street address and phone number to make sure they are using their genuine identity. In addition, look into whether or not they are using a fictitious name.
Try not to be so emotional.
If you are considering running a campaign for a charity, the next thing you should do is remove emotion from the equation. Con artists who try to defraud people through fake crowdfunding campaigns for charities usually succeed. Invest some time and effort into analyzing the marketing using just logic. Does the narrative make any kind of sense at all?
You have the option to provide money if, despite any doubts you may have, you believe the organization is operating legally and everything appears to be in order. You might even take your existing level of caution one step further by getting in touch with the person who created the campaign and inquiring about the legitimacy of their motivation.
If they are truly in need, they will readily provide you the names of physicians or referrals that they have worked with in the past. But you should get out of the deal if they give you a vague response or refuse to answer any of your inquiries.
See if the cause is feasible.
If you’re thinking about starting a new company and looking at starting a crowdfunding campaign, you should ask yourself if the concept is feasible. There are now a number of individuals who have established GoFundMe sites with the intention of raising money to combat ISIS. It’s appealing at first, but then you realize how difficult it would be for a single individual to accomplish such a target.
There are a lot of innovations and other ideas for businesses that seem amazing at first, until you realize that they can only exist in a dream world. Do not assist a new business idea in getting off the ground unless you have established that it is indeed a reputable enterprise.
When it comes to crowdfunding initiatives, if you do your research first, you may give money with complete peace of mind.
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