You are here

Understanding Crowdfunding

Share this page

Crowdfunding is a way to raise funds online by convincing a large number of people to each give money for a specific project or cause. This type of fundraising has become very popular, largely because it’s easy to set up a crowdfunding campaign and raise money very quickly. And because of this, it’s no surprise that crowdfunding sites have attracted scams.  

How it works

Crowdfunding is often used by inventors to fund projects. In some cases, the inventor asks for small contributions — $10, $50, $100 — which can quickly add up to thousands of dollars in funding.

In other instances, the project creator hopes to get individual investors to give large amounts of money, perhaps in exchange for a reward once the project is completed. This can give small companies and entrepreneurs a chance to get their projects off the ground, letting them reach contributors directly.

When tragedy strikes, crowdfunding can also be a popular way to raise funds. A crowdfunding campaign can be created easily to help a family member or individual in need of money to cover medical costs, for example. People also set up crowdfunding campaigns for larger causes like helping victims of a natural disaster or other unforeseen event.

What to know

Whether a crowdfunding campaign raises a little or a lot, or the money is for a business project, or an individual, or a charitable cause, the fundraiser has to tell the truth about what the money is for and how it’ll be used.

There are many crowdfunding platforms and each has its own set of rules on, for example;

  • how to set up the fundraising campaign
  • how much the platform will keep in fees, and
  • how and when it will disburse the money to the project creator.

What to watch out for

Scammers have taken advantage of the proliferation of successful crowdfunding campaigns to set up their own fundraisers to take people’s money. For example,

  • A dishonest businessperson may set up a crowdfunding campaign and lie about what a product does and its development timeline. Or lie about the rewards donors will get once the product is finished.
  • A scammer may ask for donations through a crowdfunding site by using the image and story of real people who need money to pay for medical treatment — but keep the money instead of delivering the donated funds to those people.
  • Someone may use crowdfunding to fund unproven and ineffective medical treatments. Donors to medical crowdfunding risk losing donated funds for the development of treatments that won’t work. People also can be misinformed about the safety of these unproven treatments and may face serious harm from trying these treatments.

What to do

If you’re thinking about giving money through a crowdfunding platform, ask questions before you invest any money and keep these things in mind:

Crowdfunding for a project or product

  • Do your own vetting. Search online for the name of the creator or project and the words “complaint” and “review.” Find out if the project creator has launched other products successfully. Have they funded these projects using crowdfunding?
  • The campaign may not get off the ground successfully. Find out what happens to your money if the project doesn’t get off the ground. Will you get a refund? What are the risks involved?
  • Having a 3D photo of the product doesn’t mean that the product is finished. Confirm the production status. Ask for a production schedule, and be clear on the current stage of development. Some crowdfunding sites don’t let fundraisers show 3D photos of the product on their websites because donors might mistake these with a finished product. Ask the project creator if there is an actual prototype and if you can see it.

Crowdfunding for an individual or charitable cause

  • Donations to individuals are not tax deductible. If tax deductions are important to you, keep that in mind.
  • Don’t assume solicitations on crowdfunding sites are legitimate. It might be impossible for you to know if the cause is real and if the money actually gets to the intended recipient. Even if posts have been shared on social media or liked by your friends, don’t assume that the fundraiser is legitimate or that the hyperlinks are accurate. Do your own research. Call your friends or contact them offline to ask them about the post they shared.
  • Don’t assume medical treatments are tested and safe. Some medical treatments that are promoted through crowdfunding campaigns are unproven.

The safest way to give on social media or through crowdfunding is to donate to people you actually know. You can always go directly to a well-known charity’s website and donate directly that way, if you’re looking to help a specific cause.

Tagged with: charity, fundraising, invest