10 Things You Must Know Before You Invest in That Crazy Crowdfunding Scheme

In bygone days, you had to be business-savvy and creditworthy to convince total strangers to give you money. Now all you need is a slick sales pitch and the right platform.

Welcome to the wonderful world of crowdfunding. There are hundreds of websites like Kickstarter and Indiegogo clamoring to promote new projects and find people willing to give their money to these schemes.

You might be tempted to give money to a crowdfunded campaign yourself, especially if you’re being promised a cool reward as a thank you, like a limited edition T-shirt or a healthy discount off the product’s retail price.

Related: A $500 E-Bike? Not So Fast.

That’s fine. But if you’re new to crowdfunding, there are a few things you need to understand. You may not get anything for your money. There are no guarantees. And there’s no substitute for thoroughly researching a crowdfunding campaign before you take the plunge.

Don’t spend a dime until you read this first.

1. All crowdfunding sites are not alike

Crowdfunding platforms differ in significant ways. Some, like GoFundMe, specialize in personal projects. Crowdrise and Causes are for nonprofits and charities. Fundable is for small-business investors with at least $1,000 to spend. And so on.

Source: Crowdrise

They also make money in different ways — by charging a monthly or annual fee, collecting a percentage of the money raised, and/or charging transaction fees. With reward-based platforms like Kickstarter, Indiegogo, and RocketHub, the more money a campaign raises, the more money they make.

2. Their rules are different, too

Kickstarter is an “all-or-nothing” platform. If a campaign doesn’t make its fundraising goal, its owners walk away empty-handed and the site collects nothing. On Indiegogo and RocketHub, campaigns don’t necessarily have to meet their goals to collect the cash, and the site still collects a percentage of any money raised. (If a campaign doesn’t make its goal, the percentage goes up.)

They also differ significantly in the amount of vetting they do before approving a campaign. Some require proof of identity, a working prototype, and a business plan. Others allow virtually anyone with a crackpot scheme onto their platforms and let the crowd sort it out.

Related: “We’re Crowdfunding a Time Machine. Please Give Us Your Money.”

Bottom line: You want to read a site’s terms of service and FAQs before you whip out the plastic.

3. Most campaigns are not successful

Crowdfunding campaigns fail to meet their funding goals more often than they succeed. Kickstarter boasts a success rate of roughly 40 percent. Indiegogo doesn’t publicize how many campaigns achieve their funding goal, but researchers estimate it’s less than 10 percent, if you include projects that raise less than $500.

Source: Crowdfund Insider

Another big difference: If a Kickstarter campaign fails to hit its goal, your contribution is returned. On Indiegogo, it may not be, depending on whether the campaign chose a “fixed” or a “flexible” funding plan. Funding for flexible campaigns is dispensed even if the goals are not met; the money is not returned to contributors.

Remember: Even when a campaign meets or exceeds its funding goals, that’s no guarantee that it will be successful in delivering the product it hopes to create.

4. A lot of campaigns don’t really need the money

Sometimes a crowdfunding campaign is just a handful of people with a dream. But many campaigns are backed by people or groups who already have millions in the bank; others have people lined up to contribute well before the campaigns get underway. In some cases campaigns are just used to gauge interest in a particular product or service, or to get the attention of deep-pocketed investors or the media. For many startups, it’s almost a required rite of passage.

5. Crowdfunding is not shopping

Here’s the most important thing you need to know about crowdfunding: This is not like buying something on Amazon, no matter how much a campaign may look like an online shopping catalog.

The Sondors eBike Indiegogo campaign may look like a product catalog page, but it’s not.

Remember: You are not buying a product, you’re funding a company. The rewards a campaign promises — which may include steep discounts on something that doesn’t yet exist — may never materialize. Don’t think of it as shopping; it’s really more like gambling.

6. Campaigns are obliged to keep their promises

If a campaign promises you a reward for contributing, it’s required to make good on that promise, according to the terms of service on the leading platforms. And the Federal Trade Commission agrees.

In other words, if a campaign promises to give you a coffee mug in return for a contribution and then fails to send you the mug, it may have violated the FTC Act’s provision against unfair or deceptive practices, says Sandy Brown, assistant director for the FTC’s Division of Financial Practices.

“The question is, what has a campaign told its backers it’s going to do?” says Brown. “If it doesn’t hold true to what it promised, it may have engaged in a potential violation.”

7. But not all of them do

Given their easy access to people with money to spend, crowdfunding platforms are especially attractive to scammers.

Much more common, though, are well-intended campaigns that fail to deliver on their promises due to inexperience or unforeseen circumstances. One of the more notorious examples is the campaign for the Kreyos Smartwatch, a voice- and gesture-controlled gadget that brought in $1.5 million on Indiegogo in June 2013 but was beset with so many problems that its CEO Steve Tan issued a lengthy public apology last August, then abandoned the project.

“Getting the money is often the easy part,” says Sally Outlaw, author of Cash From the Crowd and co-founder of Peerbackers, a consultancy for crowdfunders. “Many campaign creators don’t factor in all the other obstacles to manufacturing, packaging, and shipping a product. Most ultimately do fulfill orders, but a huge percentage of them ship late.”

8. Don’t count on getting your money back

You may actually be better off if the campaign is a deliberate fraud. If a platform detects a scam before contributions have been passed on to its owners, the site will typically suspend the campaign and refund the money.

If the platform fails to detect fraud and you’re victimized, you may be able to sue the campaign’s owners, says Joan Heminway, a University of Tennessee law professor who specializes in crowdfunding issues. If the fraudulent conduct is covered under an applicable state unfair trade practices law, you may be able to collect three times the amount you invested (assuming, of course, that you can locate the campaign owners and they have any money left).

You may also be able to report them to a state or federal consumer protection bureau, contact your state attorney general’s office, or file a complaint with the FTC, she notes. In any of these scenarios, though, the odds of recovering your money aren’t great.

After raising $1.5 million, the Kreyos Smartwatch company shut down in September 2014, leaving thousands of would-be watch owners in the lurch.

If it’s a well-intentioned campaign that fails to deliver on its promises, your options narrow considerably. Depending on how much you contributed, you may be able to take the campaign owners to small-claims court and sue them for breach of contract, according to Heminway. But the prospects of recovery under this circumstance are remote at best, she adds.

9. You might be able to hit ‘undo’

If you’re having second thoughts about a contribution, you may be able to cancel it, depending on the platform and your timing. Because Kickstarter doesn’t collect funds until a campaign has concluded, you can cancel your pledge before the campaign is over. Indiegogo offers no way to cancel a contribution once it’s made; instead, it encourages you to seek refunds from the campaign owner.

If the campaign owner fails to respond, and you paid by credit card, you may be able to dispute the charges with your bank. But such disputes must typically be made within 60 days after you receive your bank statement. Most crowdfunding campaigns take far longer than that to deliver, so you’d have to do it well before you knew whether the campaign would actually work out. And there’s no guarantee that you’d win the dispute.

According to a PayPal spokesperson, if a campaign is preselling a product or service and doesn’t deliver, you can dispute the charge within 60 days, and PayPal will attempt to secure a refund.

“As a consumer, if I pay for something with a credit card and don’t receive the goods, I’m entitled to a refund,” says Charles Tran, founder of CreditDonkey, a credit card comparison and financial education site. “But crowdfunding and charge-backs are a thorny topic. Most platforms are still struggling with how to deal with this.”

10. Do your research now or pay for it later

Most people who invest in crowdfunding schemes get nothing back but the satisfaction of helping people achieve their dreams or seeing something new and innovative come to life. Or not. There are no guarantees.

“In the majority of cases, you are agreeing to take a leap with the creator of the campaign, to share the risks and challenges in producing a product,” Outlaw says. “That’s why you want to do your own due diligence before you commit. Look closely at the creators of the campaign, read the comments, ask questions, and see if you get answers. This is where the crowd can really help.”

Email Dan Tynan at ModFamily1@yahoo.com