Biz Bulletin: Tips for evaluating crowdfunding offers

Jim Winsett
Jim Winsett

Q. I often receive email messages and see Internet advertising requests seeking donations by crowdfunding. Is this money raising method legitimate?

A. Crowdfunding to raise money has been in the marketplace for several months. Crowdfunding as defined by Wikipedia is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the Internet.

Not unlike any donation you may consider for a charity or worthy cause the Better Business Bureau recommends doing diligent research before helping fund a new charity or investing in a new business venture through crowdfunding. Unlike the typical model for raising capital through a single lender, crowdfunding is a way for entrepreneurs, nonprofit fundraisers and others to raise money from many different sources. These are usually on crowdfunding Internet sites where they can introduce their product or charitable cause to the world.

The two most common types are donation-based crowdfunding to raise money for novel charities, disaster relief efforts and to help individuals pay for medical bills and get through hard financial times. The other main category is equity-based crowdfunding, which involves investing in a concept, becoming part owner and receiving a financial return on a successful venture.

Benefits for entrepreneurs include the ability to pitch to and interact directly with potential investors and raise considerable sums of money, even though the individual donations may be small. Crowdfunding interactions also help them tailor their pitch and validate the potential of a product.

Not surprisingly, fraud may enter the picture. Con artists have found ways to abuse crowdfunding sites for fake charitable causes and business ventures in which they collect money, but stop development of a product or service and never follow through with production.

The major crowdfunding sites and their communities work aggressively to identify, track down and remove fraudulent campaigns, sometimes within hours of their launch. They have also been able to get money back to donors.

Trying to vet and monitor every crowdfunding campaign is impractical for the website operators, however, the large sites are developing teams devoted specifically to identifying and stopping fraud.

BBB says the most effective shield from crowdfunding fraud is research.

* Research the crowdfunding site. Like any other business or website, some are better than others for any variety of reasons. Start with trust at bbb.org.

* Check the records. If you are investing money -- regardless of the amount -- you want to know that it is not going to a money launderer, and that the person running the campaign actually exists. Check court documents, and look for any bankruptcies or records of previous business operations.

* Search online. Do a search with the name of the individual or the campaign to see if it appears on other sites. Check out their social media sites. Are they credible and polished? Can they provide references?

* Verify charitable appeals. Crowdfunding has helped many people obtain donations for humanitarian needs. However, a minority of them have concocted stories to raise huge amounts of money before they are revealed to be con artists. In some cases, they are never caught and consumers' donations disappear.

You will find other helpful tips on being a smart consumer and avoiding scams in the "Get Consumer Help" section at bbb.org.

Jim Winsett is president of the Better Business Bureau in Chattanooga.

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