Emerging scams signal end to crowdfunding honeymoon

cheapwatchIs the honeymoon over for crowdfunding?

Perhaps the “honeymoon” metaphor is a bit misleading.

Since its inception, the idea of crowd-sourced fundraising, a brilliant fiscal alternative heralded by the likes of Kickstarter, IndieGoGo, and others, has come under the surgical gaze of more than a few incredulously questioning eyes.

The very concept of it, for some, is undermining — even frightening. Someone, somewhere, often those with a good deal of interest in more traditional systems, is going to find problems with the process.

But then there’s the potential for abuse of that process, which some commentators have indicated is a rising, and very real, trend.

“The projects looking for crowd-sourced funds on Kickstarter range from the absurd to the brilliant,” writes Chris Morran in a Jan. 31, 2013 Consumerist post on the topic, “but a few of them are just plain scams.”

One such Kickstarter pitch, he said, recently exposed the problem in an open-and-shut fashion. Launched on Jan. 26, 2013, this particular pitch from “JMK ESS Watch Co.” all but screamed in the faces of would-be investors.

“We are making high-end, fully mechanical (no batteries) top-quality timepieces for men,” read the pitch’s especially exuberant opener, filed by a Kickstarter user named James Knudson. “You can see the watch working!!!!!” Essentially a wall of images — no doubt very attractive images, to be fair — the post was two or three scrolls deep, with an equally enticing testimony at the bottom.

“I have been making amazing watches in Switzerland for many years,” it read, “and have decided to do this on my own. I thought it was time to make my own name known to the world.” The test products, apparently, had been a smash hit with friends and family of the supposed proprietor. With 200 watches ready to ship, and parts on hand for another 300, it almost sounded too good to be true — or, if nothing else, too good to pass up.

“They all have said that they are getting huge responses from these beautiful watches,” Knudson said. “I want to start by doing everything 100% by myself.”

Not long after the post was filed — it originally had a funding end date of Feb. 25, 2013, barely a month after its launch — Kickstarter suspended the account. But before that happened, a few too many prospective, eager customers for comfort forked over their legal tender, Morran writes, excited to have one of these “stunningly beautiful” one-of-a-kind creations. “Fifteen people paid at least $175 for higher levels of sponsorship and additional watches,” he observed. In all, 53 potential customers had been taken in by the offer.

Not surprisingly, it was Reddit that cracked the case.

The watches — silver timepieces with a leather strap and a transparent face, revealing the device’s inner Swiss-style workings — bore more than a passing resemblance to another product available on AliExpress.com at the same time. Perusing the gallery of images available on that site, it doesn’t take much investigative sleuthery to determine that they were, in fact, the exact same pictures featured on Kickstarter. The very same watches, it would appear.

The jig was up.

After Reddit users alerted Kickstarter to the situation, funding was suspended, along with the account, and the depth of the apparent deception was revealed. Those hand-crafted works of painstaking artistry — hocked on Kickstarter for better than $100 apiece — were retailing on AliExpress.com for $29.60 per pair. Fifteen dollars a pop.

“Please,” Morran commented, “before you hand over your money to someone who is just trying to get their new rug/scarf/noodle truck business off the ground, do a quick search online to see if maybe you aren’t getting taken for a ride.”

“To be sure,” said David Wolinsky, a commentator on NBC Chicago, crowdfunding is “a great thing. But it also opens up people everywhere to fraud.”

Wolinsky made that observation in April, 2012, not long after President Obama signed the Jumpstart Our Business Startups, or JOBS, Act into legal existence. The well-merited, historic excitement over its provisions, Wolinsky said, comes hand-in-glove with a caveat about the possible corruption of crowdfunding. “Not to be overly pessimistic,” he warned, “but these things happen.”

Addressing that threat, Wolinsky spoke with Ken Springer and Joelle Scott, executives of business intelligence firm Corporate Resolutions.

“The problem with crowdfunding is it’s exciting, but, on both ends of the deal, there’s no guarantee that your money is going to the place where you think it is,” said Scott, a former fraud investigator and FBI agent, now Corporate Resolutions’ director of business. “I think on both sides of the deal, the only way to make this work…is to make sure that fraud doesn’t seep in somehow, because there’s always going to be an oportunity for it come in the door in some way.”

Both were optimistic, even idealistic about the idea of crowdfunding, but pragmatic about the details. Without that iron-clad umbrella of systemic oversight, they suggested, crowdfunding is a boots-on-the-ground endeavour, requiring more of a DIY spirit than some may be familiar with.

“You have to look at patterns of behavior,” said Springer. “Patterns of lawsuits. Disconnects. The appearance of success. Name-dropping. Frequent relocation.”

Transparency, both agreed, is the way to keep the potentially darker aspects of crowdfunding in check, as is a willingness to self-police to an extent.

“I think in this day and age,” Springer commented, “whether you’re a $10 billion hedge fund or not, you have to respond to peoples’ questions. Who are your investors, what are you doing?”

It doesn’t mean that the honeymoon is “over,” per se. If anything, it means that the honeymoon never existed, that the notion of crowdfunding has always been fraught with the possibility of corruption. In practice, Springer said, the general framework of crowdfunding is little different than that already at work in investment circles, whether we’re talking about hedge funds or angel investment.

What is different — alternately inspiring and troubling — is that crowdfunding as a banking alternative remains in its infancy, existing as a kind of Wild West of finance, and open to the free, unchecked flow of interests not so above board in their accountability.

It means a blank slate, a template for greater consumer power. But with that power, as always, comes great responsibility.

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