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Crowd-funding spawning scams

After a phony project drew $120K, agencies issue a warning about increasing scams on crowd-funding sites.

By Mitch Lipka Jun 24, 2013 6:04PM
Image: Global communication (© Maciej Frolow/Brand X/Getty Images)The idea of harnessing the reach of the internet to help fund projects and causes of all sorts has been a boon to movie makers, inventors and fundraisers of every stripe. Crowd-funding is hot, and can generate financial support quickly.

That's just what happened this month when the idea of "Kobe Red -- 100% Japanese Beer Fed Kobe Beef Jerky" pulled in $120,000 on the popular crowd-funding site,

Just before the money was to be released, the product and its pitch were revealed to be fake. With crowd-funding still relatively new, growing, and largely unregulated, those who are considering participating are being warned about the risks to investors by the Better Business Bureau. The BBB describes crowd-funding as the "Wild West of fundraising."

In addition to Kickstarter, other popular crowd-funding sites include Indiegogo, Crowdfunder, RocketHub, and Crowdrise.
"Crowd-funding isn't an investment in the traditional sense," the BBB said. "Unless it is specifically stated, you don't own a piece of the business, invention or project. Consider your funds a donation."

Some projects offer small tokens to investors, whether it's a t-shirt or just updates on the progress of the project. Some projects that are being pitched as investments could be illegal, the BBB warns, noting that the Financial Industry Regulatory Authority is considering adding some investor protections.
Like many scams that are accelerated by social media, crowd-funding scams get fueled when someone believes the pitch and then shares it with friends and family -- adding a dose of credibility.

"With dozens of new projects popping up each day, crowd-funding sites depend on their users to identify and report fraud," the BBB said. "So be sure to do your homework before giving."

In the case of the Kobe beef jerky pitch, a series of testimonials were posted around the web that enhanced the illusion the project was real. It isn't too difficult for a scammer to create supporting sites that make a product look legitimate.

Here are some tips from the BBB to consider before putting your money into a crowd-funded project:

  • Investigate before you give. Look beyond the project profile page to learn about the entrepreneur, artist, charity etc. Are they on Facebook or other social media? Do they provide links for further verification?
  • Don't hesitate to request more information. You can always reach out before pledging.
  • No matter what, only give money that you can afford to lose. The best way to avoid stress is to set a budget for yourself and have fun.
  • When giving to a crowd-funded charitable cause, keep in mind that contributions are usually considered gifts to the recipients and are not tax deductible unless the group receiving the funds is a 501(c)(3) organization as designated by the Internal Revenue Service.
  • Report suspicious accounts. On Kickstarter, you can hit the "Report this project" button at the bottom of the project page. Then provide as much detail as you can (links to the page with the concern, links to an account, details of the problem, etc.)

More from MSN Money:

Jun 24, 2013 10:42PM

It doesn't take long for the sharks to start circling. If there were only a way to re-direct all that knavery to a more positive venture.

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