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FTC Issues Warning About Crowdfunding Scams

by Suzanne Kantra on May 13, 2019

It's exciting to back a crowdfunding project on Kickstarter and IndieGogo, the major product-focused crowdfunding platforms. Instead of waiting for the next great thing to come to market, you can actually have a say in it and get it at a deep discount. And, there have been a lot of crowdfunding tech successes over the last several years, including the Oculus Rift virtual reality headset, SkyBell video doorbell, Tile tracker, Pebble smartwatch and Braggi true-wireless headphones.

In most cases, money is only taken from backers if overall funding goals are reached, but crowdfunding isn’t without its share of overpromising and underdelivering. It's the norm for products to miss their ship date by a few months or even more than a year, and some never come to market. In cases where there is failure, it's often not the intent of the creators to scam their backers. Despite best efforts, there can be unexpected manufacturing delays. Projects that are too successful may have trouble filling the volume of orders. And, sometimes the creators underestimated the amount of money they need. 

Unfortunately, some crowdfunding campaigns are outright scams. Case in point, the FTC has sued iBackPack, a company that was purportedly developing backpacks and shoulder bags with built-in batteries for charging devices on the go. While iBackPack claimed the bags would soon be shipped to backers, the FTC says it was all a llie. Of the $800,000 iBackPack took in through crowdfunding campaigns, FTC's investigation found that a large part was appropriated by the company's CEO for personal use. Even worse, the FTC says "the CEO allegedly threatened some of them [the backers] – adding that he knew their addresses and other personal information."

Backing a crowdfunding project has an inherent level of risk, but there are ways to mitigate those risks. 

5 questions to ask before backing a crowdfunding project  

The biggest thing to keep in mind about funding crowdfunding campaign is that you are backing the creators, not buying a product. When you submit your money, you'll notice on the big crowdfunding sites, like Kickstarter and IndieGogo, that you are contracting directly with the creators, not the crowdfunding platforms. So it pays to scrutinize the creators and the viability of the campaign before sending in your money. Here are the five key things to consider: 

1. Is the product too good to be true? 

If a product seems too good to be true, it may be a scam. Bringing a truly unique new technology to market is a huge challenge. You'll want to ensure that there are real videos that clearly show a working prototype performing the functions that are promised. Also, there should be data and studies to back up the proposed functionality and how it's possible to now bring that technology to market. 

2. What is the background of the creator team? 

There should be plenty of information available on the creator team members. Google their names and see what comes up. Check their profiles on LinkedIn. Do the team members have the expertise it takes to design and bring the product to market? If you're having trouble finding the creators online or information about them is scarce, that's not a good sign. Have they had successful kickstarter campaigns in the past?  If the creators have a record of success and/or it's a second-generation product, there is less risk.

Also, creators should be actively answering questions about the product and showcasing their knowledge, especially if it's their first campaign.

3. How do the creators plan on spending your money?

Creators use crowdfunding to fund their products at different stages in development. Knowing where a product is in its development and production is essential to determining how likely it is that you'll actually receive a product. If creators are still developing their prototype or just starting to look at the manufacturing process, there is a much higher likelihood that something could go wrong. On the other hand, some creators use crowdfunding to fund the production run, having already worked out manufacturing kinks, or for marketing purposes. In these cases, you can feel more confident in your backing. 

On IndieGoGo, you may see "Guaranteed Delivery Perk," which means that will eventually get your money back if you don't get the product. When products are marked with a "Guarateed Delivery Perk", IndieGogo states, "the project ream has begun turning their prototype into the final product. Their ability to ship the products may be affected by product development or financial challenges." To get your money back, you'll need to file two claims within six months of the guaranteed delivery date and have not received the Guaranteed Delivery Perk.

Also on IndieGoGo, you'll want to choose campaigns with Fixed Funding, meaning that you get your money back if the campaign doesn't meet the goal. With Flexible Funding, the creators get to keep the money regardless of whether the funding goal is met. 

4. How complex is the product to manufacture?

Look at the photos of the prototypes, read the descriptions of how the product will be manufactured and use your common sense to determine how complex the manufacturing process will be. Does the product require custom parts, exotic materials or software to be written? The more complex the product, the more likely there will be a problem along the way that can delay or even derail production. 

5. What are people saying in the comments?

Not only do comments provide a good way to see how responsive creators are, but they also provide way to learn about potential issues. Is the science behind the product real or has it been disputed or even debunked by reputable researchers in the same field? 

Are people posting that the campaign is a scam? It could just be a disgruntled person, but claims of a scam should always warrant a second look.

Be sure to check the comments throughout the campaign. If you start to feel uncomfortable, you can usually get your money back if the campaign hasn't ended.

3 ways you can get your money back from a crowdfunding campaign

1. Get your refund before the campaign ends

If you have second thoughts about the money you paid to back a crowdfunding campaign, the campaign is still live and your perk hasn't been shipped. You can log back into your account and cancel your plegde on Kickstarter and on IndieGoGo you can request a refund from your confirmation email or your IndieGogo account. 

2. Automatically get a refund if the campaign doesn't meet its goal

Kickstarter wil refund your money if the campaign doesn't meet its goal. IndieGoGo will refund your money as well, but only if you backed a Fixed Funding project. IndieGoGo Flexible Funding projects don't need to meet funding goals in order for the creators to keep the money.

3. Choose projects marked with "Guaranteed Perk Delivery" or InDemand on IndieGoGo

When you fund a project on IndieGoGo and a perk that's marked with "Guaranteed Perk Delivery," you can get your money back. You have to submit two claims after the Guaranteed Delivery Date to IndieGoGo ( within six months of the Guaranteed Delivery Date and you must not have received the Guaranteed Delivery Perk.  

For InDemand campaigns, you can request a refund for up to 10 days after the contribution was made, unless the perk has already been shipped. 

[Image credit: crowdfunding concept via BigStockPhoto]


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