This article lists out a number of kickstarter frauds that occurred before 2014. This ties a bit into my last post of who really is to blame here when crowdfunding goes bad, should the investors be expected to know better or should companies be more heavily vetted (and if this is the case who is going to do the vetting). To me these frauds seem to be part of the acceptable losses of crowdfunding. If one were to require the amount of vetting needed to weed out the frauds then the system is starting to look more like traditional banking where you have a centralized authority deciding who gets to play and who doesn’t. One final interesting piece about the article is that in addition to fraudulent companies, it also talks about an individual who defrauded legitimate campaigns as an investor by receiving the advertised benefits for investing and then contesting the fees on his credit card after he’d already received the benefits. Just goes to show that the issues can occur in all areas of startup funding.
I agree that fraud is a relevant, rampant problem with investing activities. I am likewise unsure how best to prevent the fraud from occurring/minimize it. Perhaps the solution is not so much vetting as more enforcement activity. However, that has the downside of money already being spend and would still involve large administrative costs in getting small investors back their $50 or $100 investments in kick starters. It may be that we call those acceptable losses, but many of the people investing in these companies. Perhaps the market strategy is to see the kick starters as junk bonds where the potential payout has to be sufficient to entice investors to invest.