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Crowdfunding Popularity Continues to Soar Despite Risks to Donors

   Jan 20, 2017

‘Dying’ Dad Tells Scamming Son to Knock It Off With This Fake GoFundMe Campaign.

Kentucky Parents ‘Angry’ Over Fake GoFundMe Campaign For Their Deceased Baby.

Mom Accused of Making Her Son Sick, Leading to Ill-Gotten GoFundMe Gains.

The three headlines above come from just a one-day sample of the news posted on GoFraudMe, a crowdfunding watchdog website created by a woman who “believe[s] that crowdfunding can be an awesome thing but as it stands, it’s just too easy for these twats to get away with ripping people off.” Unfortunately, as the popularity of crowdfunding continues to soar, so does the potential for fraudulent or fake fundraising campaigns, making crowdfunding a risky proposition for potential donors.

The Incredible Rise of Crowdfunding

Several years ago most people probably had never heard the word “crowdfunding.” Defined as the process of funding a project or cause by raising money from a large number of people, typically through a website, crowdfunding has become so popular that over $34 billion in funds were raised via crowdfunding platforms in 2015. This represents remarkable growth over 2014, at more than two-times the $16 billion raised that year, and from the $6 billion in funds raised in 2013. The extraordinary amount of money that is being raised through crowdfunding is astonishing considering how relatively easy it is for those with questionable intentions to try to take advantage of crowdfunding donors.

Crowdfunding caught fire as people quickly started to figure out how much easier it is to ask family, friends, acquaintances, and even strangers around the world for money online versus in-person. Much of the explosive growth in the last few years has been attributed to the start-up of websites such as GoFundMe and YouCaring* that have expanded the scope of crowdfunding to include compassionate and social causes. Traditionally, crowdfunding was primarily used to raise money for creative projects and entrepreneurial ventures, based on the focus of Indiegogo, the first online crowdfunding platform founded in 2008, and Kickstarter, which launched in 2009. GoFundMe and YouCaring*, which started in 2010 and 2011, respectively, slightly changed the crowdfunding model by offering individuals a platform to create fundraising campaigns for personal needs or goals and humanitarian efforts. Indiegogo even got in on the cause-based crowdfunding trend in late 2014 by launching Indiegogo Life, which it later rebranded under the name Generosity*, “to give Indiegogo users a new community for showing and sharing their compassion through personal fundraising.”

Crowdfunding for personal healthcare and medical bills, in particular, has become increasingly popular. GoFundMe and YouCaring* each experienced “huge increases in medical fundraising in the last two years,” according to a July 2015 Los Angeles Times article. Campaigns for medical expenses represent GoFundMe’s biggest category at $400 million raised in the past year, as reported by Forbes in October 2016. Overall, GoFundMe claims to be “the World’s #1 Personal Fundraising Website,” with over $3 billion raised since its inception.

[*Note:  Since the publication of this article, GoFundMe has acquired YouCaring. The deal was announced in April 2018. Along with YouCaring came Generosity.com and GiveForward, which had previously been acquired by YouCaring. GoFundMe also acquired CrowdRise in a separate deal in early 2017. For more, see:  GoFundMe keeps gobbling up competitors, says it’s ‘very good for the market’ (Fast Company, 04/04/18) and GoFundMe Just Acquired Biggest Competitor in YouCaring Acquisition (Crowdfund Insider, 04/05/18).]

Crowd-funding or Crowd-thieving?

Contributing to the rise in crowdfunding is just how fast, easy, and in many cases, free it is to start an online fundraising campaign on the popular websites. Many of the sites also provide fun and engaging user interfaces and social media integration to encourage donations. It is exactly this cost-free ease of use and virtual anonymity, however, that create an environment ripe for prospective fraudsters and scam-artists.

The top crowdfunding sites do contend that they employ a variety of protection measures and safeguards to verify the legitimacy of fundraisers. Their platforms also allow potential donors to communicate directly with the owners of individual campaigns in order to ask specific questions and obtain information. Some critics and law enforcement officials, however, say that there are not enough controls in place for crowdfunding and that better laws are needed to protect users. Unlike public charities that are required by law in most states to file an annual registration in order to be able to solicit donations, crowdfunding campaigns that are established for the benefit of particular individuals or families generally are not required under state charity laws to register to raise funds. “The issue we are grappling with is whether there is a law out there that governs this type of transaction and do we have jurisdiction,” said the president of the National Association of State Charity Officials in a February 2016 Wall Street Journal article regarding the concerns related to crowdfunding.

Even though some crowdfunding sites claim that the overall percentage of fraudulent campaigns is very low, many admit that it is nearly impossible for the sites to vet each and every fundraiser. For example, the YouCaring* Terms of Service state: “You understand that while YouCaring does investigate Fundraisers from time to time, that YouCaring does not verify all information published in any Fundraiser and cannot and does not represent or warrant the truthfulness of any Fundraiser.” The GoFundMe Terms & Conditions include: “We do not and cannot verify the information that Campaign Organizers supply…” Even if the relative number of crowdfunding campaigns that have been proven to be fraudulent is very low, the fact is that there have been many reports of alleged crowdfunding scams, including numerous cases of individuals that try to raise funds to pay for medical expenses associated with fake, non-existent health problems.

Crowdfunding vetting especially becomes an issue during times of natural disaster or public tragedy when the volume of related fundraising campaigns can reach hundreds or thousands in number relatively quickly. In the aftermath of the June 2016 shooting at the Pulse nightclub in Orlando that left 49 people dead and more than 50 wounded, over 430 related campaigns were posted on GoFundMe, according to the Associated Press. Upon examining 30 of those campaigns, the AP found that “most campaigns lacked key details, such as exactly what the donations would cover or even who was asking for them.” The AP also reported that only nine of the 30 organizers agreed to interviews, and when one organizer was asked about GoFundMe’s vetting process, he replied, “Was it so strenuous that you couldn’t fake it? No, you could definitely fake it.” A GoFundMe spokesman did tell the AP that GoFundMe staffers were vetting the Orlando campaigns before releasing funds, and that only a small fraction of a percent of past campaigns have involved outright fraud. GoFundMe lists the $9 million raised for “Pulse shooting” campaigns as the most received in connection with “News Events” in 2016.

The impracticability of thoroughly screening every crowdfunding campaign necessitates that the sites rely on their users to help maintain an honest and trustworthy fundraising community, which creates inherent risks and weaknesses. For instance, in addition to the potential for there to be bogus fundraising campaigns, there are plenty of examples of seemingly ridiculous or outlandish campaigns that highlight the questionable intentions and potential waste that can exist on crowdfunding platforms. A sampling of some GoFundMe campaigns created in 2016 shows a woman seeking $25,000 to achieve her childhood dream of becoming a professional golfer on the LPGA tour; a man trying to raise $6,500 for his “dream car;” and a woman requesting $3,500 to fund her expenses for competing in the Miss California pageant. Campaigns on YouCaring* have included a woman trying to raise $7,000 to “send my perfect spoiled a[**] on vacation;” a woman asking for $8,000 for cosmetic breast implants; and a man seeking $800 to buy a pair of “Yeezy 350 Boost” sneakers. Keep in mind that most crowdfunding sites are for-profit companies that either automatically charge, or suggest a “tip” from, donors (typically 5% or more) so the sites directly benefit from increasing their chances to collect donations, whether or not those donations were made to fund serious or silly campaigns.

Of Course Your Donation Was Used As Intended…

Another reason crowdfunding presents risk for donors is that there is a profound lack of accountability and transparency, especially once the funds raised get disbursed to the campaign owner. Public charities are required to disclose their finances through publicly available annual filings with the Internal Revenue Service (via the IRS Form 990), but there is no type of public disclosure required to account for the money raised by crowdfunding campaigns. Moreover, the crowdfunding sites claim no responsibility for verifying the use of donations. For example, the Indiegogo Terms of Use specifically state that “Indiegogo does not guarantee that Contributions will be used as promised…” The GoFundMe Terms & Conditions state: “…nor do we guarantee that the Donations will be used in accordance with any fundraising purpose prescribed by a Campaign Organizer…” There is no way for a crowdfunding donor to know for sure that any or all of the money raised was actually used for the stated purpose of the campaign. The sites try to mitigate some of this risk to donors by encouraging them to make informed giving decisions and by recommending that funds only be contributed to campaigns run by individuals that are personally known and trusted. While this is sound advice for crowdfunding donors, given the tens of billions of dollars that were raised via crowdfunding in 2015 alone, one has to wonder how frequently that advice is actually followed.

GoFundMe now claims that it has added another “layer of protection” for donors by launching “the first and only guarantee for crowdfunding,” according to its press release, starting with campaigns created on or after October 3, 2016. Under the GoFundMe Guarantee Policy, GoFundMe now agrees to reimburse donations, up to $1,000 per campaign, if the organizer or beneficiary of a campaign “commits a Misuse,” as defined by the Policy and determined by the sole discretion of GoFundMe. The three misuses described in the Policy relate to: the campaign organizer not delivering funds to the Intended Beneficiary; the campaign’s content being inaccurate with respect to a material fact that would induce a donation from a reasonable donor; and the campaign organizer or beneficiary being formally charged with a crime directly related to their actions. A major problem with this policy is the reality that there is only a very small chance that a campaign donor would ever become aware that funds went undelivered, material falsehoods induced a donation, or formal criminal charges were filed against an organizer, even if donations were stolen. The Policy also has other stated limitations, exclusions, and requirements, including requiring that claims be submitted within 30 days of the donation and excluding claims involving disagreement with how a campaign beneficiary uses funds raised in excess of the stated campaign goal. Moreover, the “Other Donor Requirements” of the Policy seem extremely favorable to GoFundMe as they state: “You [the donor] agree that a certain minimum donation amount may apply to qualify for the benefits under this Policy, and that all donation payments remain final and will not be refunded unless GoFundMe, in its sole discretion, agrees to issue a refund under the terms of this or other Policy.” Furthermore, even with this new guarantee policy, GoFundMe still continues to caution donors to only give to people that they know and trust.

Crowdfunding at the Expense of Established Charities

In addition to the inherent risks and weaknesses of crowdfunding discussed above, it appears that the soaring popularity of crowdfunding arguably could be taking away from funds that in some circumstances might otherwise be donated to traditional charities. The level of charitable giving in the U.S. each year has hovered at about 2% of the gross domestic product (GDP) for the past several decades. Crowdfunding sites may actually be expanding the giving pool by attracting donations from some people that otherwise would not give to charity. It is also possible, however, that in some cases donations may be going to crowdfunding campaigns instead of traditional charities. Given the high risk for scams to crop up on crowdfunding sites, particularly in the aftermath of natural disaster or public tragedy, this occurrence could lead to millions of dollars being diverted away from legitimate charities, especially those with an established track-record of emergency response and disaster relief.

The diversion of charitable dollars due to crowdfunding may have already happened in response to the catastrophic flooding in Louisiana from the prolonged rainfall that occurred in August 2016. Over 6,400 campaigns on GoFundMe raised more than $11 million for Louisiana flood victims, according to an October 2016 article in The Louisiana Weekly, by far the most ever raised on GoFundMe for a natural disaster. In comparison, the American Red Cross had raised about $23 million in donations and pledges designated for the Louisiana flood victims as of mid-September 2016, according to The Louisiana Weekly. Although the amount raised by the Red Cross was more than double the GoFundMe donations at that point, the Red Cross’ $23 million stood at considerably less than its fundraising target of $35 to $40 million, as reported by The Advocate in late August 2016. Moreover, one of Louisiana’s largest philanthropic organizations, the Baton Rouge Area Foundation (BRAF), had raised only $2.5 million for the flood victims through late August, according to The Advocate, even though it was able to raise four-times that amount in just the first week after Hurricane Katrina hit in 2005. Louisiana’s governor expressed his concern to The Advocate that the thousands of GoFundMe campaigns were splintering the private money coming in to assist the state. As a result, the governor said that his administration was being “fairly aggressive” in asking that people donate to the Red Cross and BRAF since that is the most effective way to make monetary contributions to aid the flood victims, even taking into account the recent criticisms regarding the Red Cross’ disaster response. Additionally, if tax-deductibility is a concern, donors should keep in mind that donations made through crowdfunding sites generally are not eligible for a tax deduction unless the funds are being raised through a campaign organized by a registered 501(c)(3) public charity.

In an effort “to add additional fraud protections” for the donations that were being collected via the thousands of GoFundMe campaigns for the Louisiana flood victims, the state announced that the Louisiana Department of Justice worked with GoFundMe to quickly detect and communicate red flags for unethical looking campaigns. Ideally, this type of “additional fraud protection” will become standard on all of the popular crowdfunding platforms, particularly in times of disaster response. The serious lack of accountability and transparency that plagues crowdfunding campaigns, however, would still remain a real problem — and one that should not at all be taken lightly by crowdfunding donors.

The use of crowdfunding has soared over the last few years, and it is showing no signs of slowing down in the near future. The inherent risks and weaknesses of crowdfunding, however, should give donors serious pause. Therefore, to significantly reduce the chance of being taken advantage of through crowdfunding, make sure that any crowdfunding donations you make go only to campaigns for people you know and trust.

Related Charities

American Red Cross