Disentangling Crowdfunding from Fraudfunding

Abstract

Using Kickstarter, the largest global reward-based crowdfunding platform, we conduct an exhaustive search of all fraud cases from 2010 through 2015 for nine different countries. While fraud in this new market has been of concern to regulators, it is arguably of greater importance to the nascent industry itself. We find that Kickstarter campaigns posted around a late and visible suspension of a crowdfunding campaign tend to have a lower probability of success, fewer backers, and raise less funds. Moreover, documenting the characteristics of fraudsters is of paramount importance. We deploy the theoretical framework of the “Trust Triangle” to document campaign features that could be helpful to backers in detecting fraudsters in crowdfunding markets. We find fraudsters are less likely to have engaged in prior crowdfunding activities, are less likely to have a social media presence, and are more likely to provide easy-to-read campaign pitches with a greater number of enticements through pledge categories.

Keywords: Crowdfunding, Entrepreneurial Finance, Fraud, Internet

JEL Classification: G21, G24, G32, K22, L26