Disentangling Crowdfunding from Fraudfunding

84 Pages Posted: 26 Aug 2016 Last revised: 16 May 2019

See all articles by Douglas J. Cumming

Douglas J. Cumming

Florida Atlantic University

Lars Hornuf

University of Bremen - Faculty of Business Studies and Economics; Max Planck Institute for Innovation and Competition; CESifo (Center for Economic Studies and Ifo Institute)

Moein Karami

Concordia University

Denis Schweizer

Concordia University

Date Written: May 16, 2019

Abstract

Using Kickstarter, the largest global reward-based crowdfunding platform, we conduct an exhaustive search of all fraud cases from 2010 through 2015, spanning nine countries. While fraud in this new market, which enables individuals to fund entrepreneurial projects, has been of concern to regulators, it is arguably of greater importance to the nascent industry itself. Should the crowdfunding market exhibit high levels of fraud, this new and potentially more efficient way of financing may disappear rapidly. This conjecture is supported by empirical evidence that campaign suspensions by Kickstarter have noticeably damaging effects on platform-wide funding activity. Identifying characteristics of fraudsters is, therefore, of paramount importance. We deploy the theoretical framework of the “Trust Triangle” to identify campaign features that could be helpful to backers in detecting fraudsters in crowdfunding markets. For example, 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

Suggested Citation

Cumming, Douglas J. and Hornuf, Lars and Karami, Moein and Schweizer, Denis, Disentangling Crowdfunding from Fraudfunding (May 16, 2019). Max Planck Institute for Innovation & Competition Research Paper No. 16-09. Available at SSRN: https://ssrn.com/abstract=2828919 or http://dx.doi.org/10.2139/ssrn.2828919

Douglas J. Cumming

Florida Atlantic University ( email )

777 Glades Rd
Boca Raton, FL 33431
United States

HOME PAGE: http://booksite.elsevier.com/9780124095373/

Lars Hornuf

University of Bremen - Faculty of Business Studies and Economics ( email )

Bremen, D-28359
Germany
+49 89 20348619 (Phone)

HOME PAGE: http://www.hornuf.com

Max Planck Institute for Innovation and Competition ( email )

Marstallplatz 1
Munich, Bayern 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Moein Karami

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Denis Schweizer (Contact Author)

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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