Disentangling Crowdfunding from Fraudfunding
84 Pages Posted: 26 Aug 2016 Last revised: 16 May 2019
Date Written: May 16, 2019
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
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