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The risky side of contributing to crowdfunding campaigns

A recently filed wrongful termination lawsuit against Skully — a “smart” motorcycle helmet company that in 2014 enjoyed a very successful Indiegogo campaign — details how the company’s founders allegedly bled the company dry spending business funds on sports cars and trips to strip clubs.

In the lawsuit, a former assistant claims that despite raising over $2.4 million in funding from an Indiegogo campaign and another $11 million in venture capital, the now-shuttered company was only able to produce 200 helmets despite pledging to fulfill 3,300 orders, because the founders used “corporate accounts as their personal piggy banks.”

Skully is not the first example of a crowdfunding campaign failing to deliver on its promises in a timely matter, if at all.

The Lily drone, which went up for pre-order in May 2014, still hasn’t shipped and is now delayed until winter of this year.

A May 2012 Kickstarter campaign for a board game raised over $122,000, only to have the creator use the money on rent and a move to Oregon.

The Federal Trade Commission (FTC) brought charges against the board game creator, (the FTC’s first-ever crowdfunding case). A settlement amount of $111,793.71 was suspended due to his inability to pay the penalties.

The common theme in all of these cases, is that when a crowdfunding project goes belly up, there is no way for backers to get their money back.

Katherine Hutt, the director of communications for the Better Business Bureau, says that part of the reason people feel like they’ve been deceived when they donate to a crowdfunding campaign and get nothing in return is a basic misunderstanding of what crowdfunding is.

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As of writing this article, the website for Skully still lists the product as “now shipping.” Photo: Skully

“When it comes to inventions or products or whatever, a lot of them have a premium, they’ll say, ‘You donate us this much, and we’ll give you this,'” Hutt told GrindTV. “But the reality is that none of those rewards are guaranteed. A lot of people look at their backing as an investment, but it’s not. It’s a gift.

“I think there’s a lot of misinformation and probably a lot of optimism in crowdfunding,” Hutt continued. “Ninety-seven percent of inventions in the real world never make it to market and big investors who do this on a regular basis know this, but to an individual doing it for the first time as a crowdfunding backer, they don't know how risky it is. It’s not governed with the same laws as stocks and bonds.”

Crowdfunding websites operate, in many ways, like eBay: If you buy something on eBay, and the seller never delivers it to you, it’s not eBay’s fault, it’s the seller’s.

“Indiegogo does not guarantee that Contributions will be used as promised, that Campaign Owners will deliver Perks, or that the Campaign will achieve its goals,” reads one part of Indiegogo’s terms of use agreement.

“One of the most important things we do is try to set expectations for users,” David Gallagher, a spokesperson for Kickstarter, told GrindTV. “We try to make it clear that this isn't a store. There are plenty of places to go and buy things and have them shipped next day.

“This is about supporting a person’s idea and bringing it to life and following their story as they do that. Ideally, if it works out, you get a reward in the process,” Gallagher told GrindTV. “But we try to be up front about the fact that there are no guarantees.”

Both companies seem to make an effort to inform users of the risks when backing a campaign. Both have A+ ratings from the Better Business Bureau and employ a oversight teams, as well as advanced algorithms, to vet out fraudulent campaigns and unscrupulous project creators.

lily crowdfunding drone
The Lily drone (shown above) has been delayed more than once. Photo: Courtesy of Lily

And those safeguards often work.

RELATED: Experts cry foul on Triton ‘artificial gills’ system

When a campaign for the Triton “artificial gills” system emerged on Indiegogo in March promising a device slightly larger than a harmonica that would help humans breathe underwater, Indiegogo shut down the campaign and returned all contributions to backers because they deemed what the creators of Triton were promising wasn’t possible.

Triton Indiegogo artificial gills
Unfortunately for all those Aqua Man fans out there, the Triton was more science fiction than actual science. Photo: Courtesy of Triton

Illegitimate crowdfunding campaigns have so far been the exception to the rule. Kickstarter worked with a professor from the Wharton School of Business to commission a study to find that only nine percent of funded campaigns fail to deliver rewards.

And there is a laundry list of innovative and successful companies that were birthed out of crowdfunding campaigns, not the least of which was Oculus Rift, the virtual reality headset that turned a 2012 Kickstarter campaign into a $2 billion company that was purchased by Facebook.

Nonetheless, as noted by Hutt, these crowdfunding ventures aren’t treated the same as investment opportunities, and there isn’t much the Indiegogos and Kickstarters of the world can do if a creator decides to take your money and run.

“Once that money is transferred from us to a campaign creator, obviously that's not a situation where we can offer refunds,” said Gallagher.

The FTC will be hosting a forum on crowdfunding on October 26 to listen to consumer protection concerns. But, in the meantime, without much government involvement in the industry, Hutt has one piece of advice for anyone who sees a cool piece of gear on a crowdfunding site.

“If you see a crowdfunding campaign for a new camera, and you want a new camera in your hands, just go to Best Buy or Target and buy a camera,” Hutt said. “Investing in a new technology and a new company is a high-risk proposition. You shouldn't go into a crowdfunding campaign expecting quid pro quo.”

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