Bus Monitors, Killers and the Dangers of Donation-Based Crowdfunding

by Crowdfundinglaw

We all enjoyed the heartwarming story of Karen Klein who, after enduring relentless taunting by a group of middle school students, became the beneficiary of a crowdfunding campaign that raised more than $655,000 in only a few days to send her on “the vacation of her life.”  This is what crowdfunding is all about, right?  Many people, using the internet to rally behind a cause and make small contributions that aggregate to meaningful dollars.  Karen is not just going on vacation, she can now retire from riding school busses with miscreants.  That feels like justice.  But is anybody else getting a little nervous about the miscreants who will now have been impressed by the power of the tool and are no doubt working overtime to fake a similarly compelling cause or to benefit from someone else’s tragedy?

The Next Story Just Might be Fiction

I have written before that the donation-based crowdfunding that is practiced today is much more rife with opportunities for fraud than the much ballyhooed fraud fears involving investment crowdfunding under the JOBS Act.  While the SEC works on the rules to safeguard investors, I hope that local law enforcement officers are preparing for larceny investigations for those that take the much more direct path: faking the next Karen Klein story.  Why worry about SEC filings and investors that will complain about being ripped off when a good story will get you 3/4 of a million in a few days with no strings attached?  This game has been around for a long time before crowdfunding.  Who can forget the bride faking cancer for donations?  It took two years for her scam to result in an arrest.  But now crowdfunding provides a much more massive megaphone than that used by former scam artists who simply got their fake cause in the local newspaper.  The success of the Karen Klein crowdfunding campaign is likely to encourage less meritorious copycats.  In an era when “reality” TV is fake and staged, how long will it take for fraudsters to fake the next video and use it to try to raise funds?

The Next Real Tragedy Might Bring Out the Crooks

In addition to totally fake causes, what happens when third parties use crowdfunding to falsely benefit a real circumstance?  After all, Karen Klein never even asked for money.  The gentleman who started the campaign on Karen behalf seems legit.  IndieGoGo is intent on making sure Karen gets the money that was intended for her.  What about the fake supporter who converts the money intended for a legitimate tragic story and runs?  Campaigns such as this do not need to be done through a crowdfunding site such as IndieGoGo.  Just take George Zimmerman, the man who shot and killed a 17-year-old kid in Sanford.  Zimmerman apparently raised $200k for his legal defense and support of his family through his own website.  This is crowdfunding as well–only we later found out that Zimmerman’s attorney is working pro bono and Zimmerman and his wife were lying in court and attempting to hide the money raised.

Crowdfunding is getting explosive.  This brings with it the good and the bad.  It also brings a heavy burden on those of us who support crowdfunding and operate crowdfunding platforms to do what we can to keep out the bad.