- The Washington Times - Thursday, August 13, 2015

When Katy Perry’s infamous Left Shark awkwardly danced on stage during this year’s Super Bowl halftime show, Laura Sirikul’s first thought was: How can I get one of those costumes? Days later, she earnestly forked over $100 when she saw a crowdfunding campaign on Indiegogo promising to manufacture the cartoonish shark suit and to donate the proceeds to a nonprofit benefiting the environment.

But five months passed — as did prime opportunities such as the Discovery Channel’s “Shark Week,” the TV premiere of “Sharknado 3” and San Diego’s massive Comic-Con — and there were still no shark suits.

Worse yet, creator David Lam had stopped posting online updates about the project. Had Ms. Sirikul and more than 1,000 others who donated to the project fallen for the latest online scam?

The popularity of crowdfunding websites has offered entrepreneurs and innovators a way to fund fledgling projects not otherwise possible by acting as a conduit for online donations. Crowdfunding platforms raised over $16 billion last year, and industry research estimates forecast that the figure could hit $34 billion this year.

But, perhaps inevitably, the lucrative crowdfunding sites also have become targets for scam artists, and none of the established or emerging platforms — including Kickstarter, Indiegogo and GoFundMe — seems to be immune.

Type “crowdfunding” and “scam” into a search engine, and the plethora of campaigns accused of dishonesty, or “scampaigns,” quickly becomes apparent. Authorities have only recently been able to hold scam artists accountable.

Washington state Attorney General Bob Ferguson filed the nation’s first consumer protection lawsuit against a crowdfunding campaign organizer in May 2014 after receiving complaints about a Kickstarter campaign that never delivered a promised deck of custom-designed playing cards.

“When we began our investigation, it became clear to me that this was a case important not just for Washington state residents who lost out on their investments but to send a message as well that if you do business, you need to play by the rules,” Mr. Ferguson said.

The problematic Kickstarter campaign, started by Edward J. Polchlopek in 2012, promised playing cards with custom artwork for backers in exchange for at least a $9 donation. Two years later, the campaign hadn’t delivered the goods and Mr. Polchlopek had gone silent.

Prior to the attorney general’s investigation, scorned donors had little recourse to address fraudulent campaigns other than to post information about scams online after the fact in an effort to prevent more, crowdfunding lawyer Kendall Almerico said.

“The prevailing logic has been the crowd will vet these projects themselves and find the people responsible,” he said.

Last month, however, the judge overseeing the lawsuit ruled in the attorney general’s favor, ordering Mr. Polchlopek’s business to pay more than $54,000 — including civil penalties and reimbursement to the 31 Washington residents who donated to his campaign.

It’s unclear whether Mr. Polchlopek deliberately intended to scam donors. The Tennessee businessman refused to communicate with prosecutors about the case, but Mr. Ferguson said it shouldn’t matter whether a campaign intentionally defrauds consumers or simply is unable to finish the promised product.

“The bottom line is Kickstarter itself is very clear in its terms: You either provide the product, or if you bite off more than you can chew, under Kickstarter terms you need to provide a refund to the customers,” Mr. Ferguson said.

For the Federal Trade Commission, which in June brokered a settlement agreement in its first crowdfunding case, whether deception or failure is behind a stalled crowdfunding campaign can make a difference in how the campaign creator is treated. But officials warn that it may take a hefty amount of sleuthing by wronged consumers to trigger an investigation.

“It’s not always apparent on the face of things,” said Sandhya Brown, assistant director of the FTC Division of Financial Practices. “A couple months past due — it’s hard to know what to make of that.

“At the end of the day, it’s about the promises you are making and whether you are following through on those promises,” Ms. Brown said.

Mr. Almerico said the self-policing among campaign backers has kept successful scams to a minimum — many are unmasked or shut down by platforms before they can collect much money — but he welcomes law enforcement.

“That hopefully raises their guard a little bit more,” he said about would-be scammers.

Inspiration strikes

The night Left Shark made a splash at the Super Bowl, David Lam wasn’t even watching the game. But hours after the New England Patriots hoisted the Vince Lombardi Trophy, he noticed friends enthusiastically sharing video clips online of the shark’s off-tempo dance moves, and inspiration struck.

“I saw it was viral,” the 28-year-old aspiring engineer said. “My thoughts were, ‘Why not use a popular meme for something that is good?’”

Mr. Lam said he had no experience crowdfunding a campaign when he sat down at 2 a.m. that morning and began hammering out the details of his idea on Indiegogo.

He was involved in another startup business and generally thought of himself as handy — he had sewn curtains and even designed and constructed his own Murphy bed. Why couldn’t he make a shark suit? It didn’t turn out to be that simple.

He went to sleep at 11 a.m. after staying up all night to work on the Indiegogo campaign. By the time he woke up, the campaign already had taken off.

“It just blew out of proportion,” said Eunyce Kim, a 26-year-old friend of Mr. Lam’s who put her skills as a social media marketer to use for the project in its first few weeks. “We were thinking we would make 100 [costumes]. And then it got really big.”

With the help of glowing news coverage highlighting Mr. Lam’s promise to donate proceeds to a nonprofit benefiting the environment, the Halftime Shark Suit project raised close to $93,000 from more than 1,200 donors.

The positive news reports, sponsorship by numerous companies and the pledge to donate to a good cause — factors that, authorities say, prospective donors should assess before sending money — encouraged Ms. Sirikul to give to the campaign.

“I was wary. I thought $100 is a lot, but I see he is backed by so many people and actual companies and so many credible websites were promoting him,” the 31-year-old writer and researcher said.

Unlike crowdfunding campaigns promising too-good-to-be-true high-tech gadgets, a shark suit seemed technically feasible.

In the initial weeks of the campaign, Mr. Lam made some posts on the website — keeping donors informed about a project is strongly suggested in crowdfunding. But communication tapered off, and when deadlines for the campaign came and went with no progress, Ms. Sirikul became frustrated.

“I was expecting it to come in July, perfect for Comic-Con,” she said. “Then, as the months go on, I’m realizing I’m not going to get this before Comic-Con.”

She sent a message to the email address on the account. Then she tried calling Indiegogo. Nothing.

Eventually, she posted a petition online demanding that the campaign refund donors’ money.

A cautionary tale

On Mr. Lam’s end, things were falling apart. He said he never intended to scam donors. He also didn’t want to become the target of their wrath.

Mr. Lam initially recruited a team that included a fashion designer, an industrial design student and a social media specialist who met on weekends to work on the project. But the momentum started to fade, and Mr. Lam had less time to dedicate to the project as work ramped up on a different startup venture with which he was already involved.

Complicating matters, Mr. Lam said, he hit a hurdle early in the process when someone broke into his car and stole nearly $4,000 worth of laptop computers and other equipment from the startup. He needed to take on jobs as a waiter and an Uber driver to pay back his partners for the losses.

In the meantime, the failing campaign began to take its toll.

Donors questioned whether Mr. Lam had taken the money and run. People posted information online about him. They tracked down and bad-mouthed his startup. He said his partners eventually asked him to distance himself from the crowdfunding project because of concerns about bad publicity.

“I just didn’t think it was going to blow up and become this witch hunt,” Mr. Lam said. “I don’t know what other word to use, but that’s how I feel.”

Ms. Sirikul’s persistence and her online petition eventually got her into contact with Mr. Lam. The two discussed possible remedies, including outsourcing production of the shark suits to an established company to fulfill the crowdfunding orders.

Mr. Lam said he did make progress on the shark suits, finishing a prototype and finding manufacturers that could make the costumes, but he worried that going forward would further jeopardize his startup project. In the end, Mr. Lam said, he just wanted the campaign to be over.

“If I could make everything go away, I would want Indiegogo to refund everyone,” he said during an interview last month.

Less than a week later, an update was posted on the Halftime Shark Suit campaign Web page notifying donors that refunds were forthcoming. The July 26 post was the last update on the campaign.

Terms of use

Even with the refund process for the Halftime Shark Suit campaign — confirmed by an Indiegogo spokesman — disgruntled investors won’t be getting back all of their money.

Mr. Lam said he spent very little of the money he collected and that no more than $1,000 went toward advertising and materials for the shark suit prototype. That should leave the bulk of the cash available for return. But as part of its business model, Indiegogo will keep a portion of the money that the campaign raised.

The practice of keeping a cut of the money raised differs slightly among crowdfunding platforms. Indiegogo charges a 5 percent fee to campaigns that reach their fundraising goals and can charge campaigns that don’t reach their goals depending on options the organizer selects. Kickstarter distributes funds to organizers only if they meet their monetary goals. In that case, it charges a 5 percent fee. If the goal is not met, the fees are refunded and the company takes no cut. Both platforms assess payment processing fees.

Based on those figures, Mr. Lam estimates that he will be able to refund 85 percent to 90 percent of the amount donated to his campaign — all of which he will have to process himself because Indiegogo takes no part in issuing refunds. On Monday, Mr. Lam said he is working this week to verify donors’ contact information so he can begin issuing refunds.

Returning money to donors is the top priority in fraudulent crowdfunding cases that the FTC pursues, even though a full refund can’t always be expected even in those cases, Ms. Brown said.

No guarantees

On their end, crowdfunding platforms try to educate prospective backers that donating to a campaign is not the same as a straightforward purchase and to warn them about scams.

“People aren’t buying things that already exist — they’re helping to create new things,” reads an entry on Kickstarter’s Trust and Safety Web page. “Some projects will go wonderfully, and others will run into obstacles. Be prepared for a little bit of each.”

Indiegogo’s own terms of use ban scams and fraudulent projects. But they also explicitly state that there is no guarantee that contributions will be used as promised and that the company is under no obligation to intervene in any disputes between campaign organizers and donors.

“The platforms themselves like Kickstarter and Indiegogo, they disclaim any responsibility for anything put up on their site,” Mr. Almerico said.

Distancing themselves from campaign operations gives platforms legal protections from regulators and lawsuits, Mr. Almerico said.

Asked during an interview whether the company would, or could, take any sort of action to compel a campaign owner to refund money, a spokesman for Indiegogo read off a list of the terms of agreement — none of which explicitly answered the question.

“In the event of any dispute, such as a Campaign Owner’s alleged failure to comply with the Terms or alleged failure in fulfillment of a Perk, we may provide the Campaign Owner’s contact information to the Contributor so that the two parties may resolve their dispute,” Indiegogo’s terms of use state.

In the case of Mr. Lam, the company confirms communication with him about the refund process.

“We have provided him clear guidance on how to issue refunds and effectively communicate with his customers to resolve any deliverability challenges and issues between him and contributors as quickly as possible,” reads a statement provided by Julian Wong, the head of the trust and safety division at Indiegogo.

When asked whether the platforms should bear some accountability for fraudulent campaigns, the Washington state attorney general said it is a conversation worth having.

“I think crowdfunding sites can be wonderful opportunities for investors and sellers,” Mr. Ferguson said, reiterating that he is not trying to stifle use of the various fundraising platforms. “With new technology and new ideas, it’s important to see if we have the right regulatory system in place to protect consumers.”

But for the donors stuck in the middle of a campaign dispute, there is little solace in regulatory victories or tough talk from crowdfunding platforms until the money is returned.

“I feel like it wasn’t a scam initially. I think initially he thought he could do this because he hasn’t run away with the money and could have not responded at all,” Ms. Sirikul said of Mr. Lam’s shark suit campaign. “I got fed up. A lot of people just want their money back. I just want my money back.”

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