The Dark Side Of Crowdfunding Nobody Talks About

From exciting new products and services to financial help for individuals and families in need, crowdfunding claims to be a fast and easy means for backing the people, things, and causes you most want to support. But there is a dark side of crowdfunding, a side that doesn't get talked about but is nonetheless important.

When you put down your hard-earned money to help a person or a business, you're doing a kind and generous thing. Unfortunately, the objectives of others may not be as well-intentioned, and a lack of cohesive crowdfunding rules and hidden downsides to the practice can combine to make this a less-than-ideal option.

In recent years, crowdfunding has skyrocketed in popularity, demonstrating the good hearts and good intentions of so many. But the system needs improvement; indeed, the downside of crowdfunding should be enough to give anyone pause. Below, let's explore the negative aspects of crowdfunding sites and how they often don't deliver on the promises they make.

  • Sometimes Donors Don't Get To Hear The Whole Story

    Crowdfunding allows any person, situation, or idea to be presented in whatever way the campaign organizer wants to present them. In other words, funders are sometimes being denied the full story. In December 2017, a boy named Keaton Jones went viral after his mother filmed him in tears as he tried to understand why he was being bullied. It tugged on the heartstrings of millions, including celebrities, and a GoFundMe was set up for Keaton which eventually raised more than $56,000.

    But after the initial onslaught of publicity and donations, disturbing details started to emerge. Keaton's mother had previously posted images on social media of her family members proudly displaying the Confederate flag, and many considered her corresponding comments to be prejudiced. She later denied having any discriminatory intent.

    Then it was discovered that Keaton's biological father, who was in jail, had an even more disturbing social media history. The moral of this lesson? Crowdfunding is a quick way to generate a lot of money, but that convenience and speed - and the speed with which news travels in the internet age - can prevent us from getting a full picture of the people and causes we're supporting.

  • The Money Promised Is Not Always The Money Received

    When you donate money to a crowdfunding campaign, you assume the target of the campaign will receive all funds in full. Unfortunately, the money crowdfunding promises is not always the money recipients eventually receive. Crowdfunding sites are taking a substantial chunk of the money that's intended to go to recipients.

    Different sites take different percentages of a campaign's total funds, and the amount is sometimes even higher if the funding goal is not met. Which, in essence, is saying, "You made less money? Well then, we'll take more of it!" There are processing fees involved as well. In the end, far less than you really think is going to those you want to support.

  • There Aren't Always Consequences For Campaigns That Mislead Backers

    Crowdfunding sites abound, and prospective campaigners have a lot of comparison shopping to do. This can be a challenge considering there are few, if any, across-the-board rules or standards for crowdfunding. One of the most glaring issues is the lack of any real consequences for campaigns that mislead backers, either purposefully or unintentionally.

    In September 2018, authorities investigated New Jersey couple Mark D'Amico and Katelyn McClure who raised $400,000 for a homeless man who helped McClure when her gasless car was stranded back in 2017. The recipient, Johnny Bobbitt, sued the couple, claiming he did not get all the promised funds. In court, Bobbitt's lawyer said he only received roughly $75,000, including a camper and a 1999 Ford Ranger. The couple denied any wrongdoing concerning the funds. 

    The federal government has tried to crack down on this problem, but the absence of any universal standards remains. And without rules in place, there is nothing preventing others from pulling the exact same stunts.

  • There Can Be Unexpected Audits From The IRS

    Is a donation received on a crowdfunding site considered a gift or earned income on the part of the recipient? This is the dilemma in which many crowdfunders find themselves come tax-paying time. A fund must be set up in a specific way if the recipient is to accept the money as a gift or donation, neither of which will really generate any red-flags for the IRS. But if a funding page is not set up in just the right way, or the recipient claims the money as income on a tax return, warning bells start going off at the IRS.

    The agency could start looking closely at the sudden spike in income, which in turn leads to an audit. So, in the end, crowdfunding could be adding a lot more stress and pressure onto the shoulders of people who are already facing significant hardship.

  • Some Of The Rules Are Unnecessarily Complicated

    It seems like it should be a straightforward proposition. You have a person or persons, or idea, that you want to see receive some financial support. You build a crowdfunding page with a few clicks of a mouse, and the donations start rolling in. Sounds pretty uncomplicated, right? Sadly, it's not.

    The few rules that exist in crowdfunding tend to be more complicated and convoluted than anyone first imagines. We humans have a propensity for skipping over the fine print, but the fine print is where the meat-and-potatoes details are, and these can be difficult to decipher at best. And, again, they can vary wildly between different crowdfunding sites. On Kickstarter, for instance, those who are crowdfunding new products cannot post photographic images of what that product will look like when finished. The goal is to fund the idea, not the finished product, and in the words of Kickstarter, they are "not a store."

    Crowdfunding has been so successful that the US Securities and Exchange Commission adopted rules making investment possible through crowdsourcing methods, but it's not without its complexities. Congress has passed a slew of often difficult-to-navigate specific laws for these crowdfunders.

  • Few Crowdfunding Campaigns Actually Meet Their Goals

    It is estimated that less than a third of all crowdfunding campaigns are successful. Just one browse through GoFundMe, and you can see that most of the campaigns have generated little if any interest (or money). Kickstarter appears to have one of the higher success rates compared to other crowdfunding sites - which is good because if you don't raise your goal you don't get any of the money - but even their numbers aren't terribly impressive. Just 31% of their campaigns met their goals in 2015.

    Unless you have a cause or idea that sparks viral-level interest, or you have a knack for creating compelling fundraising drives, the odds are that your crowdfunding is not going to be the massive moneymaker you initially think it will be.