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What to know before giving to a crowdfunding project

Kickstarter crowdfunding app.
Chris Ratcliffe | Bloomberg | Getty Images
Kickstarter crowdfunding app.

Your money might get you a cool T-shirt or bolster a good cause, but pledging money to a crowdfunding campaign isn't the same as shopping online or donating to charity. Extra scrutiny may be required.

Google "Greek bailout fund" and the top search result is currently an Indiegogo campaign aiming to raise the 1.6 billion euro (or nearly $1.8 billion) payment Greece owes the International Money Fund on Tuesday. Indiegogo CEO Slava Rubin told CNBC last week that if the campaign is successful, the site will work with campaigner Thom Feeney—a 29-year-old Londoner—to arrange transfer of the funds to Greece.

By July 6, contributors had pledged nearly 1.9 million euro, garnering postcards of Greek Prime Minister Alexis Tsipras, bottles of Greek wine and vacations to Greece, among other perks. (Still, that's barely 0.1 percent of the needed amount.)

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But not all recent crowdfunding news has been so heartwarming. Last month, the Federal Trade Commission announced its first legal action involving crowdfunding—a settlement against a Kickstarter campaigner who raised money for a board game but spent the funds on himself. Under the settlement, defendant Erik Chevalier is prohibited from deceptive representations in future crowdfunding campaigns, and must adhere to stated refund policies.

"Many consumers enjoy the opportunity to take part in the development of a product or service through crowdfunding, and they generally know there's some uncertainty involved in helping start something new," Jessica Rich, director of the FTC's Bureau of Consumer Protection, said in the announcement. "But consumers should be able to trust their money will actually be spent on the project they funded."

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A Kickstarter spokesman said the site lays out potential hurdles and risks for contributors on its Trust & Safety page, and includes suggestions for backers to scrutinize projects. "There is always risk involved in backing a project on Kickstarter, and there are no guarantees," he said. But the results show that the risk is worth taking. Kickstarter creators have a great track record."

Outright fraud is rare because of the public attention campaigns receive, said Ethan Mollick, a professor of management at the Wharton School of the University of Pennsylvania who studies crowdfunding campaigns. "You have a lot of eyeballs on it, and it's likely someone is going to spot a problem," he said. That can shut down a bad campaign before it's funded.

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More than 85 percent of large crowdfunded projects ultimately deliver on the product or service, Mollick said. Among those that don't, there are almost always legitimate reasons for the failure, such as production problems—and even then, he said, contributors are usually able to get a refund.

To make sure you're not funding a lost cause, or outright fraud, put your investor hat on, said Darrell M. West, director of the Center for Technology Innovation at Brookings Institution, a think tank. "People just have to be careful," he said.

First up: Make sure you understand the terms of your contribution, said Jack Vonder Heide, president and founder of research firm Technology Briefing Centers.

That might be equity or a product, or a minor perk in exchange for contributing to a cause. "Some campaigns give tangible benefits, others do not," said Katherine Hutt, a spokeswoman for the Better Business Bureau. And note that unless the campaign was set up by a registered charity, that donation won't be tax deductible.

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Read the platform's terms on refunds and reporting problems. A spokesman for Indiegogo said the site's terms of use point out that campaign agreements are between the contributor and the campaigner—not the site. "We are committed to facilitating the conversation to encourage a resolution," he said.

Then dig into the campaign. Check out the comments page or section to see what platform users are saying, said Mollick. That's where concerns and red flags about factors such as the campaigners, product specs and cost are likely to crop up. Research the backgrounds of campaign creators and associated companies, too, to make sure they're legit, said West. Do they have experience that's relevant to the project, or a track record of other successful crowdfunding endeavors?

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Bear in mind that cited delivery dates rarely align with reality: More than 85 percent of big campaigns are late, and 75 percent of smaller ones, said Mollick. "It's almost a cultural tradition that it's not on time," he said. In other words, if you're set on having that product in hand for a holiday or birthday gift, maybe a crowd-funded campaign isn't the best choice.