$122,000 Kickstarter fraud case highlights dangerous lack of regulation

A crowdfunding fundraiser who defrauded supporters of $122,000 (€107,000) is facing legal action in the first crowdfunding case which highlights the lack of regulation in the billion-euro sector.

The US Federal Trade Commission (FTC) launched legal proceedings on Wednesday against Erik Chevalier, who raised the money using Kickstarter to ostensibly develop a Monopoly-style boardgame but failed to deliver on the project.

The FTC maintains that Chevalier used the swindled money to relocate to Oregon and pay his rent. US authorities handed a $112,000 suspended judgement to Chevalier, who claims he does not have the means to pay the money back.

Crowdfunding platforms are an increasingly popular way of raising funds for innovative business and charity projects, with approximately $5.1bn (€4.5bn) being generated through crowdfunding initiatives in 2013.

Kickstarter, the world's second-most popular crowdfunding site, has generated more than $1.8bn (€1.6bn) for some 86,000 projects since its launch in 2009.

However, the site does not offer refunds to backers who have been defrauded by false creators and says it cannot guarantee the authenticity of projects.

Similarly GoFundMe, the most popular crowdfunding platform, says it cannot guarantee the authenticity of all its donation pages and advises users to "only donate to people you know and trust".

According to professor Alan Woodward, cybercrime advisor to the EU's law enforcement agency, crowdfunding is a new avenue for criminals to exploit due to the lack of regulation.

"Basically it's like going into the street with a bucket and saying, 'Please give me some money', it's the electronic equivalent of it," says Woodward.

He adds that the nature of crowdfunding, which is used for "blue-sky projects" which traditional investors are reluctant to stump up for, means the business of supporting ostensible projects via such sites is inherently risky.

Crowdfunding is a key aspect of financial technology, or fintech, where businesses use software to provide financial services as opposed to more traditional banks and branches. In the five years between 2008 and 2013, global investment in fintech projects tripled to almost $3bn (€2.7bn).

In a live Twitter Q&A session following the case, the US FTC confirmed that it was investigating other cases of fraud in fintech platforms, such as crowdfunding, though it was unable to specify as details of its cases are private.

FTC investigations are nonpublic, but can say we're aware of potential for fraud in #FinTech platforms. #AskFTC https://t.co/b1BMVkdSch

— FTC (@FTC) June 11, 2015

Chevalier launched his Kickstarter campaign in May 2012 to support his development of The Doom That Came to Atlantic City, a fantasy board game whose backers included a Game of Thrones designer and a a figurine sculptor who worked on several Hollywood films including Cabin in the Woods.

He promised rewards, including a free copy of the game and collectable figurines, to backers who contributed more than $75 (€67). Almost 1,250 people donated to Chevalier's project, but 14 months later, he cancelled the projects and promised refunds, most of which did not materialise.

Nevertheless, the board game made it to shelves after games company Cryptozoic finished off the game and sent free copies to defrauded investors.

When asked whether Kickstarter would be introducing new regulations following the case, a spokesperson told Newsweek: "Kickstarter is still quite new and always evolving. We've made many changes to the system over the years as we've thought through the best way to ensure its long-term health. I'm sure there will be more changes, and that we'll consider them carefully before rolling them out."

A spokesperson for the European Commission told Newsweek that the Commission did not hold precise statistics on crowdfunding fraud committed in the EU. Cases of donation-based crowdfunding, such as the FTC case, are covered by EU legislation on e-commerce and online sales and are resolved at a national level.

Newsweek contacted Action Fraud UK to establish the scale of crowdfunding fraud in the UK, but the body did not respond by the time of publication.

Update: This article has been updated to include the response from the European Commission.

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