Disentangling Crowdfunding from Fraudfunding

Area of Science:

• Business and Economics
• Entrepreneurship
• Business Ethics

Background:

• Fraud in reward-based crowdfunding poses a significant risk to the industry and entrepreneurial finance.
• Limited understanding exists regarding the occurrence, determinants, and consequences of crowdfunding fraud.
• The implications of crowdfunding fraud for business ethics literature require further investigation.

Purpose of the Study:

• To identify and categorize fraud cases in Kickstarter campaigns from 2010-2015.
• To determine factors associated with a higher probability of fraudulent behavior in crowdfunding.
• To document the consequences of fraud detection on crowdfunding project success.

Main Methods:

• Conducted an exhaustive search of media reports on Kickstarter fraud allegations (2010-2015).
• Constructed a sample of 193 fraud cases, categorized as detected vs. suspected.
• Utilized matched samples of non-fraudulent campaigns and over 270,000 total campaigns (2010-2018) to analyze determinants and consequences.

Main Results:

• A sample of 193 fraud cases was constructed and categorized.
• Features associated with a higher probability of fraudulent behavior were identified.
• Crowdfunding projects announced after significant misconduct detection showed lower success rates, reduced funding, and fewer backers.

Conclusions:

• Fraud detection significantly impacts crowdfunding project success and market trust.
• Understanding fraud determinants is crucial for mitigating risks in entrepreneurial finance.
• This study contributes to the business ethics discourse on trust and misconduct in online markets.