Disentangling Crowdfunding from Fraudfunding

We present first evidence that fraudsters in crowdfunding markets can be detected because of several specific characteristics: They are less likely to have engaged in prior crowdfunding activities, they are less likely to have a social media presence, and they are more likely to provide poorly worded and confusing campaign pitches with a greater number of enticements through pledge categories

Douglas J. Cumming


Scholarcy highlights

  • In the U.S, a central tenet of the 1933 Securities Act was the disclosure of fair and complete information, which in turn encompasses the prohibition of fraud, misrepresentation, and market misconduct.3 Over the years, a great deal of research has focused on the causes and consequences of fraud in the context of disclosure laws and enforcement pursuant to the Securities Act
  • We focus on multivariate settings in order to include multiple possible determinants of fraud simultaneously
  • We find that No of Creator-Backed Projects and No of Creator-Created Projects are both significantly negatively correlated with fraud
  • We find no statistically significant relationship between a natural person profile or formal profile name and fraudulent campaigns. This is attributable to the fact that on, e.g., Kickstarter, project creators must verify their identity through an automated process, and that information appears on their profile regardless of whether they use a formal profile name
  • Our paper is the first to provide an in-depth examination of which factors influence a higher probability of crowdfunding fraud detection
  • Becker’s theory is supported by numerous experimental studies showing, for example, that detection probability has a larger impact on deterring fraud than the magnitude of punishment. In another experiment, where subjects could misrepresent the financial statements of a firm, increasing the utility of fraud by 30% increased actual fraudulent behavior by 17%
  • We find that fraud is not a random phenomenon in crowdfunding markets, and it can be explained by empirical models
  • While the lack of fraud detection might justify private or public regulation that requires portals to offer standardized prescreening procedures, such regulations could rapidly become obsolete as fraudsters adapt and learn new methods to avoid detection

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