Disentangling Crowdfunding from Fraudfunding

Abstract

Fraud in the reward-based crowdfunding market has been of concern to regulators, but it is arguably of greater importance to the nascent industry itself. Despite its significance for entrepreneurial finance, our knowledge of the occurrence, determinants, and consequences of fraud in this market, as well as the implications for the business ethics literature, remain limited. In this study, we conduct an exhaustive search of all media reports on Kickstarter campaign fraud allegations from 2010 through 2015. We then follow up until 2018 to assess the ultimate outcome of each allegedly fraudulent campaign. First, we construct a sample of 193 fraud cases, and categorize them into detected vs. suspected fraud, based on a set of well-defined criteria. Next, using multiple matched samples of non-fraudulent campaigns, we determine which features are associated with a higher probability of fraudulent behavior. Second, we document the short-term negative consequences of possible breaches of trust in the market, using a sample of more than 270,000 crowdfunding campaigns from 2010 through 2018 on Kickstarter. Our results show that crowdfunding projects launched around the public announcement of a late and significant misconduct detection (resulting in suspension) tend to have a lower probability of success, raise less funds, and attract fewer backers.

Supplementary information: The online version contains supplementary material available at 10.1007/s10551-021-04942-w.

Keywords: Crowdfunding; Entrepreneurial finance; Fraud; Internet.

Fig. 1

Sensitivity analysis. Panel A [Panel B] shows the estimated Fraud Period [Post-Fraud] dummy variable regression coefficients in Specifications (1)–(3) of Table 9, Panel A [Table 9, Panel B], using alternative classification schemes for campaigns affected by suspension announcements (Fraud Period and Post-Fraud) for the success measures as dependent variables (Funded (logit), Log Pledged (OLS), and Log Backers (OLS)). N (ranging from 7 to 29 days) determines the number of $\mp$ [$+$] days considered in the Fraud Period [Post-Fraud] dummy variable definition. All calculated coefficients are statistically significant at least at the 5% level