What happens if the creator fails to deliver on-time whatever was promised—the T-shirt, say? You wait and grumble. Aggravations such as this, says Kazmark, are between the funders and the creators. Kickstarter chooses not to get involved. "Delays happen a fair amount," he says. "But it's uncommon for a project just to disappear or fall off the face of the earth."
It does, though, happen.
Kickstarter does not provide detailed statistics on the outcome of its funding campaigns. Nor does it track how or on what the money got spent. Mollick, though, has done his own analysis, in which Kickstarter did not participate. To make his findings, he and two graduate assistants combed the Internet for every Kickstarter campaign about which they could find information. "We assessed whether what was promised was delivered or not, whether it was late. We looked on Facebook for complaints by contributors."
Asked to give examples of Kickstarter campaigns gone wrong, he says the most famous to date was one to develop eyeglasses capable of capturing video. That project, he says, has now "gone silent," with the creators saying nothing about the disposition of the more than $300,000 raised. He says there also have been "many" campaigns in the $40,000 range that remain unaccounted for.
Kickstarter's website says that creators who have received funding have an obligation to return it to their donors, if they find they cannot complete their projects or deliver on their promises.
Mollick's research shows that the incidence of these negative outcomes is small. "Failure to deliver is under 4 percent of projects," he says, "and less than 1 percent of money raised."
The incidence of outright fraud, too, is low, he says, in part because the online dialog between donors and creators is public and completely open. "When something suspicious comes up, there are lots of eyeballs to see it," Mollick says.
He gives the example of an effort to raise money to produce a super-premium brand of Kobe beef jerky. The funding campaign sailed along happily until a would-be contributor who knew something about jerky asked why Kobe would be the right beef to use: wasn't it too fatty? Wasn't the best jerky lean? Somebody else asked what the tag numbers were for the beef (portions of Kobe beef are identified by serial number, Mollick says).
When plausible answers to these questions were not forthcoming, donors blew the whistle, and Kickstarter took down the page. No money ever changed hands.
Regarding the sale of equities, Mollick says he sees the greatest potential for fraud in situations where the crowdsourcing site does not permit open, public communication between investors or between investors and the entrepreneurs. Questionable, too, would be sites that make no claim to have exercised sufficient diligence to confirm that their cash-soliciting ventures are legit.
What signs should inspire confidence? "If the principals behind the start-up have prior experience in their industry, that's good. If they've got a working prototype of what it is they want to make, that's good, too. If those are lacking, your alarm bell ought to go off."
Mollick says that for the present the SEC has adopted an attitude of "wait and see." On the one hand, he says, the intent of the JOBS Act is to make it easier for legitimate start-ups to raise money. On the other, the SEC has a responsibility to protect investors from fraud. "There's some danger of fraud in this kind of funding. That's the reason for the qualified-investor rule."
Asked the best word to describe regulators' attitude right now, he opts for two: "Worried, nervous."