Breaking through the wall

Understanding the basics of Crowdfunding 

The emergence of social media platforms, increasing internet penetration, and rising mobile connectivity have all resulted in the creation of a new and innovative entrepreneurship ecosystem known as ‘Crowdfunding’. Crowdfunding is becoming an increasingly popular way to connect entrepreneurs in need of finance with investors in search of various forms of return, ranging from pure profits to impact investing and even non-financial returns.

Why are they so successful?

Probably because they offer, at a very low entry cost, an easy alternative to traditional financing and investing. Investors can choose projects they like - projects they feel emotionally connected to - and decide to sponsor them. Crowdfunding is furthermore strongly connected to social and impact investing.

How do you categorize crowdfunding activities?

Crowdfunding can largely be split into three main types:

  • Rewards/donation crowdfunding - Supporters pledge money in return for rewards, or simply make donations.
  • Debt crowdfunding - Investors loan their money and receive interest on their loans in return (also known as “peer to peer lending”).
  • Equity crowdfunding - Investors receive shares in a business, and share in the success of that business.
What do you need to be wary of?

Each of these platforms can help improve access to finance for growing businesses; as they mature in scale, however, they do come with inherent fraud risks that organizations need to be mindful of. Lack of specific regulations, a small and fragmented market and, often guaranteed, quick high returns are just some of the factors that may inadvertently contribute to the risk of fraud in crowdfunding. Some of these fraud risks can translate into affecting an organization/individual, leading to a fraud incident. In our experience, some of the probable fraud schemes in this space are:

  • Money laundering - Fraud is not limited to only those raising money through the platform. Perhaps less obvious, but nonetheless present, is the risk of money laundering. Funds received electronically under the guise of a legitimate crowdfunding offering would be easier to integrate into the financial system than if the transaction were conducted in cash.
  • Diversion and siphoning of funds on fake/inflated projects - Given the very nature of a crowdfunding platform, investors in a crowdfunding project may, at times, have limited visibility/transparency to the authenticity of the project they are financing. Fraud can manifest itself in many different ways. Misappropriation can be easy to pull off through false websites. The funds raised can be used for purposes other than what was initially disclosed.
  • Identity theft/cyber security risks - Crowdfunding may be vulnerable to the risk of cyberattacks in view of the online nature of crowdfunding. Such cyberattacks may come in varied forms, such as overloading a platform’s infrastructure, confusing accounts, etc. Like with any online financial transaction, phishing schemes can be used to illegally gain access to personal and financial information, such as credit card and banking information. Hacking of the payment gateway or using stolen credit card information can result in direct revenue losses for the platform.
What is the solution?

To know more about these risks in detail and how to protect yourself, read the complete article here. Do you believe crowdfunding is a booming industry? Have you experienced any fraud incidents? Share your views by writing to or on Twitter @deloitteindia.


Authored by Rohit Mahajan (Partner and Head, Forensic) and Rohit Goel (Director, Forensic).

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