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"When you start offering a share of the profits that are created through the sale of distribution of the product, then you're dealing with investment laws," said Kappel. "If someone wanted to offer more than a tote bag, if someone wants to offer an investment, they can't. They would certainly run afoul of SEC laws. And that has to go through a ton of regulation as a public offering."
Aside from contributors' inability to make money, this creates an odd loophole in the process. Since contributors aren't legally investors, that also means they don't have any ownership or control. And while this is certainly an arrangement artists prefer, it also means that there's no back-end protection for contributors. If an artist doesn't follow through on a project, there isn't much that can be done about it. While some crowdfunding websites hold the money as pledges of support until a goal is reached, others do not, and almost universally, there are no guarantees that a project that has been funded will reach fruition. Theoretically, project managers are legally culpable, but since the average contribution hovers around $25, the chances of a lawsuit from contributors are minimal.
It's what Kappel calls the difference between a legally enforceable right and practically enforceable right.
In Kappel's paper, he cites European crowdfunding websites such as Bandstocks, which allows bands to sell 10-pound shares in their album projects. Bandstocks, however, provides back-end protection by suing on behalf of contributors should a project get dropped.
However, Ringelmann said dealing with a donor unhappy about incomplete projects hasn't yet been a problem for Indiegogo.
"It's always possible someone can take the money and run off to Bermuda," she said. "But the probability is incredibly low."
Ringelmann said the two things that make it unlikely are human nature and transparency provided by the Internet.
"No one raises money from 100 percent strangers," she said. "Crowdfunding can be a way to raise money from friends and family more quickly."
Ringelmann cited a crowdfunding campaign to buy a new computer for a student as a birthday present. Her friends all pitched in a few bucks and she had enough for a new computer within several days.
Ringelmann said in a typical campaign, initial donations by friends and family serve as a vetting process. People aren't quick to financially cross those closest to them. And while strangers may eventually donate to a campaign, it's unlikely to reach that point if friends and family aren't willing to risk a few dollars first. It's part of what Ringelmann calls a "social score."
"Right now, we're judged by a credit score," she said. "But over time, I think that is going to adapt to include how good you are at following through on things like Facebook and Twitter as a way of further assessing your credibility. When you see people with great followings on Twitter, they have them because they're doing good work."
Ringelmann said a crowdfunding scam is hard to run online simply because there are so many options, and a project manager's social score can be easily gauged by prior successes and failures listed on the project page.
That transparency is why the process has such appeal to both project managers and contributors and has been successfully employed for such a wide variety of projects.
Longtime BW columnist Ted Rall even used crowdfunding to raise $25,999 for his recent expedition to Afghanistan to cover the research costs of a new book. The money covered one month's expenses--an amount Rall claimed in his pitch video would normally prohibit reporters not backed by large corporate sponsors from making the trip. He and his colleagues, cartoon journalist Matt Bors and web cartoonist Steven L. Cloud, claimed to be the only unembedded reporters operating in the nation at the time.
For their part, Rall's 211 backers received, or will receive, gifts like signed copies of his book, original sketches and thank yous in the book's liner notes. One contributor bought dinner and drinks with the author for a cool $1,000.
Since crowdfunding appears to be an effective way to raise capital, small businesses are looking at how it could be used to their benefit. But under current SEC laws, such a venture would be illegal. That's why a growing movement is trying to change the law.
"Like everyone, I have more ideas than I pursue. And for as along as I can remember, I thought there should be a way for people to invest in me, in others, with small amounts of money. Not just as a means to do it, but as external motivation," said Paul Spinrad, project editor for Make magazine, who is leading the charge to change the SEC laws and make crowdfunding easier.
He tried to put that into action with a website called Premises Premises, which was a rudimentary attempt at crowdfunding. Spinrad said it failed because the site didn't frame ideas well enough. Since then, more successful crowdfunding sites have incorporated the best elements of social networking.
When he learned about Kickstarter, Spinrad wrote several guest opinions on the popular blog boingboing.net about the potential of investing in intellectual property. People seemed interested, so he took that energy and decided to see what could be done with it.
He discovered that the SEC accepts public petitions, which are posted on the SEC website for public comment.
Spinrad decided to levy the crowd to push the SEC to write an exemption to the Securities and Exchange Act for investments of less than $100 using the comment process.
"Even if just 50 people submit comments, it's going to be way more than they've dealt with before," said Spinrad. "It's a backwater."
The exemption wouldn't cost anything, but it could open new ways for investors to make money.
"Securities deregulation, people are down on it right now," Spinrad said. "And generally I am as well, but this is not high-level insider corporate gaming. This is the kind of deregulation that a leftie can love."
Spinrad acknowledges that comment-bombing a site could backfire, but he feels the comment process is in line with the principles of crowdfunding, making it the ideal method.
"I don't want to antagonize the SEC," Spinrad said. "This is to inject it into public dialog. If they don't want to do that, that's their bad. But if it's a proposal worth consideration, then they should consider it."
It seems to be working. His campaign has levied 39 comments so far, including several from CEOs and an in-depth analysis of the exemptions potential from an associate professor of finance at Georgetown University. The American Sustainable Business Council, a prominent lobbying group, picked his cause as one of its official campaigns, and Spinrad even got an unsolicited letter from the White House Office of Science and Technology Policy encouraging him to attend and push for the exemption at an annual open forum the SEC holds to meet with small business leaders.