Crowdfunding 101: What you need to know

Crowdfunding has become the hottest way to fund everything from new inventions to medical procedures, but there are things you should know before setting up a campaign or contributing to one.

"It's important people do research whether they're looking to make a donation or set up a campaign," said Andy Osburn, an advisor to the not-for-profit National Crowdfunding Association of Canada.

There are many sites designed for crowdfunding and each has its own pricing policies. Despite many of the sites claiming they're free, the first thing creators and donors need to know is that crowdfunding comes with costs attached.

"I haven't come across any platforms that are completely free," said Osburn. Fees are typically five to 10 per cent and sometimes as high as 15 per cent, he said.

• GoFundMe, which says it has raised over $1 billion and bills itself as the world's No. 1 personal fundraising site, deducts a 5 per cent fee from each donation, a processing fee of three per cent and a 30-cent charge per donation.
• Indiegogo charges five per cent for use of the service, plus fees of three to five per cent and a 30-cent charge per transaction, depending on the payment method. It also has a separate site for social and compassionate causes called Generosity that is "free" but still includes payment processing charges of three per cent plus 30 cents on every donation.
• Chuffed advertises as a free service, but donors who pay by credit card are charged 30 cents a transaction plus two to 2.9 per cent by credit card companies.

Those are what Osburn calls "hard fees" imposed by credit card companies and PayPal and others involved in the transferring of money.

Sites collect fees differently

Different sites collect their fees differently. Some deduct them from the donation while others charge the fees on top of the donation.

Halifax-based Open Harbour Refugee Association set up a crowdfunding account to help settle Syrian refugees in Nova Scotia. Liz MacBeth, a spokesperson, told CBC News they did their homework and selected YOUCARING as their preferred site because the only charges are PayPal processing fees plus 30 cents for each donation.

MacBeth said there have been no surprises and they're happy with their choice.

Is the cause legit?

In addition to fees, donors must also be aware of fraudulent fundraisers.  

Part of crowdfunding's appeal is how it allows you to reach out to strangers.

"The downside is that if you don't know the person you're giving to, or you're not familiar with their needs, it does mean opportunistic people can take advantage of that to misrepresent their needs and rip people off," said Jeremy Snyder, an associate professor of health science at Simon Fraser University.

He said the most common cases are people pretending to be sick when they're not, and people who copy information from successful campaigns and substitute their own bank account number.

There have been a few cases where fraudsters have taken advantage of people, including Ashley Kirilow of Burlington, who said she had cancer and is alleged to have set up a fake crowdfunding account that raised $20,000.

"Donate to causes that you know are real and that your family and friends know of first hand," Snyder said, adding it's a good idea to try to confirm information about the people and story behind the crowdfunding effort.

On its website, GoFundMe urges donors to only contribute to users they personally know and trust.

"When in doubt, don't donate," the site says.

Osburn says campaign creators can help encourage donors by establishing their credibility through established social media, such as Twitter and Facebook accounts and a website. He said donors should conduct Google searches, contact the campaigner directly and ensure they're comfortable with the campaign.

Who is policing?

Snyder said he's not aware of anyone who is checking these sites for fraud, so there is no way to know how many people are dishonestly raising money through crowdfunding.

"They're taking it on face value that these people are representing their medical or other needs truthfully," he said.

On its website, Indiegogo says its uses sophisticated algorithms to monitor data for patterns and quickly identify violations. It encourages people to report suspicious activity and says it has an in-house team of experts who review the data and customer feedback closely and take appropriate action to protect the integrity of their platform.

A spokesperson for GoFundMe says the company has a team that works to ensure transparency in its fundraising campaigns by looking at the flow of money and "social signals."

"Any campaigns that display suspicious or untrustworthy behavior are removed immediately," Kelsea Little wrote in an email.

Snyder says while crowdfunding does raise concerns, it's still a powerful tool.

"I don't think people should be paranoid to the point where they never want to give," he said.

Legal requirements around crowdfunding for business were introduced in Nova Scotia in May.