The Study Of The Fraud In The Pre-sale Crowdfunding

In modern life, consumers have made full use of financial institutions to meet their consumption needs, some consumers even use credit cards to pay off the mortgage. Financial consumption, which not only meets the necessary requirements of life but also increased in value, has deeply influenced many aspects of daily life and tightly integrated into life consumption. One of the typical kind of financial consumption, a new form of Internet financial—Crowdfunding—the use of the Internet to raise money through small contributions from a large number of investors—has already caused a revolution in small-business financing. There are four forms of Crowdfunding: Equity crowdfunding, Debt crowdfunding, pre-sale crowdfunding and Donate crowdfunding.Pre-sale crowdfunding,which expands rapidly in recent years, is a famous new form of financial consumption. In 2011, the first Pre-sale site Demohour.com set up in China, it has triggered the netizens investment boom ever since. And the first crowdfunding film “One hundred thousand bad jokes” unprecedentedly improved the netizens’ recognition and participation of Pre-sale crowdfunding. Unlike the other sites, Pre-sale crowdfunding is closely related to people’s lives because of the feature to raise coverage of almost all technology products. Pre-sale crowdfunding is limited to specific businesses and types of projects, ranging from the research and development of intelligent products to Micro films or music albums, and from writing to building inn or achieving a dream of travel, more and more integrating into life. “With the purpose of life consumption”, Pre-sale crowdfunding is essentially a new financial consumer behavior.Pre-Purchase crowdfunding is limited to specific businesses or types of projects, the supporters of the project get return in the form kind of products or services, such as book publishing, gaming, music, journalism, or agriculture and ranching. It’s even being used to fund scientists’ research projects.Pre-sale crowdfunding has four characteristics: diversity returns, pre-sale, group-buy, micro-finance. Diversity returns means that the return may not be limited by the form, it may be albums, books, movie tickets, postcards, or it can be "named on Twitter thanks" "photo with author" and so on, and as the market continues to innovate, what forms of future returns are difficult to predict. Pre-sale refers to the fact that sponsors sale to the research and development of production of goods or services in advance. As a result, the fulfillment of the promised returns of products or services requires over a period of time. Group-buy means that the sponsors raise money from a team-buying group. Micro-finance means that the small and micro enterprises or natural persons raise funds for research and development via the crowdfunding site, while the financing amounts are usually small, ranging from hundred to ten thousands RMB, projects like “One hundred thousand bad jokes” successfully financing millions dollars is rare.Participants of Pre-sale crowdfunding generally include: sponsors, supporters, Pre-sale crowdfunding site, third-party payment platform. The most important legal basis of this relationship is the contract between the sponsors and supporters. The supporters compared with a unique identity—consumers.Pre-sale crowdfunding is accompanied by severe trading risks of violations of consumer rights on the threshold of rapid development. There has yet not been outbreaks of domestic consumer fraud cases, many reports expose the fact that the sponsors has cheated the consumers. As there are so many projects on the platform involved in fraud, reputation has been seriously affected, Demohour.com once even closed their website. In addition, the first Pre-sale crowdfunding consumer fraud class action cases have happened in the United States, which pre-warn us all to raise concerns of consumers protection, and accelerate the path of study to prevent Pre-sale crowdfunding fraud.Because of the problem of information asymmetry, consumers mainly rely on all information released by the Pre-sale crowdfunding site and project sponsors, it is difficult for the consumers to identify authenticity. And the risk of transaction fraud is magnified under the remote trading and virtual trader. What’s more, since pre-sale of goods or services, the contract performance seriously relys on the effects of products development and the production conditions. It clearly shows that the project sponsors(operator) will produce a certain degree of risk while passing to consumers. Those three factors have significantly raised the risk of transaction. The risk faced by consumers can be summarized as: fraud, which can be embodied into three categories: false propaganda, fund-raising fraud, product fraud.The behavior of false propaganda includes: incorrect disclosure, inadequate disclosure, luring false advertising, and defamatory comparisons of false advertising. The behavior of fund-raising fraud includes: crowdfunding site illegal fund-raising, sponsor make up project, refund fraud. The behavior of product fraud includes: price cheating, late delivery or non-delivery, finished products inconformity with samples, producing and selling inferior or defective products.Those frauds put the consumers’ right in danger, such as the right to know, the right to choose, the right of fair trade, and the right of safety and security. Right to know refers to the fact that consumers have right to know all facts related to the project, including but are not limited to the true registration information of sponsors, all the ways of raising funds, payment methods, the value in return, return periods and rewards. Right to choose refers to the fact that consumers have the right to choose to participate or not to participate in the projects, and the right to compare, differentiate and select. Fair trade means consumers have the right to be guaranteed by good quality, reasonable price, accurate measures, and other fair trading conditions, and to refuse compulsory transactions. Safety and security means consumers personal and property safety shall not be infringed when participating in projects, consumers have the right to request the sponsors to provide in-kind rewards meet the requirements for physical integrity and safety, this is the essential right of consumers, including two aspects: personal safety and financial security.Pre-sale crowdfunding consumers as opposed to sponsors and platform, for access to information, economic conditions, knowledge, risk tolerance are in a weak position. And those consumers face a significant risk of fraud, urging the need of State intervention and maintenance of protection on them. Under the background of rapid development of the Internet finance, financial products and services are increasingly diverse and complex. Consumer protection should extend to the Internet finance in order to respond to the real needs of consumer protection on Internet financial services.In China, according to the existing law, the Pre-sale crowdfunding is adjusted to Consumer Protection Law, Contract Law, Criminal Law and the relevant judicial interpretations, and so on. In terms of consumer protection law, the provisions of consumer protection are more comprehensive and thorough, that’s why this paper study the issue of the fraud in the Pre-sale crowdfunding in the perspective of consumer protection.In the United States and European countries, the Equity crowdfunding and Debt crowdfunding are included in the financial regulatory system, while the Pre-sale crowdfunding is commonly adjusted to the existing major e-commerce law, contract law, consumer protection law and other laws and norms.To protect the pre-sale crowdfunding consumers has to stick to two principles: State protection and social protection. State protection urges countries to provide consumers with a variety of help in terms of legislation, law enforcement and judicial. Meanwhile, financial regulators should supervise, detect and investigate the crowdfunding fraud behaviors, unfair competition, to maintain financial consumer protections. Social protection emphasizes on healthy market competition, industry self-regulation, social supervision, participation of consumer organizations, consumers themselves protection and other forces to reach the goal of consumers protection.In order to regulate false propaganda, sponsors should timely, fully and accurately disclose the project information, the site should strengthen the review of the project; If the sponsors or the site illegally published fraud information, the consumer could hold both of them liable for the punitive damages.In order to regulate fund-raising fraud, if the sponsors and the platform constitute a criminal offense, they had to take the civil liability,administrative responsibility and criminal responsibility. The regulatory agencies and the administrative responsibility of the sponsors and the platform are different. Administrative responsibilities to the sponsor include: ordered to corrections, warnings, confiscation of illicit proceeds, fines, order the rectification, revoking business licenses and so on. Platform also has to correct within a prescribed time limit, confiscation of illicit proceeds, fines, ordered to close down the site and other penalties.With regard to the product fraud, consumer could resort to the cooling-off, such as refunding in the crowdfunding site or return of goods to the sponsors. What’s more, according to the new Consumer Protection Law, the site has the prior-compensation to the consumer, and the sponsors and the site should bear the joint and separate liability. In addition, provisions for small claims and litigation procedures, to facilitate the pre-sale crowdfunding consumers to resolve disputes quickly and reduce litigation costs, is a powerful weapon for consumers.Protection the interests of financial consumers is of great significance to the industry’s development of pre-sale crowdfunding. Financial development is inseparable from the active participation of consumers, diversified consumer needs is an inexhaustible motive force for promoting financial development. Only full protection of consumers’ legitimate rights and interests can increase consumers’ confidence and boost consumption-oriented economic growth for China’s economic development.