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Rob Ford Crackstarter Campaign A 'Reputational Risk' To Fledgling Crowdfunding Industry

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The campaign to crowdfund the purchase of the alleged Rob Ford crack video is morally and legally murky, and poses a potential risk to the fledgling crowdfunding industry, insiders say.
The campaign to crowdfund the purchase of the alleged Rob Ford crack video is morally and legally murky, and poses a potential risk to the fledgling crowdfunding industry, insiders say.

Gerard Adderley donated $25 to an online campaign that aims to raise $200,000 for enterprising drug dealers because he believes the public deserves to see a video of Toronto Mayor Rob Ford allegedly smoking crack cocaine.

His contribution is only a fraction of what has been raised, but, along with 6,000 others, the Torontonian is contributing to a groundbreaking exercise in democratic capitalism that could have very public ramifications for the nascent crowdfunding industry.

“There are pros and cons, but at the end of the day what I think makes a fantastic story is that ultimately if this video comes to light it will not have been a news organization, per se, that paid for it, it will be the people,” the 41-year-old art director said.

Adderley believes that the video, which Ford has dismissed as “ridiculous,” should be released so the public can hold the elected official to account.

“A lot of people feel this is tantamount to bullying, and my reply to that is: Actually, no, it’s not. This is the school yard coming together to put the bully in his place.”

He hopes the video owners will use the money to leave the city and build better lives. But he also knows that there is a chance they are extorting the mayor, deceiving the public and might never produce the alleged footage.

This is the ethical quandary faced by donors to the “Rob Ford Crackstarter” campaign on crowdfunding site Indiegogo, a fundraising effort by Gawker posted after the U.S. news website’s editor and two Toronto Star reporters claimed they had viewed iPhone footage that depicted the embattled mayor smoking from what appeared to be a glass crack pipe.

The video was shopped around for “six figures” by two men involved in Toronto’s drug trade, reported Gawker and The Star, which viewed the footage but did not buy it or verify its authenticity.

Ford has denounced the allegations as “ridiculous” and accused The Star of having a vendetta against him, but the mayor has said little else and taken no questions from reporters.

In the week since the story broke, Ford has been dismissed as volunteer coach of his beloved high school football team (due to remarks he made about the school before this current scandal), been the butt of jokes round the world and fired his chief of staff, Mark Towhey, on Thursday.

Several media outlets reported that Towhey was fired for telling the mayor to “get help,” and The Globe and Mail said Friday that Ford’s inner circle had crafted a plan to put the mayor on a plane to a rehab centre and then issue a statement after he had left.

In the meantime, the campaign to have the infamous 90-second iPhone clip released has raised more than $160,000 – about 80 per cent of its goal ahead of the Monday deadline.

Gawker editor John Cook, who did not respond to Huffington Post Canada for comment on the campaign, wrote in a post late Thursday that while he believes the $200,0000 goal will be reached by Saturday or sooner, his confidence that a deal will come to fruition has “diminished.”

It appears Gawker’s tipster has been unable to reach the owner of the video in recent days, a risk the website admits was somewhat foreseeable as “folks who are involved in the crack trade tend not to be the most reliable people in the world.”

The campaign received a $10,000 donation Thursday from someone who gets to claim the actual iPhone as a reward for such a large gift.

Cook pledges to donate all the money to an addiction organization if enough cash is raised but the video is not turned over. If the goal is not reached, everyone gets their money back.

The campaign has been lauded as the evolution of free market democracy, but it has also been derided because the money paid for the video will be going to drug dealers.

Crowdfunding, which has made headlines for everything from its role in funding the Veronica Mars movie to helping to send a bullied school bus driver on vacation, is a means to raise money by leveraging a massive number of small contributions to finance a project or venture, be it a charity, a start-up business, a film, an event, an album or journalism.

Last year the industry brought in $2.7 billion, a figure that is expected to nearly double to $5.1 billion this year. Transformative, yet still fledgling, crowdfunding is considered by some as the “wild west” of the investing world, leaving regulators scrambling to make up the rules from behind.

But never has the industry encountered a case like the alleged Rob Ford video.

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The situation is an unusual deviation from typical crowdfunding ventures, said Christine Duhaime, a lawyer who specializes in corporate finance law and startups, and an expert on anti-money laundering law.

Legal and ethical red flags surrounding the video’s purchase could invite greater scrutiny of the rising industry at a time when the legal and business worlds are paying close attention, she added.

“If (some crowdfunders) start to engage in activities that are potentially linked to proceeds of crime, terrorist activity and money laundering, then I think there’s going to be reputational risk for the whole industry, which is just developing,” she said.

“It’s hard to imagine that there isn’t some sort of illegal element in that video, but buying the video itself isn't necessarily illegal,” she said.

Ford’s brother, city councillor Doug Ford, chastised Gawker’s campaign in an uncharacteristically brief media appearance.

“To the folks at Gawker, what you are doing is disgusting and morally wrong. Giving away prizes to try to raise money for drug dealers and extortionists is disgraceful,” Ford said Wednesday of rewards including a commemorative art print of the mayor smoking crack for a $200 donation and the iPhone.

There are many models of crowdfunding platforms, some of which curate and control the type of projects that can be posted to their sites. But Indiegogo believes it is not up to the platform to decide “who deserves to raise funds and who doesn’t,” it said in an email to HuffPost Canada.

Duhaime is skeptical that the video will come to light, given how many legal issues surround the public campaign. Toronto police chief Bill Blair has already said his force is monitoring what happens with the video for any evidence of criminal activity. Canada Border Services and Canadian and U.S. regulatory authorities could also be involved because financial services companies are compelled to report suspicious transactions to them.

If the goal is reached, the money will be wired from Indiegogo to Gawker (minus its 4 per cent fee) through PayPal. Gawker then has two choices: to wire the money to the drug dealers in Toronto or drive it across the border.

Both scenarios pose challenges – aside from the obvious fact that their names and bank accounts will be recorded – any amount greater than $10,000 crossing the border must be disclosed. In addition, such a large sum would likely be flagged as suspicious by Western Union, PayPal or the bank involved, particularly given the publicity about the transaction.

If Gawker decided to transfer the money to cash and drive it across the border, the conversion of such a large sum would raise suspicion at the bank and would also have to be declared at Customs because it is more than $10,000, Duhaime said.

Crowdfunding operations are subject to the laws and regulations in the jurisdictions in which they are incorporated or operated, so Indiegogo is subject to U.S. laws. Because they are not yet recognized financial services, however, their incoming transactions are not required to be tracked.

“It it is so new in Canada that it is unregulated as a financial service, and thus there is always a theoretical risk of the proceeds from a fund-raising campaign being used for criminal activities, including money laundering and terrorist financing,” Duhaime said.

Many crowdfunding platforms will be interested in the outcome of the campaign because of its unique criminal implications and for indications on how to make a judgment call, said Candace Klein, chief executive officer of crowdfunding site SoMoLend and a founding member of the U.S. Crowdfund Professional Association.

“[Crowdfunding] democratizes access – that might be access to information or access to capital. Now, that can be good and … I don’t know that it’s bad, but it can be good and controversial.”

This sort of murky legal and ethical project is the type of problem inherent in a platform that prides itself on allowing anyone to raise money for anything, she added.

Alongside donations and rewards-based sites such as Kickstarter, Indiegogo, RocketHub and myriad niche platforms, a securities-based crowdfunding industry is emerging that could shake up the business world. It would allow companies to sell shares over the Internet and open up capital to a host of startups considered too risky or small for traditional lenders such as banks, venture capital or the established stock markets.

Some of those sites are worried that crowdfunding controversies at sites that have little due diligence could sully the reputation of platforms trying to present themselves as feasible alternatives for raising capital.

Despite legal and ethical challenges, many believe crowdfunding could help small businesses and entrepreneurs bypass traditional lenders. That has the potential to provide access to groups that are traditionally underrepresented, such as women, minorities and middle and low-income entrepreneurs.

Business and political communities are beginning to recognize the potential impact of crowdfunding on opening up the investment industry.

In the United States, the Jumpstart Our Business Startups Act, which contains provisions that would allow companies to sell shares in their companies through online open platforms, was signed into law in April 2012.

The Securities and Exchange Commission is in the process of developing regulations considered pivotal for the industry. Players are waiting to see how the SEC requirements will find a balance between being too liberal, which could risk discredit and allow scams, and too heavy-handed, which could turn off potential investors.

In Canada, regulators are further behind, though crowdfunding has grown rapidly – from 17 portals to more than 50 in less than a year. The industry is so new that many Canadians are unclear about its legitimacy, said Craig Asano, executive director of the National Crowdfunding Association of Canada, an industry group started last October.

“People call us all the time,” he said, “and their first question is: Is it legal?”

While securities-based or lending crowdfunding is not yet legal in Canada, donations and reward-based models are, and the industry is optimistic that progress will soon be made on Internet capital raising after positive initial consultations at the Ontario Securities Commission. Other provincial regulators are also studying the potential for crowdfunding.

Although securities-based crowdfunding would be subject to much more stringent listing requirements than other models, “that’s not to say it will be perfect; there are frauds in all human endeavours,” said Brian Knight, vice-president for platform services at CrowdCheck Inc., a due diligence site that started last year in response to the emergence of securities-based crowdfunding.

Fraud is the biggest risk because of the amorphous nature of the Internet, the small amount of money at stake for each person and the lack of sophistication in the market, he said.

“The problem, of course, is that if securities-based crowdfunding gets a reputation for being fraudulent, the market dries up,” he said.

A secondary issue is intellectual property protection – finding a balance between regulatory disclosure and market innovation to get to a place “where people can protect their secret sauce while still giving enough information and enough transparency for investors,” he said.

Ethical and legal risks involved in crowdfunding are similar to those found in other online realms, he said, adding that, like other aspects of the Internet, the Rob Ford crowdfunding campaign is an “extension of human will and human desire.

“On one hand, there is this very noble purpose; on the other, there’s something really very slimey about this whole thing.”

He sees the video campaign as a testing ground for the industry, adding that potential damage to the industry if the experiment goes awry depends on the conclusions that people draw.

“Will people learn don’t give money to drug dealers, or will people learn don’t support crowdfunded journalism?,” he asked.

It is also a question securities-based crowdfunders will face if a fraud emerges, he added. Will investors learn to do their homework about a company before investing, or will they simply not bother making an investment?

Crowdfunding is emerging as a new public square for supporting innovation and driving social change, says Christopher Charlesworth, co-founder of Toronto-based crowdfunding site HiveWire, which focuses on projects interested in social change.

“Making a new public square online is really, really important, and so we’re seeing an emerging set of norms, standards and behaviours as to what is acceptable and what is not,” he said.

The Rob Ford video has been fascinating, he said, because not only have they been able to raise more than $100,000 in less than a week, but because it is a demonstration of the public will; there is clearly an appetite to know whether the allegations are true.

“This particular instance is particularly interesting and riveting for late night talk show hosts, but I certainly think this is not the last of experimentation, and I think we’re going to see quite a lot more disruption as crowdfunding is applied to more and more areas,” Charlesworth said.

“What’s even more fascinating about it is if we look at the amount of money that’s been raised for something like this – something that’s more of a spectacle – imagine what the possibility is for the crowd to raise funds for something substantive or meaningful in their communities.”

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