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We have seen crowdfunding follies in any number of projects these days.
So you know what it’s like, right? You see a project and it looks really interesting. And so you pledge $15 or $15,000, and all seems hunky dory for a while until time slips away and you begin to wonder if the project creator will ever deliver. Welcome to crowdfunding follies. Listen to the accompanying video here.
First of all, let’s talk about crowdfunding itself. Because it used to be, when you needed money for something or other, you asked a friend or a family member. Or you went to a bank or a credit union for a loan. Also, you had the option of just working and saving up your money. In addition, you could play the ponies or the lottery. Furthermore, you could invest in all sorts of things, such as stocks or bonds or certificates of deposit. And you would hope your investment would pay off. Yet another option, if you were starting a business, consisted of going hat in hand to venture capital firms, or working with angel investors.
Most of these means of gathering up funds came with conditions and strings and limitations. The loans, of course, came with interest. And venture capitalists and angel investors want to turn a profit which means they would get a portion of your business in exchange for their investment therein. Furthermore, although some of these methods were more ‘respectable’ than others, they were (and are) all perfectly legal. I imagine there are other sources of funding which I have forgotten to list, but you get the idea.
I won’t go into illegal means of obtaining the filthy lucre. Hence, please feel free to use your imagination, gentle reader.
History of Crowdfunding Platforms
So without going into minute detail, there are only a few names you might want to know. The first crowdfunding service is ArtistShare, founded in 2001 for the purpose of acting as a funding model for creative artists. IndieGogo came on the scene in 2008. And then Kickstarter arrived in 2009. While other such platforms exist, that’s not the real subject of this blog post.
Crowdfunding platforms provide a means for project creators to reach a wider array of possible backers. And often the project creator has three duties:
- Follow the crowdfunding platform’s Terms of Service
- Complete the project and
- Provide all promised perks
After that, most such platforms feel their involvement has ended. However, things may be about to change.
Any crowdfunding platform will happily tout its successes. Kickstarter links to them on its front page. And so does IndieGogo. As do, I imagine, all of them. Crowdfunding even made a Veronica Mars movie possible. Also, Indie authors use crowdfunding to help defray the costs of editors and cover designers – and also to pay for retreats and cash so they don’t have to hold day jobs. Yes, really.
Wait a Second
So, yeah, crowdfunding follies. People misuse crowdfunding all the time. And the law is beginning to get wise and catch up. Hence here’s a spin through some of the cases we’ve seen in our travels.
First of all, let’s look at Kickstarter’s own information on projects. The University of Pennsylvania conducted a study of Kickstarter, surveying almost 500,000 backers. First of all, the study looked at failures. And it found:
- 9% of Kickstarter projects failed to deliver rewards
- 8% of dollars pledged went to failed projects
- 7% of backers failed to receive their chosen reward
- 65% of backers agreed or strongly agreed with the statement that “the reward was delivered on time”
Second, the survey found, “Failure rates for projects across all 15 creative categories hover within a narrow range around 9%. Projects from some categories tend to fail less often than others, but there are no major outliers.”
Also, the study found the projects most likely to fail asked for $1,000 or less. While the study did not go into why, I suspect that may have to do with tiny projects not getting enough advertising and/or the inexperience of the project runners.
Furthermore, project runner behavior mattered. Backers reported less dissatisfaction if they got a refund or at least a really good explanation of the failure.
So in 2015, attorney Dan Rogers laid out Kickstarter legal liabilities in an easy to read article. And basically what he indicates is that the crowdfunding giant itself creates some of its own problems. When a campaign creator ends up being conflated with someone selling, or when a backer feels like a donor or an investor, problems arise. Donors take on risk and can receive legal protection. Donors (e. g. gift-givers) can get tax benefits from their acts (although few crowdfunding campaign creators have 501(c)(3) status). Hence gifts, purchases, pledges, perks, and rewards confuse the issue. Most worthy is the Kickstarter TOS, part 4, which states:
When a creator posts a project on Kickstarter, they’re inviting other people to form a contract with them. Anyone who backs a project is accepting the creator’s offer, and forming that contract.
So yes, they say it’s a contract. And that means it’s a legal agreement and subject to legal action if breached. As a result, there are legal cases. Let’s look at a few briefly.
As you might expect, crowdfunding follies eventually lead to legal action.
Attorney General Makes Crowdfunded Company pay for Shady Deal
On April 30, 2014, the Washington State Attorney General, Bob Ferguson, brought the first enforcement action in the nation, against Altius Management, to pay for irregularities arising from the 2012 “Asylum Playing Cards” Kickstarter campaign. Ferguson won his case, and defense had to pay $54,851. Ferguson stated:
Washington state will not tolerate crowdfunding theft. If you accept money from consumers, and don’t follow through on your obligations, my office will hold you accountable.
Feds take first action against a failed Kickstarter with $112K judgment
Also, the federal government got involved in June of 2015. Since this case involved a misuse of funds, the Federal Trade Commission intervened, and sued for $122,000. The verdict totaled close to $112,000. Also, a part of the verdict involved the defense having to honor all stated refund policies.
Crowdfunding Lawsuit on question of Active Participant vs. Passive Platform
Furthermore, in August of 2015, a charitable crowdfunding entity, GiveForward, got into legal hot water with a fraudulent campaign. It seems an estranged father ran a campaign for donations for an 8-year-old child with a heart condition. Except the child had no such condition. Once the mother determined the campaign existed, and GiveForward’s own fraud meter kicked in, the jig was, as we say, up. However, the mother brought suit against the crowdfunding platform, alleging they were complicit in the fraud. The judge found the platform remained passive (even though they assigned a ‘coach’. Still, the father never used the ‘coach’s’ services) and did not take part in the fraud.
And then in October of 2016, the Oregon Justice Department launched an investigation into the ‘Coolest Cooler’. Because although some backers never received their perks, the product retailed on Amazon at a discount. And the company also told its backers they could always pay nearly $400 and get a cooler. In October of 2016, about 60% of the backers had their coolers. The most recent Kickstarter comments date to May 2016 and the backers were calling for blood. However, I have not yet located an update for this story.
Finally, while no lawsuit has been brought by the donors, the Kickstarter comments show some donors are livid. Of course, if the matter ends up in litigation, we will cover it.
Beyond all of this, the bottom line with these crowdfunding follies is, I want you, the donors (and potential donors) to protect yourselves. Hence I have compiled some ideas, in no particular order:
Consider the Project Runner
- Use your Google-fu and look up the project creator(s). Hence you should look at everything from whatever Kickstarter and other crowdfunding platforms say, to incorporation records and even whatever you can find of legal records. While some information is hidden, do some digging, as far as you can go without invading privacy. And looking at public records online does not invade privacy and does not equate to doxxing.
- Also, ask around. Do any of your friends know the campaign creator? Or do they otherwise connect, via Facebook, LinkedIn, Twitter, or something else? Because some people might have an axe to grind, get as many opinions as possible.
Consider the Campaign, the Product or Service, and the Perks
- Furthermore, look at the campaign with a critical eye. Does the product or service make sense, or is it all just pie in the sky? For example, do you think a government agency would have a problem with it? Consider, for instance, a car with a blindfold for the driver. Of course the government would step in and nix it, due to safety issues. The example I gave is obvious; what you see on crowdfunding platforms isn’t so obvious, so do some critical thinking.
- In addition, look at the perks with skepticism. Digital perks will always be easier for a creator to fulfill. The same goes for perks not dependent upon the finished product. Therefore, if the only perks depend on full and satisfactory completion of the project, you’ll see delays if the project does not go smoothly.
Determine if the Project Runner Seems to Know What He or She is Doing
- Finally, consider the language used, either on the crowdfunding platform or in any other communications. Anyone can talk a good game, but do you think you’re being sold a bill of goods? The project creator need not be a great writer, but if it seems they don’t understand business or budgeting, listen to your instincts about that.
I want you to be safe from crowdfunding follies. Let the donor beware – Caveat Donator.