For many budding entrepreneurs, Kickstarter.com can be their answer to beginning their businesses…or a nightmare of angry “backers,” broken promises and refund demands.
Kickstarter provides a crowdsourcing platform for potential businesses and creative projects to gain not only funding, but also customers – before products or services are even launched to the public. According to Kickstarter, since 2009, “9.2 million people have pledged more than $1.9 billion, funding 90,000 creative projects.”
Kickstarter fills a niche in funding that has helped various projects reach success because of much needed financial backing they couldn’t otherwise obtain through traditional financing options (i.e loans and venture capital). However, many problems arise from such crowdsourcing sites because of the lack of regulation and oversight.
Despite Kickstarter’s efforts to address consumer protection and its own liability, its current methods struggle to properly protect its community. Consider Kickstarter’s Trust and Safety section, which, at its core states that it will provide oversight, but the ultimate liability and responsibility rests with the creators and backers. Kickstarter provides common-sense guidelines to creators and backers to be ethical and responsible in their participation with Kickstarter, but what is Kickstarter’s role? Its Integrity team watches over the site and reviews reports from the community – in effect, its method of facilitating a safe crowd-funding community is to rely on that very same community’s feedback. The good news? Frustrated “backers” who feel they haven’t been given their due are more than willing to share. Kickstarter also uses “complex algorithms and automated tools to identify and investigate suspicious activity on projects.” When Kickstarter finds “users or projects that abuse the system, [it doesn’t] hesitate to suspend them.” Beyond recommendations and guidelines to the participating community, and suspension for those who don’t abide by the rules, there isn’t much proactive prevention of suspicious activity. Some users have taken legal action, resulting in private lawsuits and settlements, but because of legal costs, this is not always a feasible option and does little as deterrence against future abuse.
Until recently. Washington’s Attorney General, Bob Ferguson, filed the first case of its kind in 2014: a consumer protection lawsuit involving crowdsourcing. Specifically, Ferguson filed suit against Altius Management and its owner, Ed Nash, for violating the Consumer Protection Act (CPA). State of Washington v. Altius Management; Edward J. Polchlopek III. Nash had promised backers a playing card game, but never followed through, eventually resulting in this suit, through which relief was sought in the form of refunds to the “backers” and a $2000 fine per backer for the defendant’s violations. The case was decided earlier this year, resulting in a court order that Nash and his company, Altius Management, pay a total of $54,851. Broken down, the court ordered defendants to pay $668 in restitution to the 31 Washington state backers, $31,000 in civil penalties for violating the CPA ($1000 per violation), and $23,183 to cover legal fees.
Ferguson expressed his concern for consumer protection in the world of crowdfunding, explaining “consumers need to be aware that crowdfunding is not without risk” and more, that “Washington State will not tolerate crowdfunding theft. The Attorney General’s Office will hold those accountable who don’t play by the rules.”
The Federal Trade Commission (FTC) followed in Washington’s footsteps, filing its first crowdsourcing suit against Erik Chevalier, charging him with misusing $122,874 that was raised via Kickstarter for a board game called “The Doom That Came to Atlantic City.” Federal Trade Commission v. Erik Chevalier. Despite promises of refunds and accounts of his spending after the project was dropped, he never actually followed through. In a stroke of luck, another game developer stepped in and fulfilled the original project, providing the board games to the backers. However, other highly prized deliverables were never completed and the backers were never refunded. Eventually, the FTC settled with Chevalier, resulting in his commitment to refrain from future misrepresentations on crowdfunding sites and penalized him $111,793.71 – though the penalty has been suspended due to Chevalier’s lack of funds.
Under both the CPA and FTC, unfair and deceptive acts or practices affecting commerce are violations and subject to fines. Crowdfunding is no exception. Whilst you do not need to (and likely cannot) guarantee deliverables to your backers, as a creator, you are still expected to act in good faith and take mitigating steps. Kickstarter provides a list of obligations creators have to his/her backers to remedy the situation, including providing updates, accounts of spending, and offers to return remaining funds to backers. The problem, much like what the FTC faced against Chevalier, is that these creators typically don’t have the funds to pay the hefty fines or refunds – either in good faith or because of deceitful spending.
The courts are still on new territory in addressing consumer protection in the world of crowdsourcing. It will take time before its actions affect the community and create substantial deterrence against consumer fraud. Furthermore, crowdsourcing projects are inherently risky because no one can guarantee the project’s success. As a result, participants are expected to act in good faith – not exactly easy to verify, both on Kickstarter and in courts. Understanding the nature of crowdsourcing, consumers should be careful, honest, and realistic in their participation with crowdsourcing sites, but realize that there may be legal recourse to remedy a crowdsourcing fundraiser’s dishonest dealings.