Could Your Kickstarter Campaign Get You Into Legal Trouble?
If you’re thinking about using Kickstarter, Indiegogo, or another crowdfunding site to raise money for your next big project, proceed with caution. The Federal Trade Commission (FTC) recently settled its first complaint against the creator of a crowdfunding campaign for deceptive and fraudulent practices. The settlement, along with a 2014 lawsuit filed by the Washington State Attorney General over a Kickstarter campaign that didn’t deliver, could be an indication that the government is taking a closer look at this popular yet largely un-policed method of raising money.
The origins of the project the FTC had a problem with go back to 2012, when Erik Chevalier launched a Kickstarter campaign to create a board game called “The Doom That Came to Atlantic City.” He raised $122,000, more than three times his goal amount, in part because be offered people collectible pewter figures designed by a well-known artist as an incentive for contributing.
But according to the FTC complaint, none of Chevalier’s 1,246 backers ever received the figurines and he didn’t make any serious effort to use the money to create the promised game. More than a year after his Kickstarter campaign launched, Chevalier announced that he was canceling the project and would refund the money raised.
Despite Chevalier’s assurances that refunds would be forthcoming, most of the game’s supporters never got their money back. That’s because he had already spent the cash. Instead of putting the funds toward game development, Chevalier used the money he raised through Kickstarter to cover moving costs, rent, and other personal expenses. According to the FTC, that misuse of funds is a big problem.
“Many consumers enjoy the opportunity to take part in the development of a product or service through crowdfunding, and they generally know there’s some uncertainty involved in helping start something new,” Jessica Rich, the director of the FTC’s Bureau of Consumer Protection, said in a statement. “But consumers should be able to trust their money will actually be spent on the project they funded.”
Chevalier was ordered to pay the FTC a fine of $111,793.11, but because he’s broke, he won’t actually have to fork over any cash. He’s also banned from misrepresenting the nature of his projects on crowdfunding sites in the future and is prohibited from using customer’s personal information for his benefit.
While Chevalier’s punishment may not seem particularly harsh, the FTC wants to send a warning to other people who think they can take the Kickstarter money and run. “We hope to deter bad actors from using these platforms,” the FTC explained in a Twitter Q&A regarding the settlement.
The FTC also says it’s keeping an eye on other potential cases of crowdfunding fraud. That might set off alarm bells among project creators, creating fear that they’ll end up in legal hot water if their project fails. Yet it seems that as long as you behave ethically and act in good faith, you should be able to stay on the right side of the law. To avoid problems with your crowdfunding campaign, the FTC has two commonsense suggestions:
“1. Keep your promises when crowdfunding. If you promise rewards, give them. If you promise refunds, provide them.
2. Use the money raised from crowdfunding only for the purpose represented. If you collect money for a specified project, like creating a board game, use the money only for that purpose. Don’t use it for personal purposes or to start another project.”
Failing to deliver a product “by itself may not be enough” to quality as misrepresentation, the FTC explained in the Twitter Q&A. Yet even if the agency doesn’t get involved, you could be opening yourself up to other problems. According to Kickstarter’s current terms of service, “when a project is successfully funded, the creator must complete the project and fulfill each reward” and creators who fail to meet their obligations “may be subject to legal action by backers.”
Despite the brouhaha surrounding “The Doom That Came to Atlantic City,” the backers of Chevalier’s ill-fated project weren’t left totally empty-handed. Another company eventually stepped in and produced the game, delivering copies to those who had contributed money for its development. Still, the experience left some people hesitant to get involved in future crowdfunding efforts.
“After this project collapse, I certainly won’t be backing another project, unless serious changes are made to the risk balancing and refund structure of [the Kickstarter] platform,” one of the Chevalier’s backers commented on the project’s Kickstarter page.
Follow Megan on Twitter @MeganE_CS