Crowdfunding Isn’t Charity

Regina M. Joseph

Regina M. Joseph

“How do I get backers for my project?”

You see this question asked frequently on social media sites. The projects are sometimes serious, but have often advanced little more than a dream. The person seeking funds may have heard of Kickstarter and Indiegogo, and perhaps he or she has heard that people contributed to quirky projects like a person being willing to make potato salad; the site as of this writing reports 6,911 backers who have pledged a total of $55,492. Although this project began as a joke, the creator, having in fact made the potato salad, ended up using the proceeds for charity.

Nevertheless, crowdfunding is intended to be a means of serious fundraising.  The Kickstarter Terms of Use state in pertinent part:

“Throughout the process, creators owe their backers a high standard of effort, honest communication, and a dedication to bringing the project to life. At the same time, backers must understand that when they back a project, they’re helping to create something new – not ordering something that already exists. There may be changes or delays, and there’s a chance something could happen that prevents the creator from being able to finish the project as promised.

“If a creator is unable to complete their project and fulfill rewards, they’ve failed to live up to the basic obligations of this agreement. To right this, they must make every reasonable effort to find another way of bringing the project to the best possible conclusion for backers.”

This contrasts with a “personal and charity” site, such as GoFundme, which advertises that there are “no deadlines or goal requirements,” and you may “keep every donation you receive,” subject to payment of the site’s service fee.

Kickstarter, which positions itself for more serious money raisers, characterizes the relationship between a fund seeker and its backers as forming a legal contract. Further from its Terms of Use:

“The creator is solely responsible for fulfilling the promises made in their project. If they’re unable to satisfy the terms of this agreement, they may be subject to legal action by backers.”

Or the creator could be subject to legal action by federal or state regulators. On June 11, 2015, the Federal Trade Commission (“FTC”) announced its first case involving crowdfunding. In a complaint filed against Erik Chevalier, also doing business as Fork Path Co., the FTC charged that the creator sought money from consumers to produce a board game called The Doom That Came to Atlantic City. Mr. Chevalier represented that, if he raised $35,000, backers would receive certain rewards, such as a game or specially designed figurines. Although he raised more than $122,000 from 1,246 backers, after 14 months he announced that he was canceling the project and refunding the backers’ money. Despite these promises, he failed to deliver either the rewards or the refunds. According to the complaint, he spent most of the money on unrelated personal expenses, such as rent, personal equipment, and licenses for a different project.

For a crowdfunding project in which an author seeks funds to write a novel, would the FTC find payment of personal living expenses to be allowable? Perhaps with proper disclosure, they would, since it’s difficult to imagine what else backers would expect to be funding, especially since self-publishing costs have become so affordable.

Kickstarter also monitors for fraud.

Although the action against Chevalier was the first one for the FTC, at least one state attorney general has initiated an action based upon state consumer protection laws. There, the State of Washington Attorney brought an action against a Tennessee company that allegedly failed to deliver playing cards promised to 810 backers. Although these backers had pledged $25,146, the AG’s complaint sought to collect $1.62 million, which was a $2,000 civil penalty for each of the 810 violations, even though only 31 backers were Washingtonians. (See also the discussion in my prior article).