Zack (Danger) Brown recently made headlines for his Kickstarter® Campaign, which was featured in CNN.com, The Washington Post, and The New Yorker as well as on Good Morning America (I guess TV stars eat carbs after all). Unlike other entrepreneurs on the popular crowdfunding platform, who use Kickstarter to launch a business idea or concept, Brown has been raising money for … potato salad. And not a special family recipe for a potato salad, either – according to Brown, this will be his first potato salad and “[i]t might not be that good.” The campaign has gone viral, and people have given upwards of $42,000 (the amount is still growing) – a sum that should more than cover the bag of Idaho spuds, mayonnaise, chives, and other ingredients to make the picnic staple.
Crowdfunding sites like Kickstarter and Indiegogo have been getting attention in the news for some time as some very significant projects have found success using the model to offer product or rewards in return for money donations to back projects like new product development, arts ventures or charitable undertakings. The use of Kickstarter to raise nearly six million dollars to fund the Veronica Mars movie has become the stuff of legend, and the first publicly backed space telescope was funded last year by donations by members of the public who gave money in return for “space selfies” and other rewards. Nonetheless, the crowdfunding model raises interesting issues about the rights of backers, particularly when product development hits a snag, and the Securities Exchange Commission is in the process of writing rules that will regulate certain types of crowdfunding projects where stock is issued.
Now, state regulators have started getting into the act. Back in May, the Washington Attorney General filed a lawsuit against Edward J. Polchlepek III, otherwise known as Ed Nash III, and his Nashville, Tennessee-based company, Altius Management for failing to follow through on promises it made to backers as part of a Kickstarter campaign. According to the complaint, Nash and his company ran an “Asylum Playing Cards” crowdfunding campaign in 2012, and consumers pledged funds in exchange for decks of playing cards featuring a retro-horror theme and other similar items. While the backers were charged for the money they pledged, Nash and his company never delivered the goods.
In response, Washington filed the first known case against a crowdfunded project, alleging that Nash and Altius acted in a deceptive and misleading manner by taking consumer money and failing to deliver the promised playing cards and other rewards to these consumers. The complaint seeks consumer restitution, as much as $2,000 per violation of the Washington Consumer Protection Act, and the state’s costs and fees for bringing the suit. According to the Washington Attorney General, “This lawsuit sends a clear message to people seeking the public’s money: Washington state will not tolerate crowdfunding theft. The Attorney General’s Office will hold those accountable who don’t play by the rules.”
While the outcome of this case is still pending, government regulators have always been clear that they will enforce existing consumer protection, advertising and marketing laws on the internet, and the crowdfunding model is no exception. It looks like Zack Danger Brown had better make one heck of a potato salad, and nascent companies seeking crowdfunding had better follow through on their promises to customers or risk regulatory enforcement actions.
Update: Melissa Landau Steinman recently joined Colin O’Keefe of LXBN TV to discuss crowdsourcing and the potential repercussions for the entrepreneurs who renege on their campaign promises.