The crowdfunding world got a bit more crowded this week–from a legal perspective, at least–when the Federal Trade Commission entered the fray with its first crowdfunding case against a project creator and his allegedly deceptive Kickstarter® Campaign. The FTC announced Monday on its website that it took action under Section 5 of the FTC Act against Forking Path, Co. and Erik Chevalier, alleging that Chevalier had promised to produce a board game called “The Doom that Came to Atlantic City” with the funds that consumers provided to fund his campaign, but instead used most of the $122,000 that he raised on himself.
According to the FTC, Erik Chevalier misled consumers donating to his Kickstarter project to develop a board game called “The Doom that Came to Atlantic City,” when he represented to backers that if he raised $35,000, they would get certain rewards, such as a copy of the game or specially-designed pewter game figurines. The project garnered a lot of support, and Chevalier ended up raising more than $122,000 from backers, most of whom pledged more than $75 in a bid to obtain those (apparently highly desirable) figurines. For a number of reasons, Chevalier was unable to produce the game, and announced after 14 months that he was cancelling the project. He promised his backers refunds, but then failed to provide them—which triggered multiple complaints. Instead, Chevalier used the money raised on unrelated personal expenses such as rent, moving himself to Oregon, personal equipment and other projects.
The FTC asserted that Chevalier’s promises about the project were deceptive under Section 5 of the FTC Act. Under the FTC’s settlement order, Chevalier is prohibited from making misrepresentations about future crowdfunding campaigns, including the purpose for which funds raised in the campaign will be used, and he is required to honor any stated refund policies for those campaigns. The order imposes an $111,793.71 judgment that will be suspended due to Chevalier’s inability to pay; the full amount will become due immediately if he is found to have misrepresented his financial condition. He is also barred from disclosing or otherwise benefiting from customers’ personal information, and failing to dispose of such information properly.
According to the FTC, the Forking Path case was brought as part of the FTC’s FinTech project, which seeks to protect consumers seeking to take advantage of new technologies. This is not the first crowdfunding case, though; the states have been considerably more active in regulating this area. Last year, we blogged about crowdfunding—including a unique campaign to make a bowl of potato salad—and the potential repercussions for those who renege on their promises in the context of the first case brought by a state Attorney General, in Washington state. Moreover, according to the New York Times, 22 states have enacted rules regulating crowdfunding—some with heavy restrictions, including a requirement that companies may only raise money from investors in their own states. At the federal level, this past March, the Securities and Exchange Commission announced this March the adoption of final rules to facilitate smaller companies’ access to capital and regulate certain types of crowdfunding projects involving stock and equity investments, allowing entrepreneurs to start raising money from the “crowd.”
What can we learn from all of this activity? The Federal Trade Commission and the states are paying close attention to crowdfunding, and to the promises that entrepreneur are making to their backers when raising money in such campaigns. And although crowdfunding may seem like an easy way to raise money to make your fabulous new idea a reality, regulators will not shy away from applying the tried-and-true FTC Act and its state law equivalents to police any bad behavior; not only that there may be some new laws to contend with as well.
So what can you do to stay out of legal hot water on Kickstarter, Indiegogo or the other crowdfunding sites? Well, according to the FTC, if you are running a crowdfunding campaign, you should:
- Keep your promises when crowdfunding. If you promise rewards, give them. If you promise refunds, provide them.
- Use the money raised from crowdfunding only for the purpose represented. If you collect money for a specified project, like a board game or potato salad haiku, use the money only for that purpose. Don’t use it for personal purposes or to start another project.
Sometimes, even great ideas are doomed, it’s true. But don’t doom yourself with regulators, too: keep your promises.