FTC Settles First Crowdfunding Fraud Case

In its first case involving crowdfunding, the Federal Trade Commission (FTC) took legal action against the creator of a project on Kickstarter who took money from consumers – purportedly to create a board game – but instead used most of the money on himself.

Crowdfunding

“Crowdfunding” is the practice of funding a project or venture by seeking many small contributions from a large number of people, usually via the internet.

In a crowdfunding transaction, consumers (also called “backers”) give money (sometimes called a “pledge”) to a project “creator” in exchange for a future “reward.”

Crowdfunding platforms raised about $2.7 billion in 2012 and $5.1 billion in 2013.

Hundreds of crowdfunding platforms exist, including:

Kickstarter – the leading site for the funding of games, gadgets, books, films, and other creative projects – helped raise more than $1 billion

Indigogo – began as a venue for funding independent films, but has since broadened its range of projects

GoFundMe – focusing on the funding of “causes,” such as supporting people with medical needs – over $1.25 billion raised

Experiement.com – for scientific experiments and research

Patreon – to support comic book artists, podcasters, essayists, and others who provide free content to fans – a virtual “tip jar”

CircleUp – a platform for consumer brands (such as Jane Street botanical vodka sodas) to raise money from accredited investors — with a $22 million fund of its own to invest in projects

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Running a Kickstarter Campaign

Kickstarter’s crowdfunding model is common. To start a Kickstarter campaign, a project creator develops a homepage that provides information about a product or project. Often, this includes a short “explainer” video and pictures of the product, service, or content to be created.

The homepage will indicate the amount of money needed and the number of days left for funding, with a maximum of 60.

If a Kickstarter campaign fails to raise the target funds within the time period, backers are not charged.

Each pledge level promises specific deliverable, or “rewards.”

“The Doom That Came To Atlantic City!”

In 2012, Erik Chevalier launched a Kickstarter campaign for a board game he called “The Doom That Came To Atlantic City!”

The game had been created by two noted creators of dark fantasy board games.

According to the FTC’s complaint, Chevalier told Kickstarter funders that they would receive certain “reward deliverables,” including a copy of the board game and pewter figurines, if the campaign reached its funding goal of $35,000.

The campaign actually raised more than $122,000.

In 2013, Chevalier announced that the project was being cancelled because

[a]fter paying to form the company, for the miniature statues, moving back to Portland, getting software licenses and hiring artists to do things like rule book design and art conforming[,] the money was approaching a point of no return.

Chevalier announced that he would be issuing refunds to donors. However, few (if any) people received refunds.

According to the FTC, Chevalier never hired artists for the game and instead used the money for “personal equipment,” his personal rent, and other unrelated expenses.

The Settlement

The FTC filed its complaint against Chevalier for deceptive practices under the Federal Trade Commission Act. The action was quickly settled via an injunction that prohibited him from making future misrepresentations, a money judgement (suspended due to his inability to pay), and 18-year compliance and reporting requirements.

Some commentators have called this penalty a slap on the wrist.

Have you been the victim of crowdfunding fraud?

Fortunately for consumers, crowdfunding fraud is rare and the amounts of money involved are usually small.

If you believe you’ve been the victim of crowdfunding fraud, your first step should be to contact the site. If you aren’t satisfied with the results, you can consider consulting an attorney with an expertise in consumer fraud, or the FTC.

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