An Introduction to Crowdfunding

Social entrepreneurs have always had difficulty raising capital to fund their cause. Unlike most business entrepreneurs who address current market deficiencies by introducing new products or ideas, social entrepreneurs tackle hypothetical, unseen, or even more controversial issues. Naturally, investors are much less willing to support risky ventures that address the latter. Investors also expect a return on their investment – something that is nearly impossible to guarantee when the purpose of an organization is a social cause. As a result, social entrepreneurs have turned to the internet to solve their funding problem.

Crowdfunding has gained popularity through websites such as Kickstarter, GoFundMe and Indiegogo, all of which allow fundraising for social entrepreneurs from online donors. For the first time, social entrepreneurs are able to secure much needed capital – typically small amounts from many people – to forward their causes with ease. In return for their pledges, these “backers” are often promised rewards (possibly a product or service) that they will receive once the fundraising goal is met. However, as simple as it may sound, crowdfunding can result in legal trouble for social entrepreneurs who do not take their promises seriously.

What Kind of Legal Trouble Could I Be Facing?

Despite being a relatively new concept, crowdfunding has attracted the attention of the Federal Trade Commission, the government agency responsible for protecting consumers. In 2015, the FTC settled a case against the creator of a crowdfunding project who did not keep his promises. Erik Chevalier sought money from consumers to produce a board game called The Doom That Came to Atlantic City. Through the online crowdfunding platform Kickstarter, Chevalier raised more than $122,000 from 1,246 backers. To attract backers, Chevalier promised that if he raised $35,000, backers would receive certain rewards, such as a copy of the board game or specially designed game figurines. After 14 months, Chevalier announced that he was cancelling the project and refunding his backers’ money.

Wait… So How Did He Get into Trouble?

Unfortunately for the backers, Chevalier did not provide the promised rewards or any refunds. According to the FTC complaint, Chevalier spent most of the crowdfunded money on personal expenses. The FTC brought a claim against Chevalier for his deceptive actions and misrepresentations. Chevalier ended up settling the claim against him.

What Happened to Him?

Under the settlement order he agreed to, Chevalier is prohibited from making misrepresentations about any crowdfunding campaign and from failing to honor stated refund policies. Furthermore, he is barred from disclosing or otherwise benefiting from customers’ personal information, and failing to dispose of such information properly. Most importantly, Chevalier’s settlement imposes a $111,793.71 judgement against him that is currently suspended due to his inability to pay. If it is found that he misrepresented his financial condition, the full amount becomes due immediately.

What Does This Mean for Me?

This action against Chevalier represents the growing concern the FTC has with crowdfunding. According to Jessica Rich, the director of the FTC’s Bureau of Consumer Protection, “…consumers should be able to trust their money will actually be spent on the project they funded.” In a Twitter Q&A, the FTC explained that it hopes the Chevalier settlement will deter bad actors from using crowdfunding platforms such as Kickstarter.

How Can I Ensure I Crowdfund Properly?

The FTC has provided us with two tips, both of which should be followed by any social entrepreneur looking to crowdfund their cause online:

Keep your promises while crowdfunding; AND
Use the money raised from crowdfunding only for the purpose represented.

The first tip is simple – if you promise something, you need to make sure you deliver on that promise. You promised rewards? Give them. You promised refunds? Provide them. The second tip is almost as simple as the first. If you collect money for a specified cause, like providing clean water to those who need it, use the money only for that purpose.

But What If I Can’t Deliver on a Promise?

In the same Twitter Q&A mentioned earlier, the FTC stated that failing to deliver a product by itself may not be enough to qualify as a misrepresentation under the FTC Act. Don’t worry if you aren’t able to further your cause and keep your promise. Provide refunds to those who donated and try your best to follow through with what you promised. Above all, maintain transparency and be honest with those who gave to your cause.

Is the FTC the Only Thing I Have to Worry About?

No. Read the terms of service of your online crowdfunding platform very carefully and ensure that you comply with those terms. Under Kickstarter’s current terms of service, creators who fail to meet their obligations “may be subject to legal action by backers.” To meet your obligations, simply follow the FTC’s advice. Good luck.