Cracking Down on Crowdfunding


Last week Chris discussed the first real legal action to be brought against a project at a state level.The tag line for Asylum cards it seems was only two letters too many when it promised “NEVER to be re-printed.” Though he discussed the particulars of the case, and expressed concerns about the ramifications of such a move, I think there is more to be said on the subject.

This is a big deal. Really. Right up there with the Pebble, Ouya, or any of the other blockbusters that have shaped the face of crowdfunded projects. Events like this will shape the funding platforms and the laws that surround them.

There is an infinite demand for free money, and even though that’s not EXACTLY what Kickstarter is, some ne’er do wells out there can’t help but see it that way.

Kickstarter, as a site and a company, has done a good job removing issues of liability from its doorstep, and pushing them back on to creators. What if the credulity of the crowd is not enough to keep their funds safe? What recourse exists after that? Legal action is the next logical step.

Traditionally the problem is that it just isn’t worth the backer’s time to sue. I mean, are you going to pay thousands to get a claim for damages on the $50 dollars you pledged to a project? Not likely. That’s why I see this consumer protection lawsuit as being a welcome consequence. Failures are common enough in this venue, but outright fraud is relatively rare. If the idea of free money is the carrot, than the possibility of DA involvement is surely the stick.

To date about half of the hundred plus projects I have pledged to are late, but there are only 2 or 3 that currently seem unlikely to deliver in some form. I’m not sure if any of them warrant lawsuits, but then I’m pretty picky about who I give my money to. Right now the bar is set pretty high. Common failures don’t seem to rate anyone’s attention. I do think there a few things you can do as a creator to protect yourself against the possibility of being sued down the road though, including:

  • Create a legal framework for your efforts to create limited liability. In our case we chose a partnership LLC for Caffeineforge. That way if you are sued, all they can take is what your company owns, not what you own. Put the law on your side before someone uses it against you.
  • Keep the lines of communications open with your backers. I was really surprised with how well strangers took bad news about our progress.
  • Act in good faith. If you are called to account, it will be a lot easier to explain a legitimate failure than a trip to the caribbean by using the money of your backers.
  • Refunds. Remember – you are on the hook to deliver to your backers. If you get half way through your project and you don’t think you are likely to succeed, you should start giving the rest of that money back.

Take it from me, as someone who has just finished paying off a failed project: there are enough risks in this process. Doing your best to protect yourself from them is the only sane thing to do.

This entry was posted by David Winchester.

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