In what is, to our knowledge, the first enforcement action against a company which raised Kickstarter money and then failed to deliver any of the promised rewards, the Washington State attorney general announced on May 5, 2014 that it had filed a complaint for consumer fraud against Edward Polchlepek and his company Altius Management. The defendants raised over $25,000 from over 800 contributors for a playing card game (and other rewards) which was to be delivered in December, 2012. Nothing was ever delivered to the Kickstarter contributors.
Potential damages are over $1.6 million (at a fraud penalty of $2,000 per consumer).
There have been a number of instances where contributors to crowdsourced funding on a donation model have not received promised rewards. The Kickstarter website warns that it is not responsible for delivery of promised benefits, and to our knowledge, to date those who have complained have been out of luck. In one example, in 2012, a creator of a new board game raised over $122,000 (with a $35,000 goal) in order to fund the creation of the board game. Instead, he used the money to move to Oregon. When the backers of the Kickstarter campaign complained to the Oregon Attorney General, however, the Oregon Attorney General declined to press fraud charges.
As the law involving crowdfunding develops, it becomes clear that donation model crowdfunding campaigns have their risks. People in companies seeking online funds for their projects need to be aware of these risks, and to be sure that their campaigns disclose the possibility that benefits may not be forthcoming, or, more palatably, delayed, and then to follow up with contributors if delays occur to keep them updated about new delivery dates and the reasons for the delays. As regulators take a closer look at crowdfunding, raising it to fund a project and then paying for personal expenses is becoming increasingly risky.
This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.
