Advising a Crowdfunded Creator? Avoid Bob Ferguson’s Kickstarter Wrath

A Washington court ruling against a Kickstarter creator who didn’t produce exposes legal risks. Here’s what lawyers should know.

A Washington state court just levied a $50,000-plus fine on Kickstarter creator Altius Management for promising a limited-edition run of retro-horror playing cards but never delivering. With his office filing this first-of-its-kind lawsuit, Washington Attorney General Bob Ferguson used the opportunity to flex his legal muscle and make it clear that consumers in Washington won’t be ripped off by fraudulent crowdfunding campaigns:

“Washington state will not tolerate crowdfunding theft,” said Ferguson. “If you accept money from consumers and don’t follow through on your obligations, my office will hold you accountable.”

But this is hardly the end for crowdfunding. In fact, with backers having provided nearly $1.9 billion in funding to creators on Kickstarter alone and with other similar platforms, such as IndieGoGo and GoFundMe, sprouting up, it’s only the beginning. And crowdfunding presents a wide range of legal issues for creators and for backers.

Here are some suggestions for lawyers who advise creators on how to avoid the unique legal risks that these new platforms present.

Advising creators
Crowdfunding may seem like a panacea for those looking to raise money to pursue a dream, be it to start a business, build a product, or develop a creative endeavor like a book or movie. But it’s not that simple. First, in order for a creator to claim any of the money provided by their backers on any crowdfunding platform, a creator must meet their established fundraising goal. According to Kickstarter’s own statistics, nearly 67% of proposed projects fail to meet their fundraising goals. For lawyers advising those who do get access to the funds provided by backers, here are some key points.

• Creators should create a corporate entity to insulate themselves from personal liability in the event that they fail to perform or something else goes wrong.
• Creators need to understand that they have to meet the timelines and delivery dates they’ve established with backers. Creators should be advised to treat crowdfunding obligations like a contract. Creators who have production delays or other problems that affect those timelines and dates must communicate about delays and mitigations to backers.
• More broadly, constant communication about the creation process is more likely to result in happy backers generally — and make them less likely to react negatively to timeline and delivery delays.

However, as was recently demonstrated in Washington and in other failed crowdfunding efforts, failure to deliver can subject a creator to lawsuits, attorney general actions, and regulatory penalties.

No liability for the platform
The crowdfunding platform itself bears no responsibility or liability under any situation. While these entities are happy to facilitate the connection between creators and their backers, that is where their liability ends. Kickstarter makes that very clear in their terms of use: “If something bad happens as a result of your using Kickstarter, we’re not liable (beyond a small amount).”

Foundering creators will find little help and no relief from the platforms themselves.

Key takeaways
The relationship between creators and their backers on crowdfunding platforms is unique in modern commerce. Lawyers advising creators should make sure they understand that if they aren’t prepared to meet their fulfillment obligations, they may not only be subject to breach of contract suits but also regulatory action.