In many ways, crowdfunding platforms have democratized entrepreneurship, allowing people to raise money for their next, greatest idea not from traditional venture capitalists, but directly from the public. But as crowdfunding has matured, tricky questions have bubbled to the surface, most notably, who pays in the case of crowdfunding fraud: the platform, the creators or the pledgers themselves?
The Federal Trade Commission is now stepping in the ring in order to protect consumers. In its first case against a crowdfunded project, the agency took legal action against a board game campaign that raised more than $122,000 on Kickstarter.
When it debuted on the platform, "The Doom That Came to Atlantic City" looked like a legitimate project. Launched by Erik Chevalier, the board game – which was presented as something of a twisted, dark sci-fi take on Monopoly – was created by a fairly well-known illustrator and game designer. After generating some buzzy press coverage, the campaign blew past its goal of $35,000, ultimately collecting $122,874 from more than 1,200 backers.
That's when things took a turn. According the FTC complaint, despite promising backers rewards, including copies of the game and figurines, most never received anything from Chevalier. Nor did they receive a refund. Instead "Chevalier spent most of the money on unrelated personal expenses such as rent, moving himself to Oregon, personal equipment, and licenses for a different project," the FTC claim alleges.
Chevalier has reached a settlement with the FTC under which he must pay a $111,793 fine, though it has been suspended due to his current financial situation. He is also permanently barred from raising money through crowdfunding.
That the FTC went after Chevalier in the first place indicates that the agency is ready to get involved in consumer protection as it relates to crowdfunding, an area where the rules are largely unformed. When approving campaigns, sites like Kickstarter and Indigogo -- by far the largest players in the crowdfunding space -- screen for suspicious behavior, but instances of fraud still occur. Neither platform offer refunds for campaigns that fail to deliver promised products or services.
While consumers who pledge money on a crowdfunding site should be aware of the possibility that the project will be delayed or fail to materialize altogether, they "should be able to trust their money will actually be spent on the project they funded," Jessica Rich, director of the FTC’s Bureau of Consumer Protection said in a statement.