by Jeff Mackowski
Online crowdfunding has grown to be a major business model. The crowdfunding website Kickstarter has reportedly received almost two billion dollars in pledges since its launch in 2009. Kickstarter allows creators to submit projects with “rewards,” which are often tangible products. Project creators set funding goals by selecting a dollar amount and a time limit. Backers provide funding to the projects by pledging financial support (e.g., “This project will be funded if at least $10,000 is pledged by Friday, October 16, 2015). If a project’s funding goal is met, then the backers are charged and the project creator receives the funds, less Kickstarter’s fee. In exchange for this payment, backers expect to receive the project rewards in a reasonable time. If a project’s funding goal is not met, then backers are not charged and the creator, and Kickstarter, gets nothing. Kickstarter’s terms of use state, “The creator is solely responsible for fulfilling the promises made in their project. If they’re unable to satisfy the terms of this agreement, they may be subject to legal action by backers.”
This business model has created ambiguity as to whether a backer is a purchaser or an investor. The argument for the backer as a purchaser sees pledging as essentially pre-ordering the project reward. The argument for the backer as an investor sees pledging as providing start-up capital for a business venture. Determining whether a backer is a purchaser or investor is important because it informs the legal rights of the backer. In 2014, Washington Attorney General Bob Ferguson filed a complaint that he believes to be America’s first consumer protection action involving crowdfunding (Washington v. Altius Management LLC, Wash. Super. Ct. No. 14-2-12425-SEA, 4/30/14). This lawsuit directly answers the question of whether a backer’s pledge is an investment or a purchase.
The lawsuit was filed under Washington State’s Consumer Protection Act and names Altius Management LLC and its president Edward Polchlopek III as defendants. The complaint alleges that defendants’ created a Kickstarter project in late 2012 to produce a custom playing card game called Asylum. Backers pledged over $25,000, exceeding the funding goal of $15,000. In exchange for their pledges, backers expected to receive rewards of playing cards and custom artwork. The backers were charged, and the defendants were paid. However, more than two years later the cards had not been produced and the backers had not received rewards or refunds.
The suit states two causes of action arising from the defendant’s alleged conduct relating to a crowdfunding campaign on the Kickstarter website: (1) misrepresentations and the failure to deliver rewards; and (2) failure to refund. The claims state that the defendants’ failure to deliver the promised rewards and failure to offer refunds to backers are “an unfair or deceptive act or practice in trade or commerce and unfair method of competition in violation of [the Consumer Protection Act].” The court granted the State of Washington’s Motion for Entry of Default Judgment in July of 2015.
Since the judgment was entered against the defendants, two things have become clear. First, backers have been receiving the rewards. Second, a new legal precedent has emerged finding that backers are purchasers afforded the same protections as a traditional consumer.
Jeff Mackowski is an Articles/Comments Editor at the FIU Law Review. Mr. Mackowski can be reached at jmack035@fiu.edu.