Thinking about crowdfunding to raise money for your latest project? If so, you’ll want to pay attention to the FTC’s first crowdfunding case. The lesson: If you launch a crowdfunding campaign, keep your promises.
The FTC just settled a case against the creator of a crowdfunding project who did not keep his promises. According to the FTC, Erik Chevalier misled consumers about his project to produce a board game called “The Doom that Came to Atlantic City.” Specifically, the FTC’s complaint alleges that Chevalier misrepresented how he would use funds raised on Kickstarter’s crowdfunding platform and broke promises about providing rewards to his backers.
Crowdfunding can be a great way to see ideas come to life. Online crowdfunding platforms like Kickstarter allow project “creators” to secure needed capital – typically small amounts from many people – to get their projects off the ground. In return for their pledges, creators offer their “backers” rewards if the project meets its funding goal. Often, the reward is the product, service, or content that the creator intends to produce with the funds.
So where did Chevalier go wrong? He told his backers that he would use the money he raised to manufacture the “Doom” board game. He also told them that he would provide specific rewards – like copies of the game and pewter figurines – if the campaign reached its goal. A year after the campaign raised nearly four times its goal, rather than providing rewards, Chevalier announced that he wouldn’t produce the game after all. According to the FTC, Chevalier spent most of the Kickstarter money on himself, not the project.
The FTC’s settlement says that Chevalier cannot misrepresent future crowdfunding campaigns, including:
- whether customers will receive a deliverable in exchange for a contribution;
- the purpose for which funds raised from a crowdfunding campaign will be used; and
- any facts material to a consumer’s decision about whether to contribute to a crowdfunding campaign.
Here’s what you or your business can learn from this case, so that crowdfunding does not become your “Doom:”
- Keep your promises when crowdfunding. If you promise rewards, give them. If you promise refunds, provide them.
- Use the money raised from crowdfunding only for the purpose represented. If you collect money for a specified project, like creating a board game, use the money only for that purpose. Don’t use it for personal purposes or to start another project.
Some crowdfunding platforms encourage their creators to follow best practices.
More guidance for businesses on a variety of compliance issues is available at the FTC’s Business Center.