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Fraudulent Kickstarter Campaign Leads to First-of-its-Kind FTC Legal Action

ftc legal actionA drink cooler that doubles as a blender and stereo system. A card game called “Exploding Kittens” for “people who are into kittens and explosions and laser beams and sometimes goats.” A motion picture starring Kristen Bell. These are a few of the inventions and initiatives that have received the most funding on Kickstarter, the popular crowdfunding site.

Kickstarter is an online platform that allows project creators to seek financial backing. If people like a project, they can pledge money to make it happen. Funding on Kickstarter is all-or-nothing - a project must meet its funding goal to receive any money at all.

I have previously written about the tax implications of Kickstarter campaigns here.

While there’s always a risk that a project won’t make it from concept to completion, most backers have an expectation that their monetary pledge will be used in good faith and for its intended purpose.

The Federal Trade Commission (FTC) thinks so, too. In its first case involving crowdfunding, the FTC recently took legal action against an Oregon man, Erik Chevalier, who launched a Kickstarter campaign in 2012 to produce a board game, but instead used most of the funds to cover personal expenses.

The board game project raised $122,000 from 1,246 backers who were promised rewards such as a copy of the game (called “The Doom That Came to Atlantic City!”) or pewter figurines. After 14 months, Chevalier cancelled the project and promised to refund the money he raised.

Chevalier failed to provide refunds.

After investigating, the FTC determined that Chevalier spent most of the money on personal expenses such as rent, moving himself to Oregon, personal equipment and licenses for a different project.

The FTC action resulted in a settlement under which Chevalier is prohibited from making misrepresentations about any crowdfunding campaign and from failing to honor stated refund policies. A $111,793.71 judgment was also imposed against him, although it was suspended due to his inability to pay.

In a press release, the FTC stated that this case is part of its “ongoing work to protect consumers taking advantage of new and emerging financial technology, also known as FinTech. As technological advances expand the ways consumers can store, share, and spend money, the FTC is working to keep consumers protected while encouraging innovation for consumers’ benefit.”

Crowdfunding is rapidly increasing in popularity, and the law is racing to keep up. If you have any questions about crowdfunding, or any other emerging technology issues, please contact a Foster Swift Technology attorney.

Categories: Crowdfunding, Venture Capital/Funding

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