Sunday, October 21, 2012

Proving Crowdfunding Good Faith | Transparency

Crowdfunded projects are wise to keep detailed records.  Records help insulate project owners from legal liability.

Failure is an Option

Fully-funded, rewards-based crowdfunded projects can fail.  For example, a game project called “Haunts: The Manse Macabre” exceeded its funding goal on Kickstarter.  It raised $29,000 to make an online game.  It told backers (people who contributed money) that they would be rewarded with certain levels of access to the game when it launched.

But the project is unlikely to launch.  It encountered problems and roadblocks.  Although it paid developers to create parts of the game, the developers have left, the game is not finished and the project is about out of money.

Legal Liability for Fraud

Did the project owner commit fraud?  Could backers sue the project owner, or could a consumer watchdog like a state attorney general take action against the owner?

Although I don’t know the answer to those questions for  “Haunts: The Manse Macabre,” the answer for some projects could be yes.

Address Risk

From the outset, a project owner must prepare for risk.  The owner is wise to warn potential backers of the risk of failure.

Kickstarter says projects funded through it are expected to make a good faith effort to complete their projects.

Good faith is a subjective standard.  Like beauty, good faith is in the eyes of the beholder.

Evidence of Compliance
To establish that the owner did make a good faith effort, detailed records of the project’s activities can be invaluable.  Detailed records can include accounting ledgers, emails, instant message logs, and even a daily diary of activities.

Opening to Outside Review

Another step an owner can take is to be utterly transparent as work on the project unfolds.   To achieve transparency, an owner could post the records it is making, for public viewing as soon as they are made (or soon afterward).

When the owner makes a payment or makes a draft of a deliverable, they can post it on the web for public scrutiny.  They should invite comments.  Example: “As we execute the steps of the project, if anyone thinks we can do better, then please say so publicly or in a private message to the project owner.”

Such transparency helps to invest third parties – both backers and critics – in the actual execution of the project.  It contributes to an eventual defense like this from the project owner: “I was showing you every step as we did it.  If you thought I was not making a good faith effort, then why didn’t you say so months ago?”


  1. Dear Mr. Wright, I found very interesting your point of view regarding the "Crowdfunding" platforms. If I understood it well those are to be considered "intermediaries", if the project is "rewarding" the backers with an "exemplar" of the final product, so the crowdfunding platform is an intermediary of a "pre-sale", on the other hand, if the backer should with the payment gain equities so the platform should be considered as an intermediary/broker...
    How ever I'm not completely sure about it... cause I see it differently, first of all because we have cases in which the project owner will only make references to the backer (like a thankful note etc...) and on this case nothing was neither presold, and we can't talk about equities neither... and I wouldn't know how to "fit in" those cases under this "intermediary" profile...
    Personally I see it as a "publicity space"... the crowdfunding sites "sell" to the project owners "space" for publicizing their projects... and they are paid in bases of success... if the project reaches its goal, so the crowdfunding site is remunerated... which means they are not responsible for the project, nor its content, or anything...
    I'm really interested on this subject since its something new in Brazil which is not already regulated and "theses" can still be developed on it... I would appreciate if you could give me your perspective over this particular point, thank you again for your time... Kind Regards, Paola Frumento Ferraz

  2. Paola Frumento Ferraz: Crowdfunding is a new concept in law. Crowdfunding can be done many different ways. The laws of different states and countries may interpret particular crowdfunding transactions different ways.

    Generally speaking: When a person is paid a percentage based on the amount of money raised, the argument for holding that person accountable is stronger. That "person" might be called a site, a platform, a promoter, a salesman, a publicist, a broker or something else.

    That person might be held "accountable" by way of liability, regulation or some other action of law.

    However -- depending on the circumstances -- that "person" may have a good argument not being accountable or liable or regulated for reasons such as the following: (a) The person fairly and clearly disclaimed liability; (b) The person embraced and promoted transparency; (c) The person took good steps to ensure that the backers (i.e., the people who put up money) were informed, able to take care of themselves and voluntarily agreed to take risk; and/or (d) Other socially-important factors were present.