Lawsuit by State Attorney General

Crowdfunding on the major sites like Kickstarter and Indiegogo has been relatively free of fraud. I believe this is because the crowd on the major sites does a commendable job of identifying bad apples and warning prospective funders away from them.

Government watchdogs like state attorneys general have not been required to bring very many investigations or lawsuits against fundraisers on the major sites. This relative dearth of fraud is remarkable given how popular crowdfunding has become.

However, the Washington State AG has initiated a lawsuit against Ed Nash and his company Altius Management. They raised money on Kickstarter to deliver a playing card game. They raised over $25,000, exceeding their goal. But they have not delivered and have ceased communicating with backers.  "Kickstarter fraud: Washington files first consumer protection lawsuit involving crowdfunding," geekwire, May 1, 2014  http://www.geekwire.com/2014/attorney-general-asylum-playing-cards-crowdfunded-project/

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?”

–Benjamin Wright