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FTC Reaches Settlement in First Crowdfunding Case 06/15/2015

Posted by Morse, Barnes-Brown Pendleton in Games & Interactive Entertainment.
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It took the Federal Trade Commission (“FTC”) less than 48 hours to settle its first ever crowdfunding case against a deceptive Kickstarter campaign, The Doom That Came to Atlantic City!

According to the FTC’s complaint, project creator Erik Chevalier raised more than $122,000 from 1,246 backers to purportedly “develop, produce, and distribute” a board game entitled The Doom That Came to Atlantic City.

Chevalier launched his Doom campaign in May 2012 with a funding goal of $35,000. Only 30 days later, Chevalier nearly quadrupled his goal –“But, after 14 months, Chevalier announced that he was cancelling the project and refunding his backers’ money.”

Chevalier did not provide refunds to his backers. According to the FTC’s complaint, “Chevalier spent most of the money on unrelated personal expenses such as rent, moving himself to Oregon, personal equipment, and licenses for a different project.”

Under the settlement order, Chevalier is required to honor stated refund policies and prohibited from making misrepresentations about any future crowdfunding campaign, including:

(a) the purposes for which funds raised from consumers will be used;

(b) that by making a contribution, consumers will receive a specific good, service, or other reward deliverable;

(c) the performance, efficacy, nature, or central characteristics of such good, service, or other reward deliverable; or

(d) the qualifications or expertise of any person associated with the crowdfunding campaign.

Although the settlement order also imposes a $111,793.71 judgment against Chevalier, project backers are unlikely to see any return on their contribution – at least for the foreseeable future – as the fine has been suspended “due to Chevalier’s inability to pay.”

The FTC’s action against Chevalier highlights the shortcomings of self-regulation. Kickstarter, and others like it, provide project backers with limited protection, generally dictated by the site’s terms of service.

“Many consumers enjoy the opportunity to take part in the development of a product or service through crowdfunding, and they generally know there’s some uncertainty involved in helping start something new,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “But consumers should be able to trust their money will actually be spent on the project they funded.”

In its press release, the FTC provides:

This case is part of the FTC’s 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.

The Commission vote authorizing the staff to file the complaint and proposed stipulated order in federal court was 5-0.

For Kickstarter campaigners, an important lesson is to be learned – keep your promises when crowdfunding. Use funds collected for a specific purpose only for that purpose. Provide refunds when necessary and rewards when promised. Or be prepared to suffer the potential legal consequences.

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