Update: Federal Trade Commission Prosecutes It’s First Crowdfunding Case

Federal Trade Commission

In a recent blog post on this subject, Assouline & Berlowe outlined pertinent provisions of Florida’s Intrastate Crowdfunding legislation. The new law is aimed at assisting venture entrepreneurs and smaller businesses raise investment capital through general solicitation and without the usual high transaction costs. By utilizing an intermediary online platform, individuals and businesses can reach a vast number of potential investors; usually those who have limited amounts to invest. As with all searches for “The Next Big Thing,” Caveat Emptor!

On June 11, 2015, in its first crowdfunding case, the Federal Trade Commission (FTC) announced legal action against a promoter who used the online intermediary platform Kickstarter.com to solicit funds to produce The Doom That Came to Atlantic City; a board game. Parenthetically, Kickstarter.com successfully raised over $1 billion since its inception. Crowdfunding online platforms raised approximately 2.7 billion in 2012, and approximately $5.1 billion in 2013.

The FTC files a complaint when it has “reason to believe” that the law has been or is being violated and it appears to the FTC that a proceeding is in the public interest. Stipulated orders have the force of law when approved and signed by the District Court judge. This case is part of the FTC’s consumer protection program related to FinTech; the use of new and emerging financial technology

The FTC and the promoter reached a case settlement. The promoter is

  • prohibited from making any deceptive representations in any future crowdfunding campaign;
  • required to honor any stated refund policy;  and
  • barred from disclosing or benefiting from customers’ personal information, and failing to dispose of such information properly

A $111,793.71 judgment was also imposed against the promoter; but was suspended because of his inability to pay. If it is found that he misrepresented his financial condition, it will be reinstated.

In its announcement, Jessica Rich, Director of the FTC’s Bureau of Consumer Protection said:

“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. But consumers should be able to trust their money will actually be spent on the project they funded.”

According to the FTC, the promoter, doing business as , Co., raised $35,000, promising certain rewards. He raised more than $122,000 from 1,246 backers, most of whom pledged $75 or more.  After 14 months, the promoter cancelled the project promising to return the funds. Neither the funds nor the promised rewards were provided to the investors. The FTC’s complaint alleged that the promoter “spent most of the money on unrelated personal expenses and for a different project.”

The FTC’s Complaint outlined the Kickstarter.com “campaign:”

To initiate a Kickstarter “campaign,” the project creator develops a “homepage” that provides information (usually including a video and multiple pictures) about the product, service, or content that will be created with the raised funds. This homepage serves as the launch point for the entire project. In addition to information about the final product, the homepage provides information about the total amount of money needed for the project and the number of days left to fund it. Project creators can choose the length of the fundraising period, but Kickstarter limits the maximum time period to 60 days.

Kickstarter is structured for “all or nothing” funding. If the creator does not raise sufficient funds to meet the original fundraising goal within the time period agreed to, the creator does not receive any money and no backer is charged.

Kickstarter’s Terms of Use stated that Kickstarter funds must be used on a project with a “clear goal” that “produces” a deliverable.

Every project’s homepage offers multiple “pledge” options. Each tier promises specific deliverables or, in Kickstarter parlance, “rewards.” Usually, the higher the amount pledged, the greater the rewards promised to the consumer.

To become a project “backer” on Kickstarter, a consumer must first locate that project’s homepage by searching for the project by its name or by browsing the various categories and subcategories within Kickstarter’s main page. A consumer has the option of searching for a project by category (e.g., dance, food, games, etc.) or location (e.g., city or state). Kickstarter’s main homepage also features “staff picks” or “popular projects that appear as soon as you arrive at the website. Clicking on the title of the project takes the consumers to its homepage.

From the project homepage, consumers can select the amount they wish to pay.

Kickstarter will prompt the consumer for his credit card information. The consumer will not be charged until the fundraising period is complete and the project reaches its funding goal. Once the project reaches its funding goal, Kickstarter charges the consumer’s credit card and transmits the money to the project creator. In the event that a project reaches its funding goal but is unable to provide rewards to its backers, Kickstarter’s Terms of Use (as existing in the current case) stated that the project creator must refund the consumers the amount pledged.

Crowdfunding is becoming an important fund raising tool. Initially developed from philanthropic campaigns, the process allows small investors greater participation in free enterprise. For the entrepreneur closed to traditional capital sourced, it can provide the “seed money” to take a concept to IPO. With all financial products, due diligence is important and skepticism critical!

To view the see the full FTC release, click here.

For more information on Crowdfunding or other Venture Capital or Private Equity matters, please contact:

Carl H. Perdue, JD, LLM
Senior Counsel and Partner
Business and Finance

The above material is for information purposes only; and is not to be considered legal or financial advice.

ASSOULINE & BERLOWE, P.A.

1801 N. Military Trail, Suite 160

Boca Raton, Florida 33431

Main:  (561) 361-6566

Fax: (561) 361-6466

Email: CHP@assoulineberlowe.com

http://www.assoulineberlowe.com/

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Filed under Business Litigation, commercial litigation, private equity, venture capital

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