The Risks of Crowdfunding

Crowdfunding is a relatively new method for companies to raise money for various projects. Companies solicit donations for a project from a wide cross-section of the public, in exchange for some kind of reward. For example, a company might offer t-shirts, or bandanas, or even allow pre-orders of its product, in exchange for the donations. What happens, however, if the company fails to follow through with the reward it promised? Nashville-based Altius Management is finding out the hard way – the State of Washington is suing Altius under the state Consumer Protection Act for failure to deliver on its promises or offer refunds.

In 2012, Altius started a Kickstarter campaign to raise $15,000 to fund development of a playing-card game called Asylum. Altius actually raised more than $25,000, but apparently failed to follow through either by shipping merchandise to its funders, or by refunding the donations. Thirty-one of those funders live in Washington, and the state filed suit on their behalf earlier this month, alleging unfair and/or deceptive acts under the state Consumer Protection Act, and requesting up to $2000 in damages for each violation. Altius has not yet responded to the complaint.

It is too early to predict the outcome of the Altius case, or even to predict whether other states might follow Washington’s example in pursuing crowdfunding deadbeats. Nevertheless, it is worth examining what a company’s obligations are when it engages in a crowdfunding campaign. There are numerous crowdfunding platforms, so I will just take a look at a few of the more prominent ones. Kickstarter is perhaps the best known crowdfunding platform, and the one used by Altius. Here are some excerpts from Kickstarter’s terms of use: