The U.S. Federal Trade Commission recently completed its first enforcement action against an undelivered Kickstarter project and resulting in an agreement to repay over $100,000 in campaign pledges. The FTC alleged that the campaign deceived supporters and spent money on items unrelated to the campaign. While not all undelivered crowdfunding campaigns will prompt FTC action, this first action lays out important rules to follow so as to avoid deceptive claims in your crowd funding campaign.
In the enforcement Action, the FTC implicitly set out four standards to comply with so as to not misrepresent a crowdfunding campaign to consumers:
1. How will funds be used. Don’t use campaign funds for purposes unrelated to the campaign, such as personal expenses or for other businesses or projects. Where your project fails, don’t use campaign funds for a different project as backers never agreed to provide funding for a different project.
2. Deliver your deliverables. Don’t promise and not deliver the deliverables, including perks, you promised to each backer. In order to avoid this issue, it is recommended that you research the exact cost of each deliverable to ensure that it is financially viable and can be manufactured on time and to the specifications promised to backers.
3. Don’t misrepresent the project. Be honest as to the stage of development the project is at and the features that will be integrated into the project. If a feature is not possible, don’t imply that it is part of the project or that it may be possible. The FTC wants consumers to understand exactly what they are contributing to and not be mislead as to what the project delivers.
4. Be honest about your skills. You should set out the expertise/qualifications of any person associated with the crowdfunding campaign honestly. Do not mislead backers as to team member expertise as the team is equally important as, and essential to the success of, the project.
Running through the above standards is a single rule: don’t misrepresent, expressly or by implication, anything in your crowdfunding campaign. Similar to a store selling goods, running a crowdfunding campaign requires you to clearly present to prospective purchasers what you are selling and who is involved in the item being sold.