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Crowdfunders: Ship Products or Face Fines

Have you or are you planning to crowdfund to raise capital for your next business product or venture?
 
If you do and you hit your fundraising goal, you need to provide what you have promised your backers or you could be subject to various penalties, including substantial fines. 
 
Recently, a judgment was filed in a Washington state court, ordering the hosts of a Kickstarter campaign to pay nearly $75,000 as a result of their failure to fulfill the promises of their campaign.  The campaign was launched on September 24, 2012, to raise money for the production and distribution of Asylum Playing Cards, a horror-themed playing card game.  People who donated $9 were promised a single deck of playing cards that they were to receive in December 2012.  The campaign sought $15,000 and was successful, ultimately receiving $25,146. 
 
Despite this successful campaign and the promise of playing cards, the backers never received the promised-cards.  In response, the Washington Attorney General filed a lawsuit against the company, alleging that the company’s failure to send the cards violated the Washington Consumer Protection Act.  The Attorney General prevailed in the lawsuit and the company was ordered to pay nearly $75,000 as a result — $688 to each of the 31 Washington residents that had backed the campaign, $31,000 in civil penalties for violating the state’s Consumer Protection Act ($1,000 per Washington resident), and $23,183 to cover the state’s court costs.
 
The press release announcing the penalties directed some strong language toward those that host crowdfunding campaigns.  It said that “Washington state will not tolerate crowdfunding theft.”  The Attorney General also remarked that “[i]f you accept money from consumers, and don’t follow through on your obligations,” then his office “will hold you accountable.”
 
This case should serve as a warning to anyone that plans to run a crowdfunding campaign.  Whether its Kickstarter, Indiegogo, GoFundMe, or some other platform, you must follow-through on your promises if your campaign is successful.  As crowdfunding becomes a more popular form of raising capital, there is no doubt that state and federal regulators will increasingly investigate and punish those that don’t live up to their promises.
 
MacDonald Illig’s Emerging Technologies Practice Group has worked with several companies that have run successful crowdfunding campaigns.  If you have questions about your specific legal obligations or about the process in general, contact someone in the Emerging Technologies Practice Group.
 
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