For The First Time, FTC Takes Action Against Failed Kickstarter

[miguelvp]

It's a start:

http://kotaku.com/for-the-first-time-ever-the-federal-trade-commission-h-1710644793

Took 2 years so I guess others will follow and might be being investigated as we speak. 
https://www.ftc.gov/news-events/media-resources/consumer-finance/financial-technology

https://www.ftc.gov/news-events/press-releases/2015/06/crowdfunding-project-creator-settles-ftc-charges-deception

[suicidaleggroll]

So he spent all of the money on personal matters, and doesn't have to pay any of it back.  What did the FTC do again?

[miguelvp]

There is not much they can do since the $112K judgement will be suspended because he cant pay.

So for now he is just ordered not to do it again (and by that it means is can't misrepresent any crowdfunding campaing and not to benefit from using customer personal information (I guess he sold the contact list?)

Yeah, barely anything more than a slap in the wrist.

Not sure if the backers can push the issue via the DOJ for unpaid settlement and maybe even jail time. Or maybe open a civil case and get everything he owns. But I have no legal background so I have no clue what can be done if anything.

[rx8pilot]

I can only hope that the laws catch up with this trend and make criminal charges possible. It is bad for legit businesses that self-finance R&D and marketing that are 'competing' with this nonsense.

Most of the Kickstarters are represented in way that makes it difficult for most people to tell that it is bogus or at least highly unlikely to happen.

[bitwelder]

As for slap on the wrists, I would hoped that FTC would have give one also to Kickstarter as to choose more carefully which projects they bring to public attention.

[madires]

Another informative post: https://www.techdirt.com/articles/20150612/11455031327/creator-behind-crowd-funded-boardgame-that-failed-to-materialize-draws-settlement-agreement-ftc.shtml

At least they (the kickstarters, Indiegogos etc) have to work on the project and not just spend the money for personal amusement.

[EEVblog]

Actually, it just occurred to me.
Given the aim of Kickstarter is to actually "kick start" businesses, that means the project creator has to eat, so no reason why they can't spend the money on effectively a living wage for themselves. I guess though it all comes down to what you promised to spend the money on, which is a requirement of listing a Kickstarter project. If you didn't mention living expenses then you shouldn't be spending it on that really.

[rx8pilot]

True enough.

I have started and sold numerous businesses. The first one that needed financing required a mountain of details about how the funds would be spent. This included of course, my salary during the start-up period. The bank financing had to cover all my personal needs for about 6 months before I could realize enough profits to begin the payback from revenues earned. It was no problem, but the underwriters certainly wanted to know what kind of lifestyle I was expecting to have with their money. Obviously they want to see a modest salary until they are getting paid.

[all_repair]

 O0

Given the aim of Kickstarter is to actually "kick start" businesses, that means the project creator has to eat, so no reason why they can't spend the money on effectively a living wage for themselves. I guess though it all comes down to what you promised to spend the money on, which is a requirement of listing a Kickstarter project. If you didn't mention living expenses then you shouldn't be spending it on that really.

Fair enough.  If the team wants to live off the kickstarter fund, then they have to be giving out equity of the company as well.  Actually, there are profit in the pricing of a kickstarter project, they have something to feed them as long they can deliver the project. 

[donotdespisethesnake]

Actually, it just occurred to me.
Given the aim of Kickstarter is to actually "kick start" businesses, that means the project creator has to eat, so no reason why they can't spend the money on effectively a living wage for themselves. I guess though it all comes down to what you promised to spend the money on, which is a requirement of listing a Kickstarter project. If you didn't mention living expenses then you shouldn't be spending it on that really.

Nowhere in their about page do they say anything about kick starting businesses? https://www.kickstarter.com/hello?ref=footer

The goal is to fund projects. That might include a reasonable salary paid for professional work as far as it relates to the project, but the project creator is not entitled to dip into the pot to pay for miscellaneous personal expenses.

Anyway, this guy was spending money on stuff completely unrelated to the project, not baked beans. The rather pathetic FTC action will hardly be a deterrent to potential scammers.

[edy]

If the money could be kept in escrow and only released partially as certain milestones are reached (with reasonable targets), that may also help reduce the abuse. For example, there is no need to give someone $1,000,000 in one lump sum the minute their funding campaign has concluded.

Let's say I was building widget X. I ask for $100,000 and get funded to $200,000. Great! I've met my funding goal and then some. Now I have 4 steps in my project... getting PCB designed, then maybe getting parts, and then assembling/testing widget, and finally shipping it out. You need certain amounts to get to each stage.... Why give the person the full $200,000 when all they needed to get funded was $100,000 which is what was asked to begin with? And even then, why not parcel it out in chunks that are appropriate to the amounts needed at the various stages?

There would have to be an independent review board or perhaps some representatives from the crowd-sourced funders to evaluate the stages to make sure things are on track.

[rx8pilot]

Not a terrible idea, if the project goes south early on the backers could at least get a pre-rated refund when the funding system pulls the plug.
I suspect that this is the job for a new competitor since it is not part of the DNA of Kickstarter, it would take a long time for them to make that kind of thing happen.

[economist]

Do we really want governments regulating everything? Nobody is coerced into participating on one of these pre-order / "funding" things, and the best thing to do (for those concerned about losing their money) is not to play. The only positive thing about these "campaigns" is that they have managed to create a market where ideas can reach funding but without the crushing regulation of small-loan bank lending, the income and qualification requirements of private equity or other formalized private funding, or the idiosyncratic nature of family and friends capital. They have turned pre-orders and enthusiasm into a defined market. That's not so bad. I can't imagine how regulation could do anything but make it worse.

[wraper]

Do we really want governments regulating everything? Nobody is coerced into participating on one of these pre-order / "funding" things, and the best thing to do (for those concerned about losing their money) is not to play. The only positive thing about these "campaigns" is that they have managed to create a market where ideas can reach funding but without the crushing regulation of small-loan bank lending, the income and qualification requirements of private equity or other formalized private funding, or the idiosyncratic nature of family and friends capital. They have turned pre-orders and enthusiasm into a defined market. That's not so bad. I can't imagine how regulation could do anything but make it worse.

Aren't you concerned that without any regulation, scammers will just kill the idea of crowdfunding? So there will be nothing at all to make it worse.

[economist]

Aren't you concerned that without any regulation, scammers will just kill the idea of crowdfunding? So there will be nothing at all to make it worse.

Sure, that is a potential problem (I'll admit I think most crowd-funded projects would do better to start small and self-fund). But I'm more concerned about a financial system that leaves small entrepreneurs with next to no options apart from friends and family funding. Just look at bank lending. Imagine a guy with a great idea and legitimate need for capital to get off the ground. He goes to his local bank and asks for a loan. After they stop laughing he leaves to hit up his parents. The banks are so heavily regulated these days (based on a history that, arguably, well deserves the oversight) that they do little more than charge customers fees for basic checking accounts and debit cards. Loans happen, but only to borrowers so over-qualified that they barely need the loan in the first place.

So, in some cases, I think these pre-order financing concepts play a valuable role. I would hate to see that undermined by government. Sure, a few small adjustments/rules might help, but when has government every been targeted and minimally invasive in its approach? It's a sledge hammer even when all you need is a slight tap. Freedom always has its costs. My point is that in this area we are better off with the costs than the ostensible cure of regulation. That's not always true, but I think it is here. We already have myriad regulations on investing/lending over many channels. Having a few options less regulated but with a little more risk is an improvement in my view.

[edy]

I think the other benefit of crowd-funding sites is that people can "TEST" the market for their concept/project before they take a major risk. They gather up customers/backers FIRST and then have time to deliver. It is also a great ADVERTISING platform for your new product.

Imagine spending your own money to come up with a brilliant idea and then when it is time to get the word out to sell it, you have nobody buying it. Either it is a great product with a tiny market, you've priced your widget completely wrong, have no advertising channels or distribution channels... etc....

The crowd-funding platform lets you know ahead of time all of that. You just need to make sure you have a working prototype and the only thing standing between you and fulfilling your project is the money needed to buy raw materials to ramp up production and refine design...

My beef is with crowd-funding projects where the entire concept is based on some non-existent technology which may be so far out of the ballpark that there is no idea whether it will ever be possible to do it, in the time-frame of the project, for the amount of money being asked for. We don't need "moon-shots".... Google has a whole department for those types of developments. The risk is too great.... But if people want to invest in moon-shots, let them.

But I do agree that there is a place for crowd-funding sites and ultimately the term "Caveat Emptor" is the motto you should adhere to.

[Corporate666]

Actually, it just occurred to me.
Given the aim of Kickstarter is to actually "kick start" businesses, that means the project creator has to eat, so no reason why they can't spend the money on effectively a living wage for themselves. I guess though it all comes down to what you promised to spend the money on, which is a requirement of listing a Kickstarter project. If you didn't mention living expenses then you shouldn't be spending it on that really.

Kickstarter (supposedly) specifically prohibits people from starting businesses on their platform.  I know of 2 people who had projects cancelled and KS told them that it is to fund a specific project with a specific stated goal, not to "start a business". 

On cursory review, it would seem the two things are (or could be) one and the same, but it's an important distinction, IMO, and a big part of that distinction would be that it's not supposed to fund all the things associated with starting a business, but rather to fund the specific things associated with delivering a project.

[Corporate666]

If the money could be kept in escrow and only released partially as certain milestones are reached (with reasonable targets), that may also help reduce the abuse. For example, there is no need to give someone $1,000,000 in one lump sum the minute their funding campaign has concluded.

Let's say I was building widget X. I ask for $100,000 and get funded to $200,000. Great! I've met my funding goal and then some. Now I have 4 steps in my project... getting PCB designed, then maybe getting parts, and then assembling/testing widget, and finally shipping it out. You need certain amounts to get to each stage.... Why give the person the full $200,000 when all they needed to get funded was $100,000 which is what was asked to begin with? And even then, why not parcel it out in chunks that are appropriate to the amounts needed at the various stages?

There would have to be an independent review board or perhaps some representatives from the crowd-sourced funders to evaluate the stages to make sure things are on track.

The problem with this is that now KS is taking an active role in the management of the project.  They don't want to do that because they don't want to have to give a shit if you get stiffed by a creator.  They want to be distanced from the liability of it all.

[Corporate666]

Do we really want governments regulating everything? Nobody is coerced into participating on one of these pre-order / "funding" things, and the best thing to do (for those concerned about losing their money) is not to play. The only positive thing about these "campaigns" is that they have managed to create a market where ideas can reach funding but without the crushing regulation of small-loan bank lending, the income and qualification requirements of private equity or other formalized private funding, or the idiosyncratic nature of family and friends capital. They have turned pre-orders and enthusiasm into a defined market. That's not so bad. I can't imagine how regulation could do anything but make it worse.

The government has some specific roles - but they have gone way overboard in our lifetimes in expanding their role without warrant to do so.

However, regulating commerce and being the voice of the people is one of their important roles, and I believe they absolutely should be regulating crowdfunding.

A big part of the reason is that it puts traditional funding at a severe disadvantage.  There are rules about how you can solicit investments, who you can solicit them from, and rules about the structure of the investments.  With crowdfunding, none of that applies... any creator can say whatever they want and get people to give them money.  A review of the comments on KS or IGG for any late or failed project illustrates that people had no idea what they were getting into when they backed these creators.  It's easy to say "that's their fault", but the same could be said about a con man running a stock scam or nigerian 419 scammers - in those cases, people should know better.  People should also know better when looking at the Ritot watch - that what they claim isn't technically possible.  But that clearly isn't happening because people are getting taken for hundreds or thousands of $$ under the belief that KS or IGG are vetting these projects when they really aren't. 

And private equity, VC, FFF investment and other avenues are only "onerous" when you're selling shit.  A lot of companies that started on KS got VC money later on.  The proof-of-concept that KS/IGG brought helped reduce risk and/or give better dealers to founders/creators, but companies and people that were un-investable before crowdfunding are still un-investable, and good companies and projects still get investment.  Nothing changed except the risk has been transferred to (often) unwitting consumers and the distributed liability makes it not feasible to pursue creators who play fast and loose with other people's money when they come up long on confidence and bravado and short on ability and ethics.

Case in point - CST (watch on KS) would have been able to get funded without KS.  But instead of having an investor who could help guide them to market and profitability, they wanted to skip having to give out equity and pissed away a million three of people's money with absolutely zero to show for it.  Now they are un-investable so the whole thing just gets flushed.  Not good for anyone.

[george graves]

There is not much they can do since the $112K judgement will be suspended because he cant pay.

So the moral of the story is spend all the money before the FTC comes knocking 

[Bud]

Does not "suspend" means put something on hold 'temporarily' ?