FTC Crowdfunding Law: A Case of Failure

September 4, 2018

crowdfunding law Contemplating a crowdfunding capital raise? Before clicking “publish,” it’s wise to consider some legal points. Not doing so could land you on the FTC’s watch list, resulting in a gigantic fine, which ultimately kills your startup.

In this post, we’ll first unpack a recent FTC crowdfunding lawsuit and close things with some startup legal reminders.

The Anatomy of An FTC Crowdfunding Lawsuit

This case is real, but we opted to disguise names and other identifying — but ultimately immaterial — details.

Claimant: The Federal Trade Commission

Defendant: A startup, which we’ll call “Apex,” that raised capital through both Indiegogo and Kickstarter campaigns.

Background: Though the Apex team raised some funds through its crowdfunding efforts, the final product, at the time of this writing, has yet to ship. Note, however, that some early investors did receive “beta” accessories meant to support the product. Ultimately, the startup used the raised money to market their product and, according to some reports, pay living expenses for the startup’s principals.

After months of inaction, FTC agents began to contact the project’s backers via a form email.

Outcome: The FTC launched a formal investigation into the crowdfunded project.

Crowdfunding Legalities: FTC Monitoring and Acceptable Failure

Kickstarter confirmed the investigation, explaining:

“Last year we received and responded to a civil investigative demand from the FTC seeking information about this project. The vast majority of Kickstarter creators complete their projects as promised, but those who abuse our system and the trust of backers expose themselves to legal action.”

Keep in mind that this wasn’t the FTC’s first crowdfunding case. In 2015, an entrepreneur raised $122,000 but never delivered the product. Ultimately, he settled with the FTC for about $112,000. He was also banned from profiting off customers’ personal information and engaging in future crowdfunding misdeeds.

But let’s be real: Failure is Silicon Valley’s fifth commandment. And believe it or not, the FTC gets and respects the ethos: Not every crowdfunded startup attempt is going to work. And the agency isn’t looking to punish every project that falls apart. Moreover, authorities recognize crowdsourcing’s inherent risk factor, which consumers choose to accept. However, the agency believes that “Consumers should be able to trust their money will actually be spent on the project they funded.”

This last point may be the sticker for “Apex.” Because according to reports, the backers allegedly received inquiries from other crowdfunding companies, and many folks seem to believe that Apex sold their information to these groups.

Get In Touch For A Crowdfunding Legal Consultation

Yes, anybody can start a crowdfunding project. However, everyone who does must comply with applicable laws and regulations. Our startup law team helps emerging companies and entrepreneurs with everything from FTC compliance to tax positioning. We’ll also guide you through the crowdfunding process to ensure authorities don’t come knocking on your door.

Get in touch today. The initial consultation is on us.


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