Washington State Files First Consumer Protection Lawsuit Against Kickstarter Project That Failed To Deliver

from the don't-kickstart-if-you-don't-plan-to-deliver? dept

I've backed a few dozen Kickstarter projects over the years, and there have always been questions about possible fraudulent projects. While I've personally found that nearly every project delivers late (often very, very late), I don't think any of the projects I've backed has completely failed to deliver (there are a couple I'm still waiting on, though...). Still, the risk of such a "default" is always a possibility, and that's always been the case. Backing a product at an early stage always comes with the risk that it may never deliver. Kickstarter itself has tried to do a better job in making people aware of this upfront with its "Kickstarter is not a store" claims.

However, Washington State's Attorney General has decided to file a consumer protection lawsuit against one project that failed to deliver.
The state’s top lawyer, Bob Ferguson, said Thursday his office has filed the first consumer-protection complaint in the U.S. to target a Kickstarter fraud.

The lawsuit alleges Edward Polchlopek III and his company, Nashville, Tenn-based Altius Management, in 2012 raised more than $25,000 from 810 people in order to print a deck of “retro-horror”-themed cards designed by a Serbian artist.

Among those backers were 31 living in Washington state, according to the suit, which was filed in King County Superior Court.
As the actual filing notes, two years later, nothing has been delivered and no money has been returned. Rather than just seeking the return of the $25,000, the lawsuit asks for $2,000 per each backer, meaning that Altius Management may be on the hook for a potential $1.6 million.

I'm a bit torn about this. As the lawsuit points out, under Kickstarter's terms and conditions, project creators "are legally bound to fulfill backer rewards if funding is successful." And going after actual fraud seems like a good thing. But there's also a risk here. Any project might not get completed for any number of reasons -- sometimes beyond a project creators' control. In fact, we've had stories of failed Kickstarter projects.

This is the nature of innovation. An idea is great, but execution is the really challenging part, and almost everyone underestimates the importance of execution. That's one of the clear risks in both creating and backing a Kickstarter project. While it seems reasonable to go after clear cases of fraud -- in which the creator had no intention to ever deliver a product, it gets a lot more complicated in cases where unforeseen circumstances resulted in the project falling apart. Should projects that discover too late that their plans were too ambitious also face the risk of millions of dollars in liability? Such a threat could cast a real chill on the crowdfunding space that has been so important for so many.

So while I think fraud charges may be appropriate in extreme cases, where it can be shown that there was never any real intent to deliver a product, there is a real risk that these could spread to the other kinds of cases, where it was just a botched execution -- and that could really do a lot of harm to an important emerging market for creativity and innovation.

Filed Under: bob ferguson, crowdfunding, edward polchlopek, fraud, scams, washington
Companies: altius management, kickstarter

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  1. identicon
    Pragmatic, 7 May 2014 @ 5:39am

    Re: Re:

    While I agree with you for the most part, jameshogg, I take exception to this statement:

    Have crowdfunded contracts come with a clause that says if the project does not meet the deadline, refunds will be given (with interest, maybe? something for the free-market to decide).

    There is no such thing as a free market or a "free-market." I'd be interested to see how would-be backers would decide on whether or not refunds would be given with interest and how they would enforce their will. Insurance of some sort to cover the risks may well be in order, but that comes with its own risks.

    If would-be entrepreneurs decide to offer refunds with interest, how will that work? A Ponzi scheme? They'll need to have enough money to cover the interest already banked somewhere.

    If Kickstarter is pressured by would-be backers into guaranteeing a win for every project and/or their backers by enforcing a refund-with-interest policy, who the hell is going to be willing to go to them for funding?

    There are market forces at work and they should be allowed to work in balance for the common good. Where the demand side has the advantage, suppliers get screwed (this is happening in the jobs market now, and that sure ain't free!). And where the supply side has the advantage, consumers get screwed (think MAFIAA, telcos, etc.).

    When we're "letting the market decide," which side of it gets to decide? I don't think it's fair to hobble Kickstarter or the entrepreneurs who use it to protect investors from the reality that sometimes projects fail, and not as a result of deliberate fraud.

    While all reports of fraud should be carefully investigated, let's leave Kickstarter as it is. I believe they've got the balance right between the market forces.

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