Imagine if you had a great idea for a new bicycle rental business that allows customers to rent bicycles through a smartphone app. While you can develop the software, you do not have the money to buy the hardware, bicycles and bicycle racks. Historically you would have to find investors, or take some sort of loan to start up your great idea; only problem here, no one will trust you. Thankfully, these days Kickstarter exist, and have been huge boons to crowd-sourced businesses. Kickstarter’s goals are to help bring “creative projects to life” by allowing creators to establish a page that outlines their projects, and invites all people (“backers”) who have interest to invest money, often for rewards such as signed copies of the final product. The creators will include the “funding goal,” often outlined with the amount of money needed for certain features of the product, and gives a rough timeline for delivery of the product. Successful projects often start with strong social media exposure, gaining a large number of backers and reaching the funding goal quickly. Some projects can be wildly successful, while others fail to deliver.
In our bicycle rental business, the biggest obstacle is buying bicycles and developing and installing “smart-racks” that recognize customers. But hardware is difficult. There are logistical complications that can lead to unexpected costs; not all creators are financial planners or industry veterans, they often underestimate their costs. The world of software is less tumultuous, lacking the manufacturing and logistical obstacles. Thus, the independent video game industry has grabbed the crowdfunding model and ran with it. That is not to say that all crowd-sourced games have been huge successes. Going back to our example, what if you are a programming novice? Or underestimated your living expenses? Most times in failures to deliver, the independent developers just run out of money (underestimating costs) or run out of time (underestimating how hard programming is, or overpromising features). In some instances, it seems as if the creator just disappears; not responding to messages, providing updates, or even accepting refund requests.
Now another “indie” developer comes under the public magnifying lens. Ant Simulator, an ant colony simulation game inspired by Maxis’s SimAnt (released in 1991), was recently declared dead. Apparently, Eric Tereshinski, the lead developer and original creator, has canceled the project because his “business partners” (no details of the contract between the parties have been provided, other than Tereshinski’s own words in his Youtube video) or “consultants” have spent the money on “alcohol, strippers and other activities not really related to making a good videogame” (see also https://www.youtube.com/watch?v=2IWl29BNawg). This case of failure to deliver is unique because it is not only the creator that seems to have lost the money or grasp on their project, rather it was the so-called “consultants.” Tereshinski, for his part, does not wish to bring any legal action against them, citing contractual language and fear of an exhausting, drawn-out legal procedure (see also Tereshinski’s comment (stating “[t]he only difference is that I would have wasted a lot of time and money on court and lawyer fees . . . [c]utting ties with them is just faster, simpler, and safer.”). The refund status is currently unknown, but Tereshinski has promised to email people who “pre-ordered” the game about refunds (people who “pre-ordered” the game are not necessarily Kickstarter backers). However, how he will find the money for refunds is currently undiscovered, seemingly because the investment money was spent all on “booze and strippers.” This has once again left supporters of the crowdfunding model disappointed and asking, what can we do about this?
The Federal Trade Commission (“FTC”) has established the Financial Technology (“FinTech”) focus to protect consumers who may use crowdfunding. The FTC announced that they aim to use their authority “under the FTC Act and other laws to bring law enforcement actions against companies whose deceptive or unfair actions harm consumers.”
On June 11, 2015, the FTC brought one suit against Erik Chevalier, of The Forking Path Co., for their abuse of a Kickstarter campaign. Chevalier made promises to deliver a board game with the money from backers, along with unique rewards for different levels of money support. Despite raising four times the “funding goal,” Chevalier canceled the project citing rising costs and did not refund every backer. It was later learned that in fact, the money was spent on personal expenses. In the end, the parties agreed to a settlement with monetary considerations; in addition, Chevalier was barred from “making misrepresentations about any crowdfunding campaign and from failing to honor stated refund policies.” He also cannot disclose or sell his previous backer’s personal data, and must dispose of it properly. There is one major difference between Chevalier and Tereshinski: Ant Simulator’s developers/consultants spent all their crowdfunded money, rather than Tereshinski. The partners, for their part, have responded and said that the allegations are completely false. They claim that Tereshinski took control over all their money, property, and social media accounts and websites (which they claim Tereshinski altered). They also claim that Tereshinski was motivated by the game’s positive media coverage. To truly understand the legal consequences of that distinction, the contract between Tereshinski and his “consultants” needs to be investigated, and perhaps the FTC can assume that duty.
The FTC taking action and bringing the complaint is a good sign for the crowdfunding model. It raises consumer confidence because they now have an agency to watch over misrepresentations and fraud, rather than attempting independent legal action. Moreover, crowdfunding is still a useful tool for bringing a desired product, or niche product, to market. It also raises accountability for creators of crowdfunded products, knowing that real legal consequences can be levied; it should create better planning for the ideas and products. While consumers will undoubtedly still be disappointed because backers are people that actually wanted the product offered, they are at least less likely to be scorned and left wondering what really happened to their money. Now, perhaps that bicycle rental business is a good one in concept, but you better make sure you’ve got a true business plan on paper before you go to the crowd.