Can You Sue a Crowdfunding Creator?

Updated: Apr 26



There are many issues that can arise with a crowdfunding campaign. Perhaps the most common one that backers face is non delivery. You're promised a product or service in exchange for your contribution but then nothing happens.


Can you sue a Kickstarter campaign? The answer is: Yes, you can. If a project's creator acts in bad faith you can sue them in court for your money. What's more, the Federal Trade Commission has laws in place regarding refunds from internet retailers that can be used to strengthen your case.


Having said that, the ability to sue and your chances of successfully suing them are court are two different things entirely. Is this a good course of action for you to take? Read on to find out more.


Liability


Failed campaigns were a huge concern during the early years of crowdfunding. Due to the fact that the field was still new, many laws and concerns around liability hadn't been developed.


There were a number of campaigns that raised funds successfully but then failed to deliver what they promised. The result was that a number of backers turned to crowdfunding platforms such as Kickstarter for help only to be told that the platform was not liable.


The reasoning was that just as Facebook and Google merely host their users' data on their websites, Crowdfunding platforms function in the same manner.


While this explanation allows the platforms to stop themselves from being sued, it didn't mean that it was good for business. After all, if crowdfunding received a bad image due to failed campaigns and fraud, how would the platforms ever make money?


This led to the platforms changing their rules around 2013 and clearly defining the relationship between the three parties involved: Creator, backer and platform. For example, here's how Kickstarter defines accountability on their website:


"Kickstarter's Terms of Use require creators to fulfill all rewards of their project or refund any backer whose reward they do not or cannot fulfill. (This is what creators see before they launch.) We crafted these terms to create a legal requirement for creators to follow through on their projects, and to give backers a recourse if they don't. We hope that backers will consider using this provision only in cases where they feel that a creator has not made a good faith effort to complete the project and fulfill."


In short: Creators need to deliver or else backers can justify their lawsuit on the basis of the Terms of Use agreement.


There is a lot of misunderstanding around the language that Kickstarter (and other platforms) use so it's worth taking the time to clearly spell out what's going on here.


As far as the platform is concerned, you (the backer) are entering into an agreement with the creator. The platform is merely facilitating this arrangement and is only a host for the mechanism by which funds can be raised.


Once the funds are raised, the platform does not legally guarantee delivery of the product. How could they, they're just a facilitator.


Therefore, any legal action that you initiate cannot place any liability on the platform. Thus, the platform has washed its hands clean of the whole thing.


This leaves backers out in the cold in case of a failure. To avoid this, they updated their Terms of Use and made it clear to creators that they will need to deliver on their promises. In case of failure, the creator will be in a breach of contract and backers can use this to sue.


However, there is a wrinkle here that backers should take a note of.


Good Versus Bad Faith


The success of lawsuits of this kind come down to proving that the creator acted in bad faith. For example, if a creator pocketed all the money in their own bank account and simply failed to deliver the product, this is a slam dunk win for the backer.


In fact, this is exactly what happened when a backer sued a company called Quest Communications that promised to deliver a device called the Hansfree. The creator in this instance transferred $35,000 to his bank account and then repeatedly lied about the status of the project.


So what if you're a creator and you've genuinely tried to deliver your product but have failed at doing so? Will you be sued?


You might be. However, it comes down to demonstrating that you acted in good faith. The question is how do you communicate good faith?


It all begins with your big picture plan. Many creators go straight to the fundraising portion of their projects and neglect the fact that they need to deliver.


You need to make sure that you know exactly how and where every dollar you raise will be used. If someone asks you about this, you need to have answers ready.


This needs to be a part of your marketing as well. Your backers should be left with no doubts about the timelines and deliverables. Your pitch is the key to all of this.


You need to craft it in such a way so as to leave your backers with zero doubt that this is a risky venture.


You also need to be careful with the language that you use and leave yourself some room to maneuver in case you face delays or additional funding needs.


If you've never written a pitch before, it's best to hire a professional who knows exactly what needs to be done here. The structure and tone of your pitch is all important.


Once your pitch clearly communicates the risk inherent in your project, you need to follow up with your audience regularly. Raising money is just the beginning.


You need to now put your plan into action. If you've planned ahead of time and have been realistic about your goals and schedule, you should face no problems, barring something unforeseen happening.


What Backers Should do


If you've backed a campaign that hasn't delivered, what can you do? The first step to take is to document all of the communication you have received from the creator as well as any instances of unhelpful responses.


Next, you will need to decide whether any of this indicates that the creator has genuinely tried to create a product but has failed or if there's something malicious going on.


Keep in mind that the key for you to determine here is whether you stand of chance of receiving any of your money back. If the creator has no money left to pay you, or is bankrupt, you're not going to see a cent.


However, thanks to the FTC ruling on refunds and liability that covers online retailers, of which crowdfunding creators are considered a part of, your chances of actually winning are high.


A case in 2015 in Washington State awarded the backer damages despite there not being an argument around good faith. This case was bolstered by state law that prohibited misleading sales practices but the state's law matches the language used by the FTC as well.


The key in this case was that the judge decided that the creator used misleading language in their pitch.


So at the end of the day, your chances of success are high but whether you'll actually receive any money back or not depends on the financial situation of the creator.


From the creator's perspective, as long as your pitch isn't deemed misleading or that your actions haven't been in bad faith, you will most likely be in the clear.


Do you see now how important the language of your pitch is?


Risk


At the end of the day, crowdfunding is risky for backers. There are no guarantees of success and statistics show that the majority of crowdfunded campaigns fail. This doesn't mean you should stop backing campaigns.


What you should do instead is align your expectations properly and ensure you're not risking too much money when you contribute.


Remember, you're essentially pre-ordering a product with no guarantees of delivery. This means you need to wait for a while. So don't treat this like a shopping purchase.


Evaluate the credentials of the creator to see if they're pulling numbers and timelines out of thin air or if they actually know what they're doing. If it seems too good to be true, then it probably is.


If you notice a lack of updates from the creator, then this is a bad sign. Document everything and meet with an attorney to determine if you have a decent case.


Remember above all else that the law is on your side!


Conclusion


Crowdfunding is a wonderful platform for both creators and backers to invest and create products that they believe in. However, it comes with risks as well.


Make sure you fulfill your responsibilities and both parties will be just fine!



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