The Umpire Strikes Back

A rather unusual follow-up to our post of May 28 of this year appeared online this week; something which may provide a temporary answer to the question of whether anything can be done about fraudulent crowdfunding projects. My last post on this subject mentioned a company that had completed its crowdfunding offering, taken the money, at (at least so far) failed to produce any actual product. Unfortunately, the company insists that it is still working on the project, and will (eventually) make good on its commitments – as soon as it figures out how to do so, presumably. Most crowdfunding projects to date don’t have any specific deadlines by which the funded company has to pay off, since in many cases the company is trying to make a product that has never existed before, so until now the “we’re still working on it!” defense has worked well enough. That may be changing, however…

According to a story on the Gizmag website, the FTC has taken action against the entrepreneur behind a failed board game project that began with an offering on Kickstarter. You can also pick up the details from the Federal Trade Commission site if you’d like, but the basic facts of the case are that the man running the project, Erik Chevalier, got the $123,000 he was asking for to create a Monopoly-style board game and then failed to spend any of it on actually producing the game. Instead, the FTC claims that he spent the money on personal expenses and put some of the residue into an unrelated business project. Even the designer and artist who actually did the work on the prototype were never paid for their work…

For the moment the sanctions against Chevalier are limited to a civil judgement and an injunction against any misrepresentation of anything involving crowdfunding, since it still isn’t clear what criminal charge (if any) would apply to misappropriation of funds from a crowdfunding project. It’s not embezzlement in the usual sense, and I don’t think you could make fraud stick unless you could somehow prove that the defendant never intended to make or sell any products in the first place. It’s possible that this will result in some of the contributors getting at least some of their money back, assuming that Chevalier ever manages to pay off the judgement, but in the long run I think the more important aspect of this story may be the precedent it’s going to set…

Up until this point there really hasn’t been much anyone could do about shady crowdfunding projects. Leaving aside the aforementioned legal gray area, there’s also the issue that it really isn’t possible to pass a law against being an incompetent businessperson. When you invest money in any entrepreneurial project there is always some degree of risk, and that doesn’t change if the investment is spread among hundreds or thousands of participants instead of a single funding source. Every so often an idea just won’t fly – there’s actually an online database of examples, and it’s only a matter of time before Kickstarter and the other major sites start cross-referencing the failures to provide context for their offerings. Although I suppose somebody might start a service to do that, if they can arrange the funding…

How much impact the FTC and/or the Justice Department will be able to have on actual scammers hiding on crowdfunding sites remains to be seen, of course. Some people will gamble money on anything, and there is only so much that our government can do about criminals from outside the US who might be capitalizing on a still-evolving industry. But up until now it has generally seemed as though no one was keeping score, or even paying attention, to people online who might be taking advantage of the naïve, generous and gullible. If this story is any indication, however, things may be about to change…