Disputes in Crowdfunding

The following article deals with the disputes in crowdfunding. It covers several topics - who are the people and services involved, which are the possible disputes, what kind of legal background there is (which "Terms and Conditions" the platforms enforce). All the disputes are also further explained through examples of existing cases.

Up until now, 2014, there are relatively few disputes in crowdfunding, as that is a rather new thing. There are even less cases which went to court, because the risks of a lawsuit are too large and people are not prepared to lose their money over it. However - anyone, who wishes to participate in online crowdfunding, should be aware of these possible risks, the disputes and frauds they might encounter. There are four major groups of disputes - intellectual property disputes, false promises and frauds, platform disputes and payment service disputes. For those, who would like to read further and learn more than this article offers, there are some links to the websites where more detailed information can be found.

General Information

Involved Parties

There are four different parties, which take part in all operating crowdfunding platforms - in this article they will be referred to as the creator, the platform, the backer and the payment service.

Creator

The creator is the person who launches the campaign for a particular project with the objective of raising funds for the development of the suggested project. He is also referred to as the creator, the project owner, the campaign owner, the campaign launcher, the project creator, the uploader etc. The creator can be in one way or another involved in all of our suggested disputes - intellectual property disputes (presentation disputes, idea thefts, identity thefts, reselling scams), frauds (false promises to the backers, launching non-existing projects), platform disputes (the platform can whenever cancel the project without any explanation) and payment service dispute (in which case the creator is not directly involved, but he is the one who suffers the damages).

Platform

The platform is the crowdfunding website, which acts as the mediator between the creator and the backer. The creator uploads his campaign on the platform, where it can be seen by the backers, who then decide if they would like to fund it. The platform reserves rights to change or cancel the uploaded projects if they see fit and are protected by "Terms and Conditions", to which one must agree if he wants to use the platform. The most popular crowdfunding platform currently are Kickstarter, Indiegogo, GoGetFunding, RocketHub, Crowdfunder, Crowdrise, Somolend, AngelList, Invested.in, Quircky etc. The crowdfunding platforms usually take a certain percentage of the raised money (they for example collect 5% of the raised money, but most of them only if the project ends successfully). The platforms distance themselves from any intellectual property disputes or possible frauds, they are however the main problem when it comes to - as we call it - platform disputes, as they reserve the right to change or cancel any project at any time for any reason, without having the obligation to explain why. In certain cases such actions led to the court, but due to the clearly stated Terms and Conditions, the platform normally is not legally found guilty of misconduct.

Backer

The backer is a member of the public who financially backs the projects by contributing funds. The backer can also be referred to as the contributor, the investor, the funder, the supporter etc. Backers can be involved mostly in disputes over frauds (fraud from the creator - where they support a deceitful project, fraud by backer - where they promise funds, which they do not provide, or false promises - where they are promised rewards, which they do not receive).

Payment Service

Payment service is the intermediary, through which the donated funds are transferred from the backers to the creators. It is one of the online payment systems, for example PayPal or WePay, which facilitate the transfer of money between backers and creators, and they also take a cut for both the platform and themselves. Payment services can sometimes be included in disputes, especially when their Terms and Conditions are not in accordance to those of the crowdfunding platforms. In those cases the creator can successfully carry through his campaign, but at the end he cannot receive the donated money because of the controversial content of the project.

Platform "Terms and Conditions"

All crowdfunding platforms are protected by "Terms of use", which you have to accept if you wish to participate on the website. Although these Terms of use may vary from one platform to another, they all have a few main things in common. All platforms clearly state, that by using their services you are agreeing to the terms and conditions of the website, which are then further explained. Most platforms protect themselves from any intellectual property issues, they have rules about what can and cannot be uploaded, they urge the users to respect the Third Party's (collaborating websites') Terms and Conditions. Most platforms also reserve the right to cancel, edit, reject, interrupt, suspend any project at any time for any reason. They also distance themselves from any disputes between the different groups of users.

Relevant sections from the "Terms and Conditions" of three different platform (Kickstarter, Indiegogo, GoGetFunding) are shown further down, where one can easily find the common points of all crowdfunding platforms.

Relevant Sections from “Terms of Use”

Kickstarter

Kickstarter Copyright

• Terms of use - "1. Welcome to Kickstarter!"

Welcome to Kickstarter. By using this website and services offered by Kickstarter Inc., you’re agreeing to these legally binding rules (the “Terms”). You’re also agreeing to our Privacy Policy and agreeing to follow any other rules on the Site, like our Community Guidelines and rules for starting projects. ...

• Terms of use - "6. Stuff we don't do and aren't responsible for."

We don’t oversee projects’ performance, and we don’t mediate disputes between users. ...

• Terms of use - "8. Other Websites"

...Kickstarter partners with other companies (such as Amazon Payments and Stripe ) for payment processing. When you back or create a project, you’re also agreeing to the payment processor’s terms of service.

• Terms of use - "9. Your Intellectual Property"

We don’t own the stuff you post on Kickstarter. But when you post it, you’re giving us permission to use or copy it however we need in order to run the site, or show people what’s happening on it. ...

When you submit a project for review, or launch a project, you agree to these terms:

We can use the content you’ve submitted. ...

When we use the content, we can make changes, ...

You won’t submit stuff you don’t hold the copyright for (unless you have permission)...

You promise that if we use your Content, we’re not violating anyone’s rights or copyrights...

You’re responsible for the stuff you post...

We’re not responsible for mistakes in your content...

• Terms of use - "10. Kickstarter’s Intellectual Property"

...You agree to respect all copyright and other legal notices, information, and restrictions contained in any content accessed through the Site...

• Terms of use - "11. How We Deal with Copyright Issues."

... We reserve the right to delete or disable content alleged to be infringing, and to terminate accounts for repeat infringers. ...

• Terms of use - "13. Our Rights"

...We have the right to reject, cancel, interrupt, remove, or suspend any project at any time and for any reason. Kickstarter is not liable for any damages as a result of any of these actions, and it is our policy not to comment on the reasons for any such action.

Indiegogo

Indiego Terms of Use

• Terms of Use - "Terms of use" (1st paragraph)

... By using the Services, you agree to be bound by these Terms of Use, our Privacy Policy, all applicable laws and all conditions or policies referenced here (collectively, the "Terms...

• Terms of use - "Prohibited Campaigns"

Campaign Owners are not permitted to create a Campaign to raise funds for illegal activities, to cause harm to people or property, or to scam others...

• Terms of use - "Community Guidelines"

Indiegogo is not a place for hatred, abuse, discrimination, disrespect, profanity, meanness, harassment, or spam. ... ...We reserve the right to remove Campaigns and terminate User accounts for such activities.

• Terms of use - "Disputes between Campaign Owners and Contributors"

Campaign Owners are legally bound to perform on any promise and/or commitment to Contributors (including delivering any Perks)...

.... Indiegogo doesn't guarantee that Contributions will be used as promised, that Campaign Owners will deliver Perks, or that the Campaign will achieve its goals. ...

• Terms of use - "User Content"

...Users grant Indiegogo a perpetual, non-exclusive, royalty-free, transferable, sublicensable, worldwide license to use, publicly display, publicly perform, store, reproduce, modify, create derivative works, and distribute User Content of any User on or in connection with the Services and our related marketing and promotional activities...

• Terms of use - "Third-Party Websites, Advertisers or Services"

...We encourage Users to be aware of when they leave the Services, and to read the terms and conditions and privacy policy of any third-party website or service that they visit...

• Terms of use - "No Warranty"

Indiegogo has no fiduciary duty to you... ... Use of the services is at user's own risk.

GoGetFunding

GoGetFunding Terms and conditions

• Terms and Conditions - "Terms and Conditions"

...By using the GoGetFunding service you agree to the following: You will comply with all local, state/provincial, regional & national laws in your area of residence. You are to alert the GoGetFunding service staff about any unauthorized use of your Project Creator or Backer accounts. You agree to abide by all our terms and conditions and the PayPal acceptable use policy...

• Terms and Conditions - "Third Party Sites"

... When you access third party websites, you do so at your own risk....

• Terms and Conditions - "Third Party Intellectual Property — Copyright Notifications"

... GoGetFunding may, in appropriate circumstances and at its discretion, terminate the accounts of users who infringe the intellectual property rights of others...

If you believe that your work has been copied in a way that constitutes copyright infringement, please provide GoGetFunding with a written notification ...

• Terms and Conditions - "Intellectual Property Rights — Project Creators"

... You hereby grant to GoGetFunding the worldwide, non-exclusive, royalty-free, right to (and to allow others acting on its behalf to) (i) use, host, display, and otherwise perform the Service on your behalf ...

• Terms and Conditions - "Intellectual Property Rights — Users"

...By Submitting User Submissions on the Site or otherwise through the Service, you:

...understand that GoGetFunding shall have the right to delete, edit, modify, reformat, excerpt, or translate any materials, content or information submitted by you...

GoGetFunding does not endorse and has no control over any User Submission. GoGetFunding cannot guarantee the authenticity of any data which users may provide about themselves...

• Terms and Conditions - "Limitation of Liability"

In no event shall GoGetFunding, nor its directors, employees, agents, partners, suppliers or content providers, be liable under contract, tort, strict liability, negligence or any other legal or equitable theory with respect to the service (I) for any lost profits, data loss, cost of procurement of substitute goods or services, or special, indirect, incidental, punitive, or consequential damages of any kind whatsoever, substitute goods or services ...

Types of Disputes

Intellectual Property

Intellectual property can be best described as "creations of the mind", for example visual art, design, inventions, literature. Intellectual property can be protected by law with patents, copyrights or trademarks, which allow the creators to protect their ideas from being used or stolen by somebody else.

Most crowdfunding platforms protect themselves by not taking any responsibility if the projects, which are posted on their site, get stolen. Some of them do, however, take action if they are informed that one of the projects which is currently in the process of collecting funds is using somebody else's intellectual property. In the case of Kickstarter, they "freeze" the campaign for a period of 30 days to resolve the dispute. If the problem is taken care of, they then re-post the project, otherwise it is cancelled. They inform the backers that the project they are financing is removed for the time being with an email, such as this one:

Hi there,

This is a message from Kickstarter Support. We're writing to inform you that a project you backed, GameStick: The Most Portable TV Games Console Ever Created, is the subject of an intellectual property dispute.

The law requires that we remove the project from public view until the process is complete or the dispute is resolved. If we are not able to re-post it within 30 days, we will cancel the project, all pledge authorizations will expire, and the project will be permanently unavailable.

If you'd like to manage your pledge, you can do so through the project page:

http://www.kickstarter.com/projects/872297630/gamestick-the-most-portable-tv-games-console-ever?ref=email

If you have any questions, we encourage you to message the creator directly. You can also do this from the project page.

Thanks so much for your patience and cooperation,

Kickstarter

Presentation Disputes

The first kind of intellectual property disputes regarding crowdfunding would be presentation disputes. They occur, when project creators use somebody else's intellectual property as material for their own presentation. In most cases these disputes can be quickly resolved, if the creators remove the controversial material from their presentation or if they gain permits from the owners.

GameStick

GameStick is a video game console developed by PlayJam. The project was launched to Kickstarter in 2013 with the aim of collecting $100,000. Sometime during the campaign Kickstarter pulled their project off the site due to an "intellectual property dispute". It turned out, that the campaign presentational video included some footage of a video game, for which they did not have the proper rights. They removed the problematic content, re-edited their video and were put back up on Kickstarter. They succesfully finished their campaign, receiving almost $650,000.

Idea Theft

On various occasions crowdfunded projects find themselves in the middle of intellectual property theft discussions, but unless the products are patented or otherwise protected, it is very hard to come to a fair conclusion. Many of such disputes are never resolved and most of them are discussed privately between the project creators. In cases of intellectual property theft it is close to impossible to remain objective and for that reason we will not discuss any examples.

Identity Theft

After a project was presented on one of the crowdfunding platforms it sometimes happens, that after some time the same project (same name, same presentation and material) is posted again by somebody else on a different crowdfunding site, who is collecting funds off of somebody else's idea. This is known to have happened various times via the platform Indiegogo, since it is especially exposed to such frauds, due to their "flexible funding" system, which enables creators to collect funds as soon as they are donated by backers. Most of the crowdfunding sites do not release the funds until after a campaign is successfully completed.

The ShopBot Handibot, Pirate 3D, Hinges, Like a Virus...

A Kickstarter campaign for the ShopBot Handibot, a new "smart" digital power tool, was going well over their initial goal of $125,000, when the owner of ShopBot discovered, that a nearly identical Handibot campaign was running on Indiegogo, with text and graphical material copied directly from their Kickstarter project website - only the funds were going to a different account. The same happened with various other Kickstarter campains, e.g. Pirate3D, Hinges, Like a Virus. All four Indiegogo sites were cancelled and removed as soon as the real creators notified the service.

Reselling

Sometimes a creator takes and existing item on the online market (for example from E-Bay or Amazon), rebrands it and promotes it on a crowdfunding platform as their own work. The item is usually promised as a reward for backers who donate a certain amount of money, which vastly exceeds the actual price of the item. The creator actually buys the product off an online shop and then offers it as reward for double or triple the money its worth.

Free Roll Machined Player Dice

A man started a Kickstarter campaign for a set of aluminium RPG game dice, which he advertises as his own design. The backers, who donated at least $30.00, would get a set of these dice as a reward. The campaign was with $5,000 well above the asking goal of $1,500 with only a few more days to go, when somebody found the exact same item being sold on Amazon online shop, only that the entire set was worth only about $12.00. The creator then cancelled the campaign himself and never collected the funds.

Fraud and False Promise

Fraud is a deception deliberately practiced in order to secure unfair or unlawful gain. As crowdfunding becomes mainstream, the potential for fraud will inevitably increase. In order for it to become a viable and lasting means of funding for emerging companies, fraud has to be limited; unsuspecting contributors, donors and investors must be protected. In crowdfunding there can be differentiated three major types of scams: fraud from the creator or fraud from the backer and false promises from the creator.

Creator fraud

With a crowdfunding campaign the creator asks for money from backers. In case of fraud from the creator, he is using deliberately misleading pretenses about the project or the expected outcomes.

“Stillborn Fraud” occurs when a campaign that is submitted for launch is summarily rejected by the platform. While campaigns are rejected for a variety of reasons ranging from technical errors to merely being incomplete, there are certainly many that get rejected because they carry a risk of fraud. They are filtered out before they are ever launched. crowdfunding platforms avoid suspicious projects as they can be damaging its reputation badly. 

In cases of “attempted fraud” a creator will try to use a crowdfunding platform to attract money from unsuspecting backers. They are good examples of how the transparency and public nature of crowdfunding platforms attract these attempts at fraud. The effect of the Wisdom-of-the-Crowd does an effective job of “outing” most attempts before money changes hands. The platform shuts down a suspicious crowdfunding campaign before any money changed hands. It is often discovered by members of the site, many who are just observers as opposed to contributors. Discussion often happens in public forums and the platform administrators are alerted. In these cases, the escrow-protected nature of fund exchange proved an important safeguard for those backing a campaign.

Kobe Beef Jerky

On crowdfrauds.com the article “Kobe Beef Jerky – Biggest Crowdfunding Scam Yet?” talks about such a fraud from a creator. This case is referred as “one of the biggest frauds in Kickstarter’s history.” The backers luckily discovered the scam just in time. The project quickly raised more than $120,000 in funding, nearly 50 times the campaign’s financing goal. That is when backers and other members of the site began to grow suspect. The scam started to unravel when the “Kickstarted” documentarians hired a private investigator to look into the campaign’s creator, Magnus Fun Inc.. They found several strange details about the company and published their findings. Soon after, the fraudulent suspicions went viral, and users began to flag the campaign. Kickstarter eventually shot down the project before its conclusion and prevented an astronomical fraud of $120,309. The backer mostly pledges a high amount. After the campaign was successfully founded and once his rewards had shipped, he rescinds his money through credit card chargebacks, receiving both the reward and the money. These cases are very difficult to bring to court because the backer can easily stay anonymous. But the damage for the creators can be immense. Officially their project got funded, so they have to provide their backers with their product.

Victims of Backer Scam

A Kickstarter donor, Encik Farhan, appears to have been pledging large amounts of funds, only to withdraw the cash after he received the rewards. Farhan used a system known as the credit card chargeback, scamming more than 100 Kickstarter project owners in the process. Farhan just changed the way that Kickstarter operates its funding and rewards program. The credit card chargeback was created to protect buyers from fraud and merchant negligence. The credit card company investigates, and in most cases, the credit card owner gets his money back. When a chargeback is rendered, the bank immediately refunds the proceeds to the winning party.

False Promise

In case of a false promise the project creator fails to deliver the promised reward to the backers after they paid money via crowdfunding campaign. Often these cases are not brought to court because the money each backer invested is not worth the effort.

In the Terms of Use of Kickstarter is written if a creator is unable to complete their project and fulfill rewards, they’ve failed to live up to the basic obligations of this agreement. To right this, they must make every reasonable effort to find another way of bringing the project to the best possible conclusion for backers. This reasonable effort includes among others showing by updates on the page of Kickstarter what work has been done, how funds were used, and what prevents them from finishing the project as planned and they offer to return any remaining funds to backers who have not received their reward (in proportion to the amounts pledged), or else explain how those funds will be used to complete the project in some alternate form. And later on: The creator is solely responsible for fulfilling the promises made in their project. If they’re unable to satisfy the terms of this agreement, they may be subject to legal action by backers.

Asylum Playing Cards

This dispute is apparently the first consumer protection lawsuit involving crowdfunding. The project was launched in 2012 and funded successfully by 810 backers. Over two years passed after the completion of the Kickstarter campaign and the transmission of the funds but not a single consumer has received the promised reward. The Kickstarter campaign raised funds to create a set of Asylum playing cards, and the campaign promised the retro-horror-themed playing cards, posters and signed sketches from a Serbian artist as rewards. In May 2014 the attorney general for the state of Washington has filed a lawsuit against Altius Management and owner Edward Polchlepek III, also known as Ed Nash. Several backers had tried to contact the project creator over the two years. Kickstarter’s terms of use require creators to fulfill all rewards of their projects or refund backers. Backers have a legal recourse if creators do not fulfill their promises.

Platform Disputes

Cancellations and Suspensions

Most crowdfunding platforms can (without giving any explanation) take down any of the projects, which have been uploaded to their site. A majority of these platforms are protected by "Terms of use" in which their rights are stated - among those appears also their right to modify content or remove any project at any time for any reason. The following section is taken from Kickstarter's Terms of use:

• 13. Our Rights

... We have the right to reject, cancel, interrupt, remove, or suspend any project at any time and for any reason. ...

Naked Paddock

The wife of a professional race car driver Chapman Ducote, Kristin "M.K" Ducote is the author of the book Naked Paddock, which talks the drama in the life of proffesional motorsports. The Ducotes used Kickstarter to raise the funds needed to publish the book. A few days after the initial launch of the project the couple appeard on a reality TV series, where they advertised their crowdfunded project in hopes to attract more backers. But only five days after the launch, kickstarter cancelled the project. A lawsuit followed, in which the couple demanded $1 million for compensation, but kickstarter clearly states in it's Terms of use, that they " have the right to reject, cancel, interrupt, remove, or suspend any project at any time and for any reason". Later the same year the lawsuit was settled and dismissed, where Kickstarter allegedly won and ended up paying nothing at all.

Payment Service Disputes

Contrasting Policies of Collaborating Services

A crowdfunding platform and a payment service can have different policies regarding the content of the funded projects, which can result in creators not receiving the funds, although everything was done properly. This has happened on more than one occasion. In such cases the creators need to obtain the money directly from the funders - which means they have to be personally in contact with them to get the funds wired directly from one account to another, without the involvement of a payment service (WePay, Paypal etc.) - or accept the fact that the funds cannot go through and be left without the money.

Kickstarter writes in its Terms of Use that each payment provider is its own company, and Kickstarter isn’t responsible for its performance. Kickstarter partners with other companies (such as Amazon Payments and Stripe ) for payment processing. When you back or create a project, you’re also agreeing to the payment processor’s terms of service.

Andre Shakti

Andre Shakti is in adult entertainment and sex industry worker. She started a campaign on www.fundly.com, a platform which promotes itself with the slogan “Raise money for anything!” to cover her travelling expanses for a flight to a festival for Feminist Porn Awards. She raised the money she needed but when trying to purchase the ticket, she was informed by WePay that she violated WePay’s Terms of Service and her funds could therefore not be processed and that the contributors would be refunded their pledges. There was nothing that neither she, nor the platform, could do about it.

External links

Asylum Playing Cards by Altius Management