It's patronage [0], as explained on a KS blog post the day before the site went live [1]. This means backers are funding a good-faith effort by the team to deliver the described result. They don't have any recourse if the team's good-faith effort fails (meaning, genuine attempts are protected from litigation), but they do have recourse if that effort is not made.
The term appears about 3000 times in the US Code overall.
That really depends on how you fund the company, and what the company "fails" at.
If you fund a company by providing debt (rather than equity) financing, and they fail to pay what the promised, yes, you can sue them.
> What is the difference in the case of Kickstarter. They are a crowdfunding platform are they not?
The difference between Kickstarter and debt financing is that, with a Kickstarter, the offered exchange for money now is a specified "backer reward" later, instead of a specified amount of money later.
This is a bit more malicious than "things didn't work out."
Apparently I'm not allowed to look at more than 4 pages without using their app. So I gave up.
I've never been a fan of Scribd but MAN that's hostle.
If you read it, can you write a short summary of their malicious acts?
> 4.15 Defendants represented on the Asylum Playing Cards Campaign website that delivery of the rewards to all backers (e.g. the Asylum playing cards themselves, as well as the various add-on rewards) would take place in December 2012.
> 4.16 Defendants have not posted an update to the Asylum Playing Cards Campaign website since July 13, 2013.
...
> V. FIRST CAUSE OF ACTION - MISREPRESENTATIONS AND THE FAILURE TO DELIVER REWARDS
...
> 5.2 In the context of operating the Asylum Playing Cards Kickstarter campaign, Defendants engaged in the following acts or practices constituting unfair or deceptive acts in trade or commerce:
> a. Misrepresenting either directly or indirectly that Backers who paid for Rewards through the Kickstarter Campaign would receive those Rewards in approximately December 2012;
> b. Failing to deliver the promised Rewards to Backers after the Backers paid money to Defendants via the Kickstarter Campaign.
...
> VI. SECOND CAUSE OF ACTION - FAILURE TO REFUND
...
> 6.2 In the context of operating the Asylum Playing Cards Kickstarter campaign, Defendants engaged in the following acts or practices constituting unfair or deceptive acts in trade or commerce:
> a. Failing to provide refunds to Backers who requested one after they did not receive their Reward in a timely fashion from Defendants' Kickstarter Campaign;
> b. Failing to offer refunds to any other Backer, whether a refund was requested or not, after Defendants were unable to deliver the Rewards to any backer within a reasonable timeframe.
When a project is successfully funded, the creator must complete the project and fulfill each reward. Once a creator has done so, they’ve satisfied their obligation to their backers.
Throughout the process, creators owe their backers a high standard of effort, honest communication, and a dedication to bringing the project to life. At the same time, backers must understand that when they back a project, they’re helping to create something new — not ordering something that already exists. There may be changes or delays, and there’s a chance something could happen that prevents the creator from being able to finish the project as promised.
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. A creator in this position has only remedied the situation and met their obligations to backers if:
they post an update that explains what work has been done, how funds were used, and what prevents them from finishing the project as planned; they work diligently and in good faith to bring the project to the best possible conclusion in a timeframe that’s communicated to backers; they’re able to demonstrate that they’ve used funds appropriately and made every reasonable effort to complete the project as promised; they’ve been honest, and have made no material misrepresentations in their communication to backers; 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. 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.
Section 4 outlines the facts of the case with item 4.2 stating that backers "paid for" rewards. Sections 5 and 6 are all accusations based on the "paid for" premise and the basis for the action.
This is where I have a problem with this - kickstarter is not a store. If I order from Amazon, I'm expecting that they will deliver. It's a sales transaction. If on the other hand I'm willing to help someone take a shot at doing something new, and, if successful, get some sort of reward back, that's not a store sales transaction.
The premise of kickstarter has a lot more in common with angel or seed investing than with buying stuff.
In reading through the facts section, I don't see any argument being made that the campaign was started in bad faith and the project creator is not being prosecuted for fraud. The basis of the case is essentially consumer paid for a good and that good never showed up and no refund was issued.
But again, kickstarter is not a store...
When you take money from people that they give you in response to your solicitation representing that, if they give you a specified amount of money, you will provide specified tangible things in the future, reciting as a mantra that the venue through which you made this solicitation and received the funds "is not a store" isn't, as it turns out, a legally dispositive way of disimissing liability.
> The premise of kickstarter has a lot more in common with angel or seed investing than with buying stuff.
Angel or seed investors get well-defined things in exchange for the money they provide, but the things that they tend to be offered (which tend to be in individually, actively negotiated term sheets, which is rather completely unlike the situation in Kickstarter) tend not to be future goods.
Kickstarter might not be a store, but the legal context of many kickstarter is a lot more like store than it is like angel or seed funding.
> and the project creator is not being prosecuted for fraud.
Well, that's true in two senses:
(1) The project creator is not really "being prosecuted" at all, as default judgement was entered in July; the prosecution part is pretty much done.
(2) The specific legal language was "unfair and deceptive acts in trade or commerce" rather than "fraud", though one might consider that the common use of the latter term certainly encompasses the former. And, further, that while the specific operative language in the relevant Washington State law might be different, the usual legal definition of fraud encompasses the specific things at issue in at least the First Cause of Action in the case -- to wit, soliciting and receiving money on a false representation that certain goods will be provided in the future.
People who want to try a project in good faith will now think twice because they may end up being sued if the project fails.
These guys might have deserved this, but the overall effect on kickstarter community will be negative.
In law, "fraud" is the name of both a civil wrong (tort) and a crime. The same is true of lots of things -- assault, for instance, is likewise the name of both a tort and a crime -- and, while related, the two offenses have different elements (as well as different sanctions, different legal processes, and different parties who can bring actions.)
See, e.g., https://en.wikipedia.org/wiki/Fraud#As_a_civil_wrong
It certainly seems to me to be worse for kickstarter and that model of crowdfunding in general if backers are denied recourse that is otherwise available both through direct action on government action on behalf of impacted parties through the civil justice system and restricted only to public prosecution through the criminal justice system for wrongs inflicted by firms seeking funding through crowdfunding mechanisms.
Having both civil and criminal remedies available in the same manner as they are for other commercial transactions avoids crowdfunding becoming a specially-protected haven for fraudsters, which would drive out backers, which would be bad for legitimate projects seeking to use the mechanism to fund themselves.
That said, the evidence is that this case sets the following precedents: - Failing a project could lead to substantial liability, even exceeding the amounts collected. (Previously, failing a project led to reputation damage and likely inability to raise more funding.) - Backer funding is being treated as pre-paid goods/services and is essentially a loan. (I'd call it interest-free loan, but there are fees involved in payment processing and refunds.) - Rewards are considered merchandise or goods sold. (Does this open the door for sales/use taxing? There could be other implications here, such as need to register to collect/remit these taxes.)
Crowdfunding started as a way to give ideas and less formal ventures a shot at becoming something. The amount of money now involved is definitely sizable and the fraudster comment you made speaks to that. Unfortunately, the formalization and the precedents here will likely change the spirit of crowdfunding very rapidly and make it a lot less appealing to legitimate projects. Fraudsters will likely find ways to skirt these precedents by establishing corp structures or what not that will shield their personal assets from much of the civil liability.
To me, this is a sad day.
A "crowdfunding platform" doesn't mean anything to a judge. Crowdfunding doesn't mean anything legally. A donation to a charity has legal ramifications, but Kickstarter is no charity, equity an investor owns has a legal definition, but Kickstarter projects are no investments ... Kickstarter becomes a store as soon as a reward is promised.
If you back something and you are promised a reward, you are entitled to that reward or a refund, and i'm sure many more cases will go in that direction, which is a good thing.
If you're an investor, and you believe that the company was not acting in your interest, then yes, you can sue.
"What is the difference in the case of Kickstarter. They are a crowdfunding platform are they not?"
Shouldn't matter; if you don't put forth a good faith effort to actually do what you set out to do, you should have the crap sued out of you.
Rewards are promises against pledges: Someone pledges, you owe them the reward. Now if you offer your product as a reward, then yes, you owe them the completed product. If you are not sure you can do that, then don't offer the project goal as a reward, but things you can do. Then it doesn't matter that much if you fail at completing your main project.
And really, analogies don't go very far if the terms and contracts you agree to explicitly spell out something different.
If you fund a company by buying equity, you have no recourse except possibly a share of whatever remains when the company is liquidated, after debtholders are paid. In exchange, you have an unlimited upside if the company does well.
Kickstarter commitments are much closer to debt than to equity.
This case is interesting because it's the first one holding that Kickstarter is anything but simply a gift. Preferred equity holders have certain rights that go along with their place in the capital structure; they can usually prevent the corporation from paying dividends to common shareholders unless they're also being paid, and sometimes they have debt-like rights as well if the company is not paying dividends as agreed. The analogue here would be that the preferred dividends are the goods plus rewards.
Unfortunately, this case is much narrower than that, and the holding is very weak. You're still not entitled to anything as a Kickstarter backer. All this means is that the founders can't commit fraud: they must actually intend to deliver something and make some effort to do so. So really, you're still nothing like any kind of creditor or equity owner, and you're still entitled to nothing. Contributions are still gifts, but they have very small strings attached. They're nothing like an investment.
Yeah, if you take money now for product later, that's an order rather than a bond.
But, then, looked at that way, Kickstarters are more like stores than any form of financing.
What is the difference in the case of Kickstarter. They are a crowdfunding platform are they not?
I have seen this system abused many times. For many it is just a store. Kickstarter should have stricter rules, but why should they, the liability is on the creators and if they succeed, Kickstarter collects some percentage.