The FTC recently announced it had entered a settlement with a fellow named Erik Chevalier arising from Chevalier’s alleged misconduct in operating a crowdfunding campaign for his startup “The Forking Path.”
It was probably inevitable that the Federal Trade Commission would get involved in the crowdfunding phenomenon sooner or later. The FTC is charged with rooting out deceptive practices affecting commerce. Using this authority, the FTC has been busy with everything from online scams to cyber security. So it’s no surprise that a large scale movement where new businesses collect start-up costs from consumers would appear on the FTC radar.
But first, a little background. Crowdfunding, according to the FTC, is the practice of funding a project by raising many small amounts of money from a large number of people, typically via the Internet. In a crowdfunding transaction, consumers give money to a project creator in exchange for a specific reward. Most often, the reward is the product, service or content that will be produced with the raised funds. Arguably the most popular crowdfunding platform is Kickstarter, which has raised over $1 billion for project creators since its inception.
In this case, Chevalier developed a board game called “The Doom That Came to Atlantic City!” (editor’s note, surprisingly, this is not a reference to Donald Trump). According to the FTC, the game had been created by two prominent board artists of the dark fantasy genre. Chevalier set a goal of $35,000 within a 30 day fundraising period. For incentives, consumers who pledged $50 or more would receive a copy of the game; consumers who pledged $75 or more would receive a copy of the game with pewter game figures; and a pledge of $105 or more would garner all of the above, plus an extra set of 8 pewter pieces.
There are, apparently, more
nerds fantasy board game enthusiasts with disposable cash than even Chevalier realized. His campaign raised $122,874 from 1246 backers. And that is where the trouble started.
Chevalier never produced a game, and eventually cancelled the project. He also spent the money he raised on personal expenses, including rent for his own apartment and a license for an unrelated project. He never returned the money and never followed through with a promised accounting for the funds.
The FTC sued Chevalier for violating the Federal Trade Commission act. When the FTC files suit, it frequently has a settlement/consent order waiting in the wings. And that was the case here. The settlement required Chevalier to return over $111,000 to the FTC. That order was stayed upon Chevalier’s proving he had no money to satisfy the judgment.
Chevalier is also required to file “compliance reports” with the FTC for the next 18 years. Yes, 18. Not a typo. The reports pretty much require Chevalier to tell the FTC whatever business he is involved in whether as an employee or otherwise. Talk about your dark fantasy.
From reading the complaint and the settlement, it doesn’t look like the FTC has a problem with crowdfunding. In fact, in its press release announcing the settlement, the FTC said:
This case is part of the FTC’s ongoing work to protect consumers taking advantage of new and emerging financial technology, also known as FinTech. As technological advances expand the ways consumers can store, share, and spend money, the FTC is working to keep consumers protected while encouraging innovation for consumers’ benefit.
So the point is, feel free to use crowdfunding to secure startup money. Just make sure you don’t lie to people or embezzle the money. Seems like a reasonable request.