Rewards based crowd funding is becoming an increasingly popular way for budding entrepreneurs to raise funds to bring their vision to reality. It involves running a campaign on a rewards based crowd funding site, such as Kickstarter or Pozible, and taking ‘pledges’ from customers in return for which you are to deliver your product. For anyone thinking of launching a new product, the idea of upfront payments from customers is alluring and there are undoubtedly a large number of crowd funding success stories, with over $2 billion pledged on Kickstarter since its launch in 2009.

However, we have all probably heard about failures, such as The Coolest Cooler or Skarp’s Laser Razor.

Typically, there are no guarantees when backing a rewards based crowd funded campaign and it is always possible that circumstances can change or unexpected difficulties can arise, meaning the creator of the campaign is unable to complete and deliver the product. However, when a campaign fails, what liability does a creator have to their backers?

This will usually depend on the terms of the crowd funding site and the campaign itself.

One of the obvious targets for disgruntled backers is the crowd funding site itself. However, crowd funding sites typically disclaim all liability for unsuccessful campaigns, making them a difficult target. For example, Kickstarter’s terms of use include terms releasing Kickstarter from any claims, damages or demands of every kind arising from the use of their services.

The story may be different for the creator. For example:

  • it is likely when a backer backs a campaign that a contract will be formed between the creator and the backer for the delivery of the product. Depending on the terms of that contract and the reason the campaign failed and the product was not delivered, the creator may be liable for breach of contract;
  • in Australia, a creator may be subject to claims under the Australian Consumer Law for misleading and deceptive conduct for any misrepresentations made in the campaign material;
  • the ACCC has power to enforce the Australian Consumer Law and to bring proceedings where it believes that statements, claims or other representations are misleading or deceptive.

These issues are largely untested in Australia, but there have been cases in the United States where a backer sued a creator of an iPad stand (with devastating consequences for the creator) and where Washington State took proceedings against the creator of a failed card game.

Whilst no budding entrepreneur wants to think about their dreams failing, it would be wise to consider that possibility and the potential risks involved. Before starting a rewards based crowd funding campaign, creators should:

  • carefully consider their business structure and potential liability if the campaign fails;
  • be very careful to ensure that any representations made in the campaign are true and that there are reasonable grounds to believe that they will be able to deliver on their promises and the product on which the campaign is based.

Otherwise, they could find themselves being pursued by disgruntled backers or regulatory bodies such as the ACCC.