What’s the News?

A recent lawsuit in Washington State suggests that so-called “crowdfunded” fundraising campaigns could be in for greater scrutiny from consumer protection regulators. “Crowdfunding” — in which projects are funded by raising contributions from a large number of people — are growing in popularity, driven in large part by the success of online crowdfunding platforms such as Kickstarter, Indiegogo, and RocketHub. These platforms allow just about anyone with an idea to raise money from the general public, but at least some regulators are starting to wonder whether the public is getting its money’s worth.

The Lawsuit

In the most recent case, a company called Altius Management launched a fundraising campaign on Kickstarter to raise $10,000 toward the production of retro-horror themed playing cards. The campaign was a huge success, with 810 individuals pledging more than $25,000 toward the project. Despite the success of the campaign, however, Altius never produced the playing cards. It also stopped communicating with the project’s backers and failed to return the donations.

That’s when state regulators stepped in. Washington State’s attorney general filed a complaint against Altius, alleging that, by failing to adhere to the terms of the fundraising campaign, the company had committed unfair and deceptive practices in violation of the state’s consumer protection statute. Although Kickstarter does not provide any guarantees or assurances to backers that the projects will come to fruition, the attorney general said he wanted to file the suit in order to send “a clear message to people seeking the public’s money: Washington state will not tolerate crowdfunding theft.” The suit calls for contributions to be refunded and up to $2,000 in fines per donor for violations of the consumer protection statute.

Why Is This Significant?

Crowdfunding has become an increasingly popular method of raising money among the general public. On Kickstarter alone, over $1 billion has been pledged by more than five million backers since the site’s launch in April 2009. This suit is a warning to entrepreneurs and potential donors that state regulators are paying increasingly close attention to such fundraising campaigns. In addition, although the Washington attorney general noted that the suit is “the first consumer-protection lawsuit in the nation involving crowdfunding,” the growing popularity of crowdfunding suggests that these types of complaints could become more prevalent and may eventually lead to legislation and regulation.