FTC Settles Crowdfunding Fraud Case
The FTC announced last week its first settlement in a crowdfunding fraud case.
The FTC had accused Erik Chevalier of defrauding consumers in a Kickstarter crowdfunding campaign in which he sought to raise funds for a board game to be called “The Doom that Came to Atlantic City.”
Chevalier and his company, The Forking Path, launched their campaign for “The Doom That Came to Atlantic City” on Kickstarter in May 2012. The game was based on a board that looked a lot like Monopoly, and required players to play the roles of villains in a post-apocalyptic version of Atlantic City.
Chevalier’s campaign looked to raise $35,000, with each $50 pledge receiving a copy of the to-be developed game. Pledges of more money would provide extra awards. After some initial excitement, the campaign raised more than its goal, eventually pulling in $122,874 from more than 1,200 funders.
But Chevalier and Forking Path never completed the game or fulfilled rewards to backers. Chevalier eventually posted on Kickstarter in June 2013 that he was abandoning the effort, saying, “My hope now is to eventually refund everyone fully.”
The Federal Trade Commission (or “FTC”) under Section 5 of the Federal Trade Commission Act has the authority to bring civil causes against defendants who engage in any “unfair or deceptive act or practice” in interstate commerce.
Kickstarter’s mandatory terms of fundraising projects requires promoters to either deliver promised rewards to funders or to refund pledges made. The FTC claimed that Chevalier breached those terms when he announced that he was abandoning the effort without either delivering his promised rewards or providing backers a refund.
The FTC’s settlement, which follows its usual form, imposes a judgment of roughly $111,000 on Chevalier but suspends that judgment because of his inability to pay. Instead, Chevalier is subject to a lifetime injunction from engaging in any misrepresentation in connection with a crowdfunding campaign. If the FTC finds that Chevalier has violated the terms of the settlement (or has misrepresented his financial condition) the entire amount of the judgment becomes due and Chevalier is deemed to have admitted to all of the material claims in the FTC’s case.
Two lessons are important from this case. The first, which should be obvious, is that standard prohibitions against fraud are in place and are enforceable in the crowdfunding context. Promoters who don’t fulfill their promises in the crowdfunding context should expect the possibility of FTC anti-fraud enforcement.
The second is that the Chevalier case was a “rewards” crowdfunding campaign, not a crowdfunded offering of securities. Backers were promised a copy of the game and other tangible rewards, not an equity stake in Chevalier’s business. Opponents of securities-based crowdfunding have claimed that crowdfunding is dangerous because of the potential for fraud. That potential exists, of course, but it is no more likely to occur in the context of a securities offering than it is in the context of a rewards offering. Fraud, it is sad to say, finds root in every aspect of human endeavor.
The FTC’s Chevalier settlement, however, has little in it to guide future crowdfunding campaigns because Chevalier’s errors were so obvious and straightforward. Chevalier breached his promises to his backers and admitted to that failure when he posted on Kickstarted that he was abandoning the effort but hoped to provide rewards in the future. That this should be unacceptable should be clear to any future crowdfunding promoter
Jonathan B. Wilson is a partner in the corporate law department of Taylor English Duma where he represents growing companies in finance, securities and technology matters. He can be reached at firstname.lastname@example.org.