April 26, 2021 4 min read
Sometimes crowdfunding projects don’t work out as planned. It happens. According to an independent study conducted by the University of Pennsylvania, 1 out of every 11, or 9% of successfully funded Kickstarter projects fails to deliver rewards to project backers.
But even with a seemingly high success rate, that study also found only 65% of backers strongly agreed with the statement “The rewards were delivered on time.” The professor behind the study concluded that 1 in 10 projects should be expected to fail, and backers should only expect a refund 13% of the time.
When delays continue occurring and it seems like rewards will never be delivered, there’s a curious thing seen in online discussions.
Many project backers who didn’t get the pledge rewards they were expecting feel like they were ripped off. But there’s always that other view, the one that says Kickstarter and other crowd-funding platforms aren’t stores—backers aren’t ‘buying’ anything when they pledge to support a project. But is that correct?
It raises questions about what these platforms are, what responsibilities they have to project backers, what legal obligations project creators have, and whether or not project backers are being reasonable in their expectations of actually receiving the rewards they were promised.
First off, are rewards-based crowd-funding sites like Kickstarter and Indiegogo stores, like a brand’s website, or marketplaces that operate like Amazon or eBay?
Ecommerce sites like Amazon and eBay will mediate disputes between buyers and sellers. Other online stores must issue a refund, or are at risk of a PayPal or credit card dispute, if they fail to deliver what a customer purchased.
Note this disclaimer under article 6:
But, does that make these sites somewhat like casinos? Are project backers simply gambling that they’ll receive the rewards they’ve been promised?
Legally speaking, it seems that’s also not the case.
Recent regulation aimed at crowd-funding only focuses on transactions deemed to be the sale of securities (i.e, an equity investment in or loan of funds to a business).
But in the eyes of the law, and so far, of the courts, at both the state and federal levels, project creators are inviting others to form a contract when they create a rewards-based crowd-funding project. When someone backs a project, they are accepting that offer, and that contract is created.
What sort of contract has been created, then?
It’s been argued that the contract formed would be governed under article 2 of the Uniform Commercial Code.
Article 2 of the UCC governs the sale of goods, most often defined as things that exist and are transferable at the time of sale. But that wouldn’t seem to apply to a project intended to create something that doesn’t yet exist.
However, Article 2 also governs ‘mixed development-sales’ contracts. These are contracts entered into when one party is hired to first develop and then sell a product to the other party, as is often seen with computer software.
Within these contracts, it’s understood that the development portion is only incidental to the primary purpose of the transaction—the purchase and delivery of the developed product.
Once a project is funded and money changes hands, a contract is formed, and the project creator is legally obligated to deliver the rewards they promised, or return the funds to project backers.
This isn’t just legal bluster. Several US states’ attorneys general and the Federal Trade Commission have taken legal action to protect consumers and force project creators to deliver rewards or return funds to backers. Additional investigations and legal cases are ongoing.
Clearly, in the eyes of authorities, project backers aren’t simply a creator’s benefactors. They’re customers.
Additionally, unlike cash gifts to friends or relatives, or donations to a non-profit, funds raised on these platforms will be treated as taxable income to the project creator.
Again, in the eyes of the law, project backers aren’t simply giving creators their money out of kindness. The law views the exchange of funds as a transaction, with one party paying the other to deliver something. The funds received are considered payment, not a gift, nor an investment, with any associated risk.
In that way, while backing crowd-funded projects may be a bit of a gamble, backers are not unreasonable in viewing their pledges as a purchase and expecting to receive the promised rewards in return.
In effect, Kickstarter project backers ARE buying something, despite the naysayers and Kickstarter's disclaimers.
What can project backers do, then, if rewards are not delivered as promised?
Unfortunately, enforcing these contracts can be difficult for individual backers. More often than not, it doesn’t make sense to sue, as the pledge amounts are relatively small, and much of the funds the creator received are likely to have been spent already.
While joining a class action lawsuit may make it easier to file suit, it’s unlikely to result in project backers receiving full refunds.
So far, it seems that project backers’ best option would be reporting these projects to states’ attorneys general and federal authorities like the FCC here in the USA.
Sources for all of the above:
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