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It's the big new thing, every man and his dog is rushing to Kickstarter lately to either receive funding or to contribute to it. I'm sure the majority of us have done so at one point or another (I know I sure have), after all many of the things advertised seem like the bargain of the century with just one small catch that they need X amount of initial investment to become reality.
But is that the only catch? Before you read on, stop and think for a second. How much do you actually know about how Kickstarter functions?
While browsing reddit today i stumbled across a post, claiming that the founder of the new biggest Kickstarter project Star Citizen was involved in some shady stuff in his past. While i was unable to find information confirming or refuting this post it got me thinking, what is in place to actually stop someone from defaulting on their promise, or from simply using that money for something else? So as any respectable internet denizen would do, i went on quest to fill this gap in my knowledge and ended up finding some interesting conclusions.
The first and most important question I wanted an answer to was:
What systems are in place to prevent someone from simply accepting Kickstarter funds and disappearing
The short answer? Not an awful lot.
The long answer is a bit more complicated, my first port of call was the official Kickstarter blog where they have a post titled Accountability on Kickstarter while there was a lot of interesting points adressed, the part i was most interested was: Is a creator legally obligated to fulfill the promises of their project?Yes. Kickstarter's Terms of Use require creators to fulfill all rewards of their project or refund any backer whose reward they do not or cannot fulfill. ( This is what creators see before they launch.) We crafted these terms to create a legal requirement for creators to follow through on their projects, and to give backers a recourse if they don't. We hope that backers will consider using this provision only in cases where they feel that a creator has not made a good faith effort to complete the project and fulfill.
While the wording of this might lead you to believe that Kickstarter has vested interest in ensuring (and following up on) projects that default, don't be fooled. If you visit the linked picture it only states that: A failure to fulfill promises can lead to a) damage to your reputation or b) possible legal action on behalf of the backers.
Possible action? Hmmm... this doesn't sound to assuring. Time to take my search further, this time to the actual Terms of Use.
Here i found a bit more clarification on the issue:Project Creators are required to fulfill all rewards of their successful fundraising campaigns or refund any Backer whose reward they do not or cannot fulfill.
Which would indeed give Kickstarter legal rights to pursue anyone failing to fulfil promises. The question now becomes, are they required to do so? and if not would they?Kickstarter is not liable for any damages or loss incurred related to rewards or any other use of the Service. Kickstarter is under no obligation to become involved in disputes between any Users, or between Users and any third party arising in connection with the use of the Service. This includes, but is not limited to, delivery of goods and services, and any other terms, conditions, warranties, or representations associated with campaigns on the Site. Kickstarter does not oversee the performance or punctuality of projects. The Company does not endorse any User Submissions. You release Kickstarter, its officers, employees, agents, and successors in rights from claims, damages, and demands of every kind, known or unknown, suspected or unsuspected, disclosed or undisclosed, arising out of or in any way related to such disputes and the Service.
I guess that answers that, they are entirely free to ignore defaulters if they wish. So will they take action? According to this site(as well as a few others i visited) who claim to have spoken to one of their board members They will, they say, assist prosecutors if backers get law enforcement involved. But ultimately, it is up to the backers to solve any legal issues. So in the event of a failure to deliver, they will provide you with evidence(and possibly advice) that you can then use to pursue legal action. Is this worth it? Almost certainly not. Unless you file all the paperwork yourself or if you (or another backer) organises a class action lawsuit on behalf of the backers, you stand to spend a lot more than you would gain. Not to mention the hassle involved in the process, or if the creator simply leaves the country.
Hmm.. So now that we've got the legal stuff out of the way lets take a closer look at being a backer, my next question is:
What exactly does backing a project mean?
I've heard it put several different ways: "I'm investing in X product/company" "I've pre-purchased X product on Kickstarter" "I'm supporting X company on Kickstarter"
Lets examine these positions a bit more closely.
- Is backing a project an investment? Yes and no, it's true you are "investing" your money in a project. There is however no guarantee that this will result in a product or profit and can even result in a loss of funds if anything it is more of a gamble, so perhaps this isn't the best way to think about it.
- How about a pre-purchase? This is even more untrue. A pre purchase is a guarantee of product/s delivered by a set date. Not only is there no guarantee of a product, there is also no set delivery date (all Kickstarter 'dates' are estimates, and is reflected as such in the ToS).
- The last is by far the best way of the three to look at your actions, you are giving a company or person money in support of their idea in the hope that it will come to fruition upon which point you will receive compensation.
So what exactly does this all mean for you as a backer?
If you go to Kickstarter looking to use it as an online shop, you are setting yourself up for disappointment. If you do, do this, at least practice safe Kickstarting habits;- Larger projects with more funding are more likely to result in a refund, due to the high profile nature of the project and journalism coverage Kickstarter / or a backer will be much more likely to take legal action resulting in a class act lawsuit.
- If the project is already funded, is there really a need to provide further financial backing? If it is successful it is extremely likely you will be able to purchase the product shortly after release, which removes all financial risk from yourself.
- Question whether or not the project has deliverable goals, if you don't think that they can achieve the goals(don't forget all the bonus pledge goals) in the allotted time then it's probably an indication of a potential problem. Do they have unrealistic stretch goals? Are they adjusting their development time to fit in additional stretch goals? These can be other potential red flags.
- Is the pledge amount worth not only the rewards, but the potential risk of losing your money? As the pledge amount increases, I would be more and more wary.
- How much do you know about the creator? Would a loss of reputation affect him in any way at all?
Hopefully this has been an enlightening read, if you have any additional information to add please do. I very well could of missed a great deal in my research, and this post simply reflects my understanding of the issue. If you have additional questions please don't hesitate to ask, and i will do my best to answer them.
 
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Interesting read, thanks for sharing the info
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I'm pretty sure most people contributing to projects are fully aware of all that.
You're not investing it, let alone buying a product (so it certainly isn't a "bargain" for you). You only give money to something you think is a good idea or looks good and hope the developer comes through. For the most part it's just blind faith.
You can mitigate the personal risk somewhat by contributing to projects that can show that a considerable amount of effort already went into them. In general, these projects tend to get better funded and accomplish the goals faster.
That said, there's nothing wrong with informing people about how things work. I just think that the slightly conspiratorial tone of the blog was unnecessary.
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I'm sure many people do know there is risk involved, however I figured if i didn't know the exact legal recourse for a defaulted project then others would probably be in the same boat.
But I honestly believe there are people that are either ignore the risks involved completely, or simply don't know about them. I still see hundreds of posts on forums about backing this or that Kickstarter with very questionable goals and deadlines, or people asking when they will receive their pledge rewards, or posts about how upset they are that X project has hit it's projected due date and they have either a) not received their pledge reward or b) no news from the project creators.
If i came across as conspiratorial it was unintentional, i simply made the post to illustrate the way i looked into the issue (and the process of digging deeper), what i found out and some advice for people who use the service.
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United Kingdom1012 Posts
I think this accountability gets kind of overblown when you consider most donations are fairly small. For anyone who's working, $20 isn't a serious amount of money to risk. People actually make these kind of investments all the time, not just through money but through time itself.
Hypothetical example: people say nethack, dwarf fortress, dota2, or Lol are good games. Yet all of these games require a significant investment in time (reading up on what does what etc). By the time someone can even really decide if they like the game, they'll have spend at least two hours. And if turns out its not for them? That's two hours they won't get back. Assuming a low paying job, and they're in the same position as if they'd backed a no-show kick-starter. Same investment, same result, different framing.
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In all likelihood, "investments" in Kickstarter projects would not be considered "investments" in a legal sense. The individual giving the funds is not expecting a profit based on the money they give. They are just expecting predetermined returns of X, Y, and Z.
They would probably have a case for common law fraud.
Of course, the original question posed (What systems are in place to prevent someone from simply accepting Kickstarter funds and disappearing) is a bit silly - any capital based system in our society possesses the risk that a party will simply leave with the money. That's why we have laws.
The real issue is that your average person should not be giving money to strangers. Outside the purview of the SEC, the world of large-scale capital "investing" is murky at best, and it's a prime breeding ground for fraud and deceit. The section at the end of the first post discussing "safe" habits is demonstrative of the issue - if you have to be informed of the risks and can't figure them out on your own, you should probably not be doing this.
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So what's your solution for crowdfunding then?
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On November 20 2012 18:24 Shady Sands wrote:
So what's your solution for crowdfunding then?
I'm not a fan of crowdfunding in practice. Kickstarter isn't really crowdfunding (in my opinion) since it's probably not an investment contract, but I think if you are going to use it, you should do your research and be aware of the possibility of loss.
I offer some thoughts on crowdfunding here.
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I once backed a project on Kickstarter.
The video they made looked good, the other information was well written, the people seemed nice and trustworthy, and the product was cool.
It got fully funded, and they sent out regular updates on how the production was going.
I got my rewards for backing the project in a timely manner and was very satisfied.
Yeah, maybe it seems super sketchy, but if you use your best judgement based on all the information given, you can probably avoid backing projects that are doomed to fail.
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Have backed-up many projects, no fails yet.
All are running nicely and have very good updates.
Usually it is very clear if the product can succeed, the most fishy I've seen is the Ouya. I don't expect people to get what they expected.
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A lot of poor replies to a well written blog.
I lack the time to answer in details but you seem to have overlooked the fact that most of the kickstarter projects aren't crowd-funded but merely paid in advance, in which case consumer laws should apply. Of course there hasn't been any significant non-scam failure so without precedents it's hard to judge the nature and the degree of the risk.
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On November 21 2012 00:40 Otolia wrote:
A lot of poor replies to a well written blog.
I lack the time to answer in details but you seem to have overlooked the fact that most of the kickstarter projects aren't crowd-funded but merely paid in advance, in which case consumer laws should apply. Of course there hasn't been any significant non-scam failure so without precedents it's hard to judge the nature and the degree of the risk.
No, there haven't been any high-profile scams yet, but the Amanda Palmer case (written about in the blog post the OP mentioned, I think) is worth looking at.
Basically she got 10x the money she asked for, but then proceeded to ask for other musicians to volunteer to play for free as opening acts on her tour - which would seem unprofessional, as artists who ask others for money so they don't have to work for free should be the last to perpetuate the idea that artists should work for free. Then, when people started breaking down her original Kickstarter request into what actually would have cost her to produce the record commercially, they found the estimates in the pitch to be exponentially overblown.
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On November 21 2012 00:40 Otolia wrote:
A lot of poor replies to a well written blog.
I lack the time to answer in details but you seem to have overlooked the fact that most of the kickstarter projects aren't crowd-funded but merely paid in advance, in which case consumer laws should apply. Of course there hasn't been any significant non-scam failure so without precedents it's hard to judge the nature and the degree of the risk.
Thankyou for the kind words, means a lot to me! As for your statement I believe legally they don't count as pre-order / purchase.
If if the Kickstarter indicates that its a pre-purchase this is not the case, i read some stuff about how Kickstarter didn't fall under the same legal purview as sites like e-bay or paypal which handle stuff like refunds and money back, due to the fact that none of the Kickstarters are legally viewed as payment for goods / services. Whether or not it will stay this way if a large case hits the courts i have no idea.
On November 20 2012 18:08 Tal wrote:
I think this accountability gets kind of overblown when you consider most donations are fairly small. For anyone who's working, $20 isn't a serious amount of money to risk. People actually make these kind of investments all the time, not just through money but through time itself.
Hypothetical example: people say nethack, dwarf fortress, dota2, or Lol are good games. Yet all of these games require a significant investment in time (reading up on what does what etc). By the time someone can even really decide if they like the game, they'll have spend at least two hours. And if turns out its not for them? That's two hours they won't get back. Assuming a low paying job, and they're in the same position as if they'd backed a no-show kick-starter. Same investment, same result, different framing.
This is a very interesting point and I agree there is an inherent danger to purchasing something without sampling it first, for both Kickstarters and non- Kickstarters. I would even argue that is is worse for a Kickstarter, with released products you can at least make an informed judgement based on popular opinion, Kickstarting is not only increasing the risk in this aspect of a purchase, but on top of that there is the risk of getting absolutely nothing.
On November 20 2012 18:10 remedium wrote:
The real issue is that your average person should not be giving money to strangers. Outside the purview of the SEC, the world of large-scale capital "investing" is murky at best, and it's a prime breeding ground for fraud and deceit. The section at the end of the first post discussing "safe" habits is demonstrative of the issue - if you have to be informed of the risks and can't figure them out on your own, you should probably not be doing this.
I think this is probably the best way to look at it. Unfortunately there are many ignorant people out there, who engage in very questionable buying habits or simply haven't considered the implications of what exactly it is they are doing. Which is exactly why I wrote this, to help people come to a greater understanding of what they are doing and to perhaps develop a mindset that allows for the consideration of risk to factor into their thinking.
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Well written blog. I wonder if Indiegogo has similar ambiguities or if it has more structured policies to protect those involved.
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Very interesting read. I do know a few people who've been disappointed by certain projects never getting funded. It should be obvious that your money is lost if the project doesn't become fully funded, but what if it's, say, 95% funded? Where does the money go if the producers don't actually make any of their product?
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On November 22 2012 22:20 synapse wrote:
Very interesting read. I do know a few people who've been disappointed by certain projects never getting funded. It should be obvious that your money is lost if the project doesn't become fully funded, but what if it's, say, 95% funded? Where does the money go if the producers don't actually make any of their product?
You aren't actually charged until shortly after funding is completed. If it's not funded, no charge. If in the case that funding occurs and nothing is made, you have to take the case to a civil court to retrieve your money. Which most people simply won't be bothered doing for sub $100.
On November 22 2012 20:40 Wetty wrote:
Well written blog. I wonder if Indiegogo has similar ambiguities or if it has more structured policies to protect those involved.
Interesting question, i will have to look that up some time. Maybe i'll make another blog on it if it significantly differs. If not i'll probably just bump this one and edit it in.
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EPT
