Crowdfunded business startup settles federal probe

Minnesota business is changing with the advent of new technologies and the ability to seek customers and investors throughout the country and the globe to assist with business formation and growth. However, new legal issues follow the use of these new platforms — which can have serious consequences for poorly-prepared ventures.

One new technology is crowdfunding. This involves raising funds from numerous sources and consumers, particularly through dedicated online platforms. The funds may be used for business startups and product development. However, the funds must be dedicated to the business venture advertised in the solicitation.

Earlier this year, the Federal Trade Commission took legal action and settled a case for a project creator which allegedly used deceptive tactics to raise money from consumers for the production of a board game through a Kickstarter campaign. However, the developer spent the funds on unrelated personal expenses which included personal equipment, rent, a move to another state and licenses for a different project.

This defendant sought investors by stating that special-designed pewter figurines would be offered if he raised $35,000 mostly through pledges of $75.00. Eventually, 1,246 backers paid $122,000 for the venture but never received the figurines. The developer also made false representations in updates that progress was being made on the game but he eventual announced that he was cancelling the project and refunding the backer’s financing. This was ultimately used for his personal expenses instead of being refunded.

As part of the FTC settlement, an $112,000 judgment was imposed which was suspended because of his financial inability to pay. However, the judgment will be immediately due if he misrepresented this condition. He is also prohibited from making misrepresentation about any crowdfunding and failing to comply with stated refund policies. The FTC also barred him from disclosing or personally benefitting from customers’ personal information and failing to properly dispose of this information.

As this case illustrates, this business type of business expansion and development may be potentially lucrative and finance business development. It may also be fraught with risk. Legal assistance and advice may assist developers create a program that provides investment with the law.

Source: Federal Trade Commission, “Crowdfunding project creator settles FTC charges of deception,” accessed Oct. 6, 2015

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