Crowdfunding relies on trust. Big time. In general, as a project owner, your biggest responsibility is to honour that trust.

The reason being, you are often making big promises to people who don’t know you. You might be making a movie, or developing software, or producing a product.

But you are asking people to trust who you are, and what you say you are capable of.

Now, for $25, an individual might be able to take that risk. But if your project initially funds (for thousands, or perhaps even millions of dollars) before falling over during production, what are your responsibilities?

A few assumptions

Firstly, I’m going to assume you are a good person and not a dirty scammer. By that I mean that your project will be conducted in good faith and at the time of launch, you intend to complete it.

Secondly, there is a massive difference in terms of legal obligations on someone running a Kickstarter project, vs someone selling equity in a business via crowdfunding. This post focuses on rewards-based crowdfunding (such as Kickstarter, Indiegogo, PledgeMe Rewards, Pozible or RocketHub).

If you are running an equity crowdfunding project (where backers receive ownership in a company, rather than a reward or perk), you will be subject to your own local laws. Your equity crowdfunding platform, or lawyer should be able to advise you on the specifics for your country or state.

The short of it

Basically, if you are entering into a crowdfunding project in good faith (that is, you are funding something you intend to fulfill), your main obligation is communication with your backers. This includes the highs, but especially the lows.

The crowdfunding platform you host your project on acts as a third-party supplier. This means that they provide the infrastructure required to host and execute a crowdfunding campaign, without the legal obligation to ensure the project delivers backer rewards or results.

Increasingly, however, it appears you do have the legal obligation, as well as the moral one, to complete your project. In the past couple of years, some key lawsuits have begun to set precedents in the crowdfunding arena.

It’s important to note that platforms are not responsible for your failures in the eyes of the law: you are.

Platform expectations

For the most part, each crowdfunding platform toes the same line, but they take their responsibility to managing risk differently. 

Indiegogo

Indiegogo has one of the worst reputations for ‘dud’ projects, with three major dodgy campaigns in the last 12 months (The Ritot; Healbe; and Telspec).

There are a number of factors in this, but these campaigns clearly illustrate that Indiegogo does not take an active role in investigating the validity of its major campaigns – let alone the minor ones.

Indiegogo’s Terms of Use state:

These terms of use mean that the major consideration for anyone using the Indiegogo platform should really be whether you are running a fixed or flexible campaign. When you are “legally bound to perform on any promise and/or commitment to Contributors”, then it’s sometimes going to be better to run an all-or-nothing type campaign (‘fixed’), and know you are going to have the resources to deliver on those promises.

To combat what is increasingly becoming a trust and authority issue at Indiegogo, the platform have recently trialled an insurance scheme. For an additional $15, backers of the Olive can claim their money back if the project fails to ship within 3 months of the estimated delivery date.

As yet, this insurance is not an option available to all project owners, but it is an interesting reaction to an all-too-common problem.

Kickstarter

In 2014, Kickstarter made a massive overhaul to simplify the way it worked and provided clarity to its Terms of Use.

In essence, Kickstarter’s stand is as follows:

It’s not all too different from Indiegogo’s statement, but crucially, Kickstarter is much faster to intervene when a flag is raised about a project. When concerns were raised about the Scribble Pen in 2014, the project was pulled and moved to competing platform, Tilt.

Kickstarter are also very clear about how to deal with a project that fails to meet its goals. This information is laid down in the Terms of Service introduced in September 2014.

In essence, they say that when someone backs your project, they are forming a contract with you. Your obligations are then to fulfill that contract, meaning:

The key difference between this statement and Indiegogo is that if your project is never fully funded, you are not obligated to fulfill your goals or rewards because no money exchanges hands.

Kickstarter offers a checklist of how to resolve a campaign that was successful in its funding round, but failed to complete the objectives of the project.

This checklist is really a best-practice for all creators, no matter what platform you are on.

Other platforms

Most platforms really do say similar things, and legally, you’re pretty much in the same boat no matter what platform you use.

From a legal perspective, contributions to a rewards-based crowdfunding campaign are generally seen as ‘donations’. This makes it significantly harder to protect the interests of backers, though increasingly we are seeing lawsuits challenging that status.

Legal precedents

At this point in time, there are really two major lawsuits to know about.

The first one was in 2012 where Neil Singh sued Seth Quest over the failed product, Hanfree. Inc. have written a thorough breakdown of the course of events that is worth a read. In essence, the Hanfree failed due to lack of experience. However a single backer (Singh) bought a case against the project creator for breach of contract.

This lawsuit occurred prior to Kickstarter’s “We Are Not A Store” stance. It also appears to be linked to rules around prototypes and renderings, and the introduction of the Risks and Challenges section on each project.

But one backer bringing a suit against a creator is unusual. As Northwest Corporate Law notes:

Meaning in most cases, an individual backer won’t go after a creator legally because it’s not worth it.

There are, however, many cases of a cheering crowd turning into an angry mob. Kickstarter’s Terms of Use changes do appear to open creators up to class-action suits when their crowd feels really hard done by.

In May 2014 the industry also got it’s first state-backed legal proceedings in Washington State. In this case, the Washington State Attorney General has bought a case against Edward J. Polchlepek III for the project Asylum Playing Cards on behalf of the 31 backers who live in Washington State.

This is the first case of a government intervening, and we will be following closely as the case progresses.

Moral obligations and crowdbuilding

Covering your ass legally is just one reason you should take your responsibilities as a project owner seriously. Another is because your crowd is your most valuable asset.

Every type of crowdfunding involves risk for the backer. The fact is, projects that began with totally good intentions can run into unexpected problems. The key thing here is communication.

Crowds can be remarkably forgiving if they know what’s going on. When something is going wrong, many creators choose to knuckle down and try to quietly sort out the issue before they communicate with backers. This is the wrong move.

Being honest about a flailing project is difficult, but it’s substantially easier than the angry mob that could chase you down with pitchforks after a year of not hearing from you. Part of the reason your backers have chosen to come on board is because they want to be a part of the journey.

Again, Kickstarter put it very well in their FAQ where they say:

Frankly, your timelines are almost certainly going to blow out. Research indicates that around 75% of projects will deliver late. Your project timeline is considerably less important than your communication of timeline changes to your backers.

Know the risks and challenges. Kickstarter introduced the need for this section in 2012, in response to projects which had gone pearshaped. While Indiegogo and other platforms might not insist on this section as Kickstarter does, it certainly wouldn’t hurt to include it in your project.

Be really clear about what you will, and will not deliver. Seriously consider what might get in your way, and let your backers decide for themselves whether this is a project they’d like to get involved in. Do not downplay the risks and challenges as it will only bite you in the long run if things do go askew.

What it boils down to

The safest avenue for you as a project owner, is to create a papertrail, and to be honest, while conducting your project in good faith.

Because money is involved, act as if your backers will be auditing you. Create a separate bank account and ensure all transfers and payments are explainable. Keep receipts, quotes and invoices.

Use project management software like Trello, and time tracking software like Toggl to show the work you are putting into the project. Being able to show that you are working diligently on progressing towards completion will go a long way if unforeseen circumstances come up later on.

And finally, post regular updates to backers showing the progress (both good and bad). Aim for at least once a month. Be honest, and show your progress using photos and project plans.

Conclusion

Ultimately, your backers are unlikely to sue you if they feel empathy towards you. But they can’t build that emotional connection if they never hear from you.

Unexpected events and circumstances do occur. Even a creator with the best intentions can be subject to life (and, it has been known to happen, death). It’s worth ensuring that your project is above board, and able to illustrate a papertrail that demonstrates both progress, and responsible management of backer funds.

Your commitment to your backers runs until you have fulfilled all rewards. You need to take that commitment seriously, working towards project completion until the project is actually complete.

Not only will this ensure you have fulfilled your responsibilities as a project creator, but it will also mean your crowd will be willing to support you again, creating a sustainable way for you to achieve your goals and dreams in the future.

Do you have any thoughts about creator responsibility that you think I haven’t covered? I’d love to hear them in the comments below!