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Kickstarter is not in some bizzarro pocket universe where the normal protections against fraud don't apply.

If someone truly takes the money and runs, that's a criminal offense. Kickstarter doesn't need special policies to make it so, and I'm sure they'd cooperate with a criminal investigation. I think they've even said as much!

I'm not sure it's fraud per se. Kickstarter seems like a way of monetizing up-votes. They have various sized up-arrows that are tied to a bucket of electronic chits over a PayPal. I sometimes wonder if people back projects with the same forethought they bring to up voting a good story.

I think that's exactly what the $1 pledge is for.

Really?

(http://www.kickstarter.com/projects/schuyler/lockpicks-by-op...)

Wanted $6,000; got $87,000; completed funding in sept 2010; backers still waiting. Cheapest pledge to get product was $20.

Someone else has taken on the project. A few people have got "practice sets", but that's not what they wanted. They wanted the picks.

You present that like it's contrary to my point, but it's not.

If legal action had been attempted and failed, that would be interesting! But here there's no indication that the matter has been brought before a court.

It doesn't sound like they took the money and ran. It sounds like they took the money and are having a lot of problems executing.

Including depression, from memory?

Nothing about that story screams fraud. It is a fairly classic tale of a failed business venture. This happens all the time.

Jason Scott is currently heading the project along with three other members "The Board". They are doing their best to get stuff out to backers, read more about this project here: http://ascii.textfiles.com/schuyler-towne-kickstarter

Scam implies some sort of intent. There's actually a huge difference. When burned, you might call someone a dipshit. But to actually BE a dipshit, their intent matters.

Intent is difficult to measure.

Money on the other hand, is very easy to measure. So are your legal obligation as a merchant.

If you sell something online, and the person on the other side never receives it, that's mail fraud. No matter what your intensions were.

caveat: As a merchant you also have legal protections in this case, which is where refunds, reshipping, etc. come in.

The get-out, of course, is that neither the projects nor Kickstarter are actually selling anything.

While they "technically" receive a donation from you and send you a gift, I think most judges would see an exchange of money for an item and say that somebody definitely is selling something.

NPR gave me a coffee mug for my donation. Were they selling it?

Partially. I'm pretty sure if you write-off that donation you need to subtract the fair market value of that mug. A real accountant could speak better to that though.

This is how it's supposed to work.

(accountant)

I see it as a donation to an entrepreneur, artist, or other innovator.

I sometimes turn down the rewards. And I'm always offered the option to do so. Which means it's definitely not a normal for-sale arrangement. Who would order something from Amazon and then check a box saying, "Oh, just charge my card; don't actually send anything"?

See my post above though, even Kickstarter's Guidelines say there is a legal obligation to deliver.

"are actually selling anything"

As others have pointed out they are selling something. Nothing indicates that you can get the "thing" simply by sending an entry to the address and there is no obligation to buy anything. As happens with contests that don't want to appear to be a lottery. In other words you can't have someone pay for a chance to win something (in many legal jurisdictions particularly in the US not sure about anywhere else). But you can have people both buy things and enter with a very clear "no obligation to buy" as we have all seen (once again in the US).

So it is very clear and obvious that in exchange for paying money you are expecting to receive something in return.

Now of course they could probably work around this with the proper wording somewhere.

"We hope to produce this lightbulb. There is no guarantee we will succeed. Here is a complete list of our qualifications. Be aware that if we fail to deliver you will loose your money. Here is our record with other projects. Etc."

In that case the "game" becomes a little different and it is apparent and visible that you stand to loose just like paying to enter a marathon you pay money and are not guaranteed to win. (Not a great example but anyway..)

I understood mail fraud did NOT cover electronic sales...

This comment stuck in my craw a bit, and I'm trying to disect the comment and why it bothered me.

I have backed several kickstarter project, received the results of a couple, funded a project via kickstarter and promoted several projects. You could say, I'm a fan of the kickstarter model.

On the other hand, I've been predicting that one of these high-profile (likely physical hardware) projects in going to dramatically fail, and then we'll see the fallout.

I guess what stuck in my craw is "complicity allowing this sort of scam-project". Mainly because this feels like an unwarranted accusation.

To try and reassess my feelings, I visited the Kickstarter page to read the copy and get a feel for how protective they are of the backers.

How it Works "Every project is independently crafted, put to all-or- nothing funding, and supported by friends, fans, and the public in return for rewards." (Ok, so, explicitly stating that the funding is in exchange for rewards.)

  "The filmmakers, musicians, artists, and designers you see  
  on Kickstarter have complete control and responsibility 
  over their own projects."

(Ok, this suggests that kickstarter isn't guaranteeing success... but does feel more like ass-covering.)

  "Rewards are things like a copy of what's being made, a   
  limited edition, or a custom experience related to the 
  project. This isn't Best Buy — rewards aren't shrink-
  wrapped and ready to ship. Once the project is funded, the 
  journey to bring them to life begins."

(Another really... hedged statement. This just implies that it might take a while to get the rewards, not that they may not be delivered.)

Clicking "Back this Project" on Lifx

  FREQUENTLY ASKED QUESTIONS
  Who is responsible for fulfilling the promises of this project?
  Kickstarter does not investigate a creator's ability to  
  complete their project. The claims and responsibilities of 
  this project are solely its creator's.

(This is interesting, and prominent on the backing page.)

Guidelines

  Are creators legally obligated to fulfill the promises of 
  their projects?
  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[1] 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.

(Now, that was really interesting to me, as I had never seen that. It's pretty explicit.)

So, basically, whether kickstarter is complicit comes down to a couple questions in my mind: 1) How much responsibility do they bear to vette each project for likeliness of funding? 2) Are they messaging backers well enough about everybody's responsibilities in these scenarios?

... And I don't know the answer to either. The information is there on the site, but a little hidden and the recourse for failed projects seems non-existant. Most of these larger projects are new LLCs set up for the project, and if all the money is gone, suing them is likely going to be fruitless.

(So... yeah, I've got no answers. Just some exploration.)

[1]https://ksr-assets.s3.amazonaws.com/creator-responsibility.p...

The only recourse would be through the courts and I am quite sure Kickstarter will not be paying anyone's legal bills. They do have this language so that they or their Backers could take legal recourse if required. They do not have this language because they promise to ever do such a thing.

For kickstarter, this isn't only a question of strict legality and having the right weasel-words in their small print. It's also a question of reputation.

There's already a bunch of stories in the press about projects failing to deliver, and the more backers get shafted the worse this will get. If no-one wants to invest in Kickstarter projects that'll be bad for kickstarter.

There's a whole bunch of different things Kickstarter could do about hardware projects failing to deliver. Why they aren't taking action yet is a mystery to me.

"There's a whole bunch of different things Kickstarter could do about hardware projects failing to deliver. "

Such as what? Like offering insurance for failed products? Doing due diligence into creators? Or?

Any solution you come up with (and I do really want to hear your suggestions) has problems. If they vet it puts more liability on them and legally that would place them in a different position. If they offer insurance then they have to vet and the risk shifts to them which isn't the idea of what they are trying to do. So your thoughts are specifically?

Kickstarter could change their fee model to better align their interests with backers. For example, they could choose to not take their fee until the project creator has delivered on their project. This gives the Kickstarter team more of an incentive to vet the quality of projects and their creators.

> Such as what? Like offering insurance for failed products?

In a perfect world, Kickstarter could do just this - or even better, set up a prediction market* on whether the stuff will (eg.) ship on time. Then users could check the market price and decide whether the risk is small enough for them, and even directly hedge against loss.

* http://en.wikipedia.org/wiki/Prediction_market

I don't see why vetting would put any more liability on Kickstarter - all the 'responsibility lies with the creator' legal mumbo-jumbo can remain in place.

If you browse this thread you'll find lots of suggestions from different people. Probably other people will have better ideas than mine, but for what it's worth: I'd require projects successfully raising a large amount (say, more than the price of a midsized car) for hardware to agree a series of milestones, releasing the funds to them in stages. The precise milestones would be agreed on a project-by-project basis, but could include: Some money up front, some money when they have a preliminary electrical schematic and prototype on breadboard, some money when they have a costed bill of materials and a final prototype, some money when they have a feature-complete mobile app, and some money as the products start shipping and the invoices from manufacturers start arriving.

To put it another way, creators can't have any pudding if they don't eat their meat.

"to agree a series of milestones, releasing the funds to them in stages. The precise milestones would be agreed on a project-by-project basis, but could include"

My first reaction is that that's a good idea. But on second thought this would create quite a burden and bureaucracy at kickstarter to monitor and make sure the right thing happened. I would imagine that for that reason alone they wouldn't go for that but I could be wrong.

Well, in the case of the 'LIFX' bulb mentioned in the article, they've made a 5% commission on the $870,447 raised and I can't imagine too much of that would go on administration.

I agree admin costs would be a problem for smaller projects; if Kickstarter was only making $2500 total on a project they couldn't afford a thorough technical design audit. Some costs could be kept down with technology, e.g. prototype demo youtube videos, which creators should be doing to keep their backers engaged anyway. You'd risk rigged demos, of course.

Crowd funding is still a developing industry at the moment, and it's mostly assumption on my part that makes me think creators failing to deliver is going to be a problem. It's going to be interesting seeing what develops.

You feel there are there are enough crowd-sourced hardware startup failures to warrant any action? I know the interest from this site is primarily tech products but it seems to have grown in proportion to the site which is still heavily arts/crafts saturated. I don't believe the sample size is really close to large enough to be come to the conclusion that that vaporware is as big a issue as the article claims. Providing failsafes for investors ruins the unique accessibility that Kickstartr provides for aspiring project managers.

Of course people want to see their projects realized but I believe that far more good will come from disappointing projects. The horror stories will serve to remind people that these are still investments and as such: it would be best to consider funding these projects with non-profit-esque expectations rather than some hipster product marketplace.

I do not think Kickstarter projects can be viewed under legal framework of merchants and consumer protection.

A project much more like an investment prospectus than it is a sales offering.

So I would be interested in knowing if the SEC has already had a look at the Kickstarter legal setup, and if not, it may well be the next step (ie not suing Kickstarter, but refering them to SEC)

The laws around prospectus and offerings are setup very explicitly to avoid your situaton 2) - so I would be very surprised if kickstarter projects are not somehow explicitly avoiding those regulations - or if they are in fact compliant

Kickstarter is not an investment. You're buying the rewards for the tier that you choose.

In the Kickstarter TOS, there is the following line:

  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.

Nope. Investments mean you own a piece of the business. Kickstarter doesn't allow that.

Legally, Kickstarter is just a channel for contributions. If you want, and if the project offers it, you can sometimes pre-order goods in exchange for your contributions. But you get no interest in the business beyond your pre-order, so it's not a security.

The worst case for kickstarter is that they fall under both consumer protection laws and investment regulations.

There is no question that they fall under consumer protection laws, products are being advertised and offered, and anyone can "buy" them. I'm sure the FTC already has an open investigation or investigations.

If you create a kickstarter project, pull in $1m+, spend it all legitimately and fail to deliver the project, you could end up being named in a civil suit. In the future there will be people who lose their houses over this. Just because you made the project in 2011 doesn't mean you won't get sued in 2014.

If you create a kickstarter project, pull in $1m+, spend it all illegitimately, on personal expenses, expect to go to jail. I predict this will happen to at least 1 person.

The larger question to me is what liability kickstarter themselves have. Whatever that amount ends up being, I think they can absorb it as a cost of doing business, as long as it remains on the civil side of the law.

I like kickstarter. So far I've stuck to using it for pen and paper RPGs, something I know can be delivered on. I think the core concept around kickstarter is going to radically change the world of consumer products. Its just too new to have much of a reputation system yet (but its coming.) May be kickstarter isn't the facebook/google of pre-funding projects. If they look like they are going to take a big hit, be ready to step up.

As someone who designs business projects the whole thing sounds like a personal nightmare to me. I know first hand how the simplest of projects on paper can take 5-10x longer than estimated to complete. Add in bells and whistles to make it look attractive to a bunch of people, ouch. Easier said than done applies very much here.

Ok,so there is a difference when the person making the pitch really believes (perhaps foolishly) that they can do what they say they can. Its one of those "That doesn't look to hard ..." kind of situations.

That said, investors do serious due diligence (usually) before investing and ask hard questions. We don't see those questions on Kickstarter so you cannot make a more reasoned choice about investing or not investing.

Do you think that it is possible that the kickstarter model leads to press-than-sufficient sure diligence by lowering the barriers to investment that have traditionally driven larger investors to do more sure diligence?

Is it possible that kickstarter might be predicated on lowering inhibitions to invest below the levels necessary to consistently make sound, rational judgments?

I think that the kickstarter model is below the legally viable laissez faire line, and the once the lawsuits start flying the party will be over. People will look back and say "What were they thinking would happen?"

But that is just my opinion of where its going, it may turn out to be as revolutionary as eBay was in the casual sale market.

I've got the same opinion. It's amazing how so many entrepreneurs love the idea of crowdfunding their next project. They don't see how their crazy startup idea is just another insanely risky investment alongside scammers and people who have no idea what they're doing.