July 8, 2015

Crowdfunding: First Enforcement Action Against Project Creator

This recent, first FTC enforcement action against a crowdfunding project creator is instructive. The defendant, who raised money from (and promised rewards to) individuals on Kickstarter to produce a board game, allegedly instead used the more than $122,000 obtained from 1,246 backers for personal expenses including rent, relocation, personal equipment and licenses for a different project.

Under the settlement order, the defendant is prohibited from making misrepresentations about any crowdfunding campaign and failing to honor stated refund policies, and barred from misuse of customers’ personal information. The order imposes an approximately $112,000 judgment that was suspended due to the defendant’s inability to pay, but will be due immediately if he is found to have misrepresented his financial condition.

In addition to signaling a warning to other crowdfunding project creators who may be thinking that their misdeeds are below any regulatory radar screen (which, fortunately, is not the case), the action serves as a reminder to consumers to be mindful of the risks associated with crowdfunding of this nature. See also this Securities Edge post and WSJ blog, and this Crowdfund Insider post comparing and contrasting reward-based and equity-based crowdfunding.

I realized Crowdfunding had become mainstream when I saw this “how to” guide in my recent LA Times weekend Parade magazine.

Startup Funding Sources: Crowdfunding an Increasingly Significant Player

According to this recent policy brief from the Kauffman Foundation, over 20% of startups applying for loans in the first half of 2014 did so through an online loan platform, i.e., crowdfunding.

Other noteworthy stats include:

Banks (particularly small banks) are the primary source of startup capital.
40% of initial startup capital is in the form of bank debt.
Equity, primarily sourced from angel investors and venture capitalists (3% and 1%, respectively), is much rarer, but reportedly more impactful due, in part, to intangible contributions from these types of investors such as expertise and guidance.
Venture-backed companies purportedly tend to professionalize sooner, have an increased likelihood of an IPO, and have greater post-IPO survival rates.

The brief includes a reader-friendly chart noting the primary advantages and disadvantages of each of the main funding sources.

In related news, intrastate crowdfunding was among the principle topics discussed at the SEC Advisory Committee on Small and Emerging Companies meeting last month. Among other things, committee members urged the Commission to review Rule 147 of the ’33 Act, which is deemed to be impeding the use of state crowdfunding. See this Crowdfund Insider blog.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Cybersecurity: Board Guidance – A Different Approach
– Revenue Recognition Standard: Early Adoption & Deferral
– 2015 Audit Committee Agenda
– Blackholes in the Boardroom
– Stand-Alone Conflicts of Interest Policy Considerations


– by Randi Val Morrison